Accidental traces of unauthorized GM grain would be allowed up to a 0.5 percent level for the first three years.

The draft agreement will now return for approval to the European Parliament, where some legislators are calling for stricter tolerances.

The draft rules also apply to labeling of foods produced from GM crops. This means Canadian canola oil, which is produced from GM crops but does not contain the DNA nor protein of GM origin, would have to be labeled, a move that the president of the Canola Council of Canada called disappointing.

"This is not a health and safety issue for food: this is purely political," Barb Isman said.

Currently, Canadian farmers grow GM canola, soybeans and corn, none of which is approved by Europe. Small amounts of non-GM soybeans are shipped from Canada to Europe.

But Canadian canola has been effectively shut out of European markets since 1997, when GM canola was first grown on Canadian farms.

Because of the bulk-handling system for canola - in which GM and non-GM varieties are mixed together at grain elevators and terminals - it's not economically practical to separate the two.

The proposed European rule of 0.5 percent for unauthorized GM grain would make it virtually impossible for any shipper to try exporting non-GM canola to Europe, said Isman.

The draft rules could also hold implications for a debate over whether GM wheat should be commercialized in Canada.

Monsanto Canada is developing a hard red spring wheat that withstands its popular glyphosate-based weedkiller Roundup. But many grain industry players worry the wheat will also kill Canadian markets.

More than 80 percent of customers of the Canadian Wheat Board, which has a monopoly on wheat exports, have said they do not want to buy GM wheat.

Chief among these are European customers, who on average buy more than 1 million tonnes of Canadian wheat per year.

"The European market is very important to us and if we saw that there were unreasonable tolerance levels there ... we just would not allow GM wheat to go on the market," said Patty Rosher, who manages GM issues at the Canadian Wheat Board.

"It would just be too much of a negative impact on farmers' income," she said.

Monsanto Canada has promised to wait to commercialize the wheat until major markets have established reasonable tolerances, said spokeswoman Trish Jordan.

The company plans to produce the wheat only under tightly controlled contracts outside the bulk-grain-handling system, Jordan said.

"GM wheat is a research project that's a long way away from commercialization," Jordan said. "It's our ability to meet our commitments that will determine when we launch."

But even if GM wheat production is segregated, Rosher said small amounts of seed inevitably would slip into the bulk grain handling system.

Canada could meet tolerance levels of 5 percent, although even those levels would be "difficult and risky," she said.

Rosher said the EU's proposed tolerance levels of 0.5 percent are unreasonable.

"Those are incredibly difficult for a bulk handling industry like the world grain bulk-handling-industry to meet," Rosher said.

That's why the United States is threatening to launch a World Trade Organization action against the EU, Rosher said.

"This is very clearly a trade barrier," she said.