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Canada's Foreign Minister Chrystia Freeland (C) addresses the media with Mexico's Economy Minister Ildefonso Guajardo (L) and U.S. Trade Representative Robert Lighthizer at the close of the third round of NAFTA talks involving the United States, Mexico and Canada in Ottawa, Ontario, Canada, September 27, 2017. REUTERS/Chris Wattie


By Lesley Wroughton and David Ljunggren

OTTAWA (Reuters) - The United States, Canada, and Mexico said on Tuesday they had made some progress in talks to modernize the NAFTA trade pact while acknowledging much work remained if they are to wrap the process up by the end of the year, as planned.

Negotiators ended the third of seven rounds in Ottawa by saying they had substantially concluded one chapter, on small and medium-sized enterprises. They also said they expected to wrap up work on competition issues before the next round in Washington from Oct 11-15.

But the three teams did not dive into the details of the most sensitive matters and Mexican Economy Minister Ildefonso Guajardo told a news conference that there would be "substantial challenges" in the next round.

Mexican and Canadian officials have already expressed concern that the United States has not yet presented details on some of the toughest issues, such as rules of origin which outlines how much of a product needs to originate in a NAFTA country.

The talks are supposed to finish in December but trade experts say this is unlikely, given the complexity of some of the most contentious topics.

"We never said this was going to be easy," Canadian Foreign Minister Chrystia Freeland told reporters at the end of the five-day session.

Trade among the three nations has quadrupled since NAFTA came into effect in 1994, surpassing $1 trillion in 2015. But U.S. President Donald Trump regularly calls the treaty a disaster and has threatened to walk away from it unless major changes are made, citing U.S. job losses and a trade deficit with Mexico.

The talks took place as Canada fumed over a U.S. decision to impose preliminary duties on Bombardier's CSeries jets, which is likely to add to trade tensions.

The decision by the U.S. Commerce Department is likely to further harden Canada's stance on keeping a key dispute-settlement mechanism in the North American Free Trade Agreement, which the Trump administration wants to eliminate.

Freeland raised the issue with U.S. Trade Representative Robert Lighthizer on Wednesday during NAFTA negotiations, Prime Minister Justin Trudeau told legislators.

Freeland has suggested that Canada could walk away from the NAFTA talks over the so-called Chapter 19 dispute mechanism, under which binational panels make binding decisions on complaints about illegal subsidies and dumping. The United States has frequently lost such cases.

A lengthy fight over Chapter 19 could drag out NAFTA negotiations beyond a planned end-December deadline to reach a deal ahead of Mexico's presidential election campaign.

The U.S. delegation presented draft text on NAFTA labor standards on Tuesday and put forward proposals on investment and intellectual property at the weekend.

Laxer labor standards and lower pay in Mexico have swelled corporate profits at the expense of Canadian and U.S. workers, making the issue one of the major battlegrounds of the NAFTA talks.

(Reporting by Lesley Wroughton, additional reporting by Adriana Barrera; Editing by Nick Zieminski)

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