* Pact could increase two-way trade to $35 bln a year
* Would be EU's first with major world economy
* Decision to announce a done deal seen as premature
By Robin Emmott and David Ljunggren
BRUSSELS/OTTAWA, June 2 Canada and the European Union are struggling to finalise a multi-billion dollar trade pact six months after political leaders said it was sealed, an embarrassment for Brussels as it seeks a far bigger deal with the United States.
Over a celebratory lunch last October, Canadian Prime Minister Stephen Harper and European Commission President Jose Manuel Barroso termed the accord "a landmark achievement for the transatlantic market" that could come into force next year.
But the free trade deal, which could increase bilateral trade by a fifth to 26 billion euros ($35 billion) a year, has run into trouble over issues ranging from financial services to how beef and cheese quotas are shared out.
The drawn-out final stage of talks, with each side accusing the other of going back on promises, illustrates the complexity of sealing sophisticated trade deals and bodes ill for the EU's more ambitious talks with the United States.
"Negotiations cannot drag on forever," said Marie-Anne Coninsx, the EU's ambassador to Ottawa. "It is in the interests of both parties that we get things done."
The deal would make Canada the world's only major economy with preferential access to the world's two largest markets, the EU and the United States, home to a total of 800 million people.
For Europe, the accord is meant to be a template for its trade negotiations with the United States, which would encompass a third of world trade and almost half the global economy.
Both the EU-Canada deal and the accord with the United States seek to go far beyond tariff cuts and to reduce transatlantic barriers to business. Such trade deals are seen as a way for developed countries to generate economic growth and overcome the worst financial crisis in a generation.
Publicly, EU officials say it is a question of days for the final wording of the Canada trade deal to be agreed. Canadian Trade Minister Ed Fast told lawmakers last week that "all of the substantive issues have been resolved".
Harper and Barroso will hold a bilateral meeting on the margins of the Group of Seven summit in Brussels this Wednesday and Thursday, confirming their intention to seal the pact.
Behind closed doors in Brussels and Ottawa, trade delegations, diplomats and business groups complain of long delays and difficult issues that have yet to be resolved.
"With hindsight, it was premature for Harper and Barroso to announce a deal," said one person close to the talks. "There is a sense of embarrassment in many quarters."
Talks were launched in May 2009 but stalled last year over issues such as the size of quotas for Canadian beef and EU cheese. At their lunch in October, where chefs cheekily served Italian gorgonzola and Greek feta, Harper and Barroso said the big issues were resolved.
But both sides are still negotiating the divisive issue of how foreign companies bring claims against either Canada or a European Union country if a government breaches a trade treaty.
The Europeans want more protection for their pharmaceutical patents in Canada, a market known for generic medicines. Ottawa does not want to allow European pharmaceutical companies to easily challenge Canadian rules once a trade deal is in place.
"The EU will never accept this," said one diplomat.
Canada's position is a response to Eli Lilly's $500 million lawsuit against the Canadian government last year on the grounds it unfairly ended patents on two best-selling drugs. Eli Lilly brought its lawsuit under the terms of another trade deal: the North American Free Trade Agreement (NAFTA).
Other difficult areas include how to regulate financial instruments and how beef and cheese quotas are managed, showing the sheer scope of this new type of free-trade agreement.
"The deals with Canada and the U.S. go well beyond what trade negotiators alone can deliver. There are so many government agencies and sectors at the table," said Andre Sapir, a trade specialist at the Brussels-based think tank Bruegel. (Writing by Robin Emmott; editing by Ralph Boulton)