With a bilateral deal between Mexico and the US already ironed out, Canada said an agreement to salvage the trilateral NAFTA - which technically no longer exists - is possible by the Friday deadline, but it will be hard work to resolve specific issues as talks with the United States entered a second day. Canadian Prime Minister Justin Trudeau said his government is trying to reach agreement with the U.S. this week. But Trudeau added that Canada won’t sacrifice its goal of getting the "right deal."

“We recognize that there is a possibility of getting there by Friday, but it is only a possibility, because it will hinge on whether or not there is ultimately a good deal for Canada,” he said at a press conference in northern Ontario on Wednesday. “No NAFTA deal is better than a bad NAFTA deal.”

“We’re going to be thoughtful, constructive, creative around the table but we are going to ensure that whatever deal gets agreed to is the right deal for Canada and the right deal for Canadians.”

Trump earlier set a Friday deadline for the three countries to reach an in-principle agreement, and is pressuring Canada to strike a deal by week’s end, which is when the Trump administration plans to inform Congress that he intends to sign a new trade pact with Mexico in 90 days that would replace Nafta. If Canada holds out, Trump warned he would levy tariffs on Canada if it does not come on board with revised trade terms.

This gives Canada three options according to Bloomberg: either strike a deal both can live with, cave to Trump’s pressure tactics or dig in and see what the U.S. will do.

Canadian Foreign Minister Chrystia Freeland said Wednesday that she was optimistic that progress can be made this week, but she added that much work remained to be done to iron out the details: "When it comes to specific issues, we have a huge amount of work to do."

Foreign Affairs Minister Chrystia Freeland says she is "encouraged" and "optimistic" as NAFTA negotiations resume in Washington.

Read more: https://t.co/FfbLIHqR3O pic.twitter.com/kScaxlYiU0 — CTV News (@CTVNews) August 29, 2018

She declined to name the specific issues, but said on Tuesday that Mexico’s concessions on auto rules of origin and labor rights was a breakthrough. Freeland said the U.S. and Canada agreed to not negotiate the unresolved details publicly.

“There are some important things that we believe we have accomplished together with the U.S. and thanks to some significant compromises Mexico was prepared to make to support Canadian workers,” Freeland told reporters Wednesday in Washington after morning meetings with U.S. Trade Representative Robert Lighthizer.

The Canadian dollar pared losses after Freeland’s comments, and was little changed at C$1.2915 per U.S. dollar at 3:19 p.m. in Toronto trading. It had been down as much as 0.2 percent earlier in the day. Freeland said she’s planning to meet with Lighthizer again at 5 p.m. on Wednesday.

According to Bloomberg, Canada’s dairy market is a focal point for Wednesday’s negotiations, a U.S. official familiar with the negotiations said. Trump has repeatedly deemed Canadian tariffs on some dairy products as unfair for U.S. producers.

Trudeau on Wednesday restated his position of defending the “supply-management” system that controls production of some Canadian farm products like dairy.

After being sidelined from the talks for more than two months, Freeland will be under pressure to accept terms the United States and Mexico worked out. The U.S. Congress also wants a deal that includes Canada. The three countries are aiming to seal a trade pact by Friday to allow Mexican President Enrique Pena Nieto to sign it before he leaves office at the end of November. The timeline accommodates a 90-day waiting period under U.S. trade law before Trump can sign the pact.

The political implications are big for the other two countries too. Republicans face mid-term elections in November and Trudeau a national one expected by October 2019. “The strategy is to get a better deal,” White House spokeswoman Sarah Sanders said on Wednesday.

Outstanding issues

One of the issues for Canada in the revised deal is the U.S. effort to dump the Chapter 19 dispute resolution mechanism that hinders the United States from pursuing anti-dumping and anti-subsidy cases. U.S. Trade Representative Robert Lighthizer said on Monday that Mexico had agreed to eliminate the mechanism.

As Reuters reports, to save that mechanism, Ottawa plans to change one rule that effectively blocked American farmers from exporting ultrafiltered milk, an ingredient in cheesemaking, to Canada, the Globe and Mail reported, citing sources. Trudeau repeated on Wednesday that he will defend Canada’s dairy industry.

Other hurdles include intellectual property rights and extensions of copyright protections to 75 years from 50, a higher threshold than Canada has previously supported.

“I think that what they probably need by Friday is some indication from Canada to the Americans that it’s ready to play ball, that they’re ready to negotiate in good faith,” said Mark Warner, a trade lawyer with MAAW Law, which specializes in Canadian and U.S. law. “If Chrystia Freeland goes down there and she starts going on and on about red lines again, then I think it’s all over,” he added.

Commenting on today's talks, President Donald Trump said they are going well, expressing optimism the two countries could reach a deal this week.

"We’re doing really well,” Trump told reporters at the White House on Wednesday, referring to negotiations between U.S. and Canadian officials in Washington. “They want to be part of the deal. And we gave till Friday and I think we’re probably on track."