By Lesley Wroughton and David Ljunggren
OTTAWA (Reuters) - The United States, Canada, and Mexico said on Wednesday they had made some progress in talks to modernize NAFTA, but acknowledged that relations between Washington and Ottawa had become strained over a U.S. decision to impose preliminary subsides on Canadian jet manufacturer Bombardier.
U.S. trade envoy Robert Lighthizer said Canada "mentioned" the U.S. ruling on Tuesday against Bombardier Inc (TO:BBDb) after rival Boeing Co (N:BA) accused Canada of unfairly subsidizing the aircraft.
Asked whether the dispute could affect NAFTA talks, Lighthizer told reporters: "I'm not saying it doesn't have an effect on relationships, it does, but not on this negotiation."
The countries acknowledged at the five-day session in Ottawa that much work remained to conclude the NAFTA discussions by the end of the year, as planned.
Negotiators said they had wrapped up one chapter on small and medium-sized enterprises in Ottawa and expected to finish another on competition 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.
Lighthizer said the United States would "hopefully" present draft text by the next round on the thorny issue of rules of origin, which outlines how much of a product needs to originate in a NAFTA country, and on a dispute settlement mechanism.
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," 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 seethed over a U.S. decision on Tuesday to impose preliminary duties on Bombardier's CSeries jets. The decision is likely to further harden Canada's stance on keeping a key dispute-settlement mechanism in NAFTA, which the Trump administration wants to eliminate.
Lighthizer said the U.S. decision on Bombardier still had several stages to go through before it was finalised.
"There are several more stages, we don't even know whether it is going to be successful, and in addition there are off-ramps in the litigation," he said. "It's too early to tell."
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 labour standards on Tuesday and put forward proposals on investment and intellectual property at the weekend.
Laxer labour 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.