Canada, US close in on NAFTA deal as midnight deadline looms (UPDATE 4)

Canadian Prime Minister Justin Trudeau called a late-night Cabinet meeting for Sunday amid signs that Canada and the United States were on the verge of sealing a deal to update NAFTA after frantic talks.

Negotiators from both sides spent two days talking by phone as they tried to settle a range of difficult issues such as access to Canada's dairy market and U.S. tariffs.

U.S. President Donald Trump's administration has said Canada must sign on to the text of the updated North American Free Trade Agreement by a midnight Sunday deadline (0400 GMT Monday) or face exclusion from the pact. Washington has already reached a bilateral deal with Mexico, the third NAFTA member.

Trump blames NAFTA for the loss of American manufacturing jobs and wants major changes to the pact, which underpins $1.2 trillion in annual trade. Markets fear its demise would cause major economic disruption.

Trudeau called a Cabinet meeting for 10 p.m. on Sunday (0200 GMT Monday) to discuss the talks, said a government source, declining to give more details.

Trudeau had joined his negotiating team on Sunday evening, a possible sign of movement.

Two sources briefed on the talks said the two sides were very close to an agreement.

Canadian Foreign Minister Chrystia Freeland, in Ottawa for the negotiations, scrapped plans to give her country's annual address to the U.N. General Assembly on Monday, a spokesman said.

David MacNaughton, Canada's ambassador to Washington, earlier told reporters that there had been "lots of progress but we're not there yet ... we still have a couple of tough issues, so we're doing our best".

He added: "I'm cautiously optimistic, but we'll see."

Separately, Mexico's Economy Ministry tweeted that it would hand the Mexican Senate the updated NAFTA text later on Sunday. If there was an agreement with Canada, the text would be trilateral. If not, it would be bilateral, the ministry said.

As part of an agreement, Canada looks set to offer increased access to its highly protected dairy market, as it did in separate pacts with the European Union and Pacific nations.

The influential Dairy Farmers of Canada lobby group - which strongly opposes the idea - said in a statement that it insisted "any final NAFTA deal should have no further negative impact on the dairy sector."

Canada and the United States are also looking for a compromise on the issue of U.S. tariffs.

The U.S. Trade Representative's office told industry stakeholders over the weekend that Washington was on track to reach a deal with Ottawa by the end of Sunday, said people briefed on the matter.

One of the Canadian sources said Ottawa would take nothing for granted until Trump had signed off on a deal.

U.S. Trade Representative Robert Lighthizer and White House adviser Jared Kushner have been updating Trump throughout Sunday on the talks, a U.S. source familiar with the discussions said.

U.S. business groups oppose turning NAFTA into a bilateral deal because the three nations' economies have become closely intertwined since the original pact came into force in 1994.

Officials have blown through several deadlines since the talks started in August 2017, and a third Canadian source said that if the two sides were close enough at midnight, negotiations could spill over into Monday.

TARIFF ISSUE

Trump has already imposed tariffs on Canadian aluminium and steel, citing national security, and is threatening similar punitive measures against auto exports. Trudeau said it made no sense to sign on to a new NAFTA only to be hit by new tariffs and is seeking safeguards.

One source briefed on the talks said negotiators were looking to imitate the provisions of the bilateral Mexico-U.S. deal on NAFTA.

The two nations signed a side letter allowing Washington to pursue tariffs on annual Mexican car and SUV imports of over 2.4 million vehicles, a number that significantly exceeds last year's total. The Mexican government said the letter provided insurance that gave the auto industry scope to grow.

A fourth Canadian source directly familiar with the negotiations said any suggestion Ottawa would accept a cap or quota on autos exports was inaccurate.

(With inputs from agencies.)