Clothes may make the man, but does the engine block make the car? And is a Band-Aid applied to an auto worker's finger part of a car's manufacturing cost? Such questions are looming as auto production in Mexico takes off. They are already provoking an angry dispute with Canadians over Hondas built in Ontario. The answers will do much to shape the auto industry's future in North America.
Negotiators are wrestling over these issues as they try to forge a North American Free Trade Agreement (NAFTA). They have to decide how much North American content a car, washing machine, or PC must have to be eligible to move duty-free among the three countries. Detroit auto makers want strict "rules of origin" aimed at keeping mostly Japanese cars from slipping into the U.S. through Canadian and Mexican quick-assembly plants. The rules should ensure that the "guts" of the car are made in North America, says Joseph T. Gorman, chairman of TRW Inc.
SIMPLE ADDITION? Gorman and the auto makers are on the right track. Stiff content standards should cover nuts, bolts, and pistons--and exclude such intangibles as depreciation and debt costs today counted as local content. For the U.S. to benefit, the best way to measure content is to add up the value of the parts. If half the value is that of parts made in North America, let the product move anywhere on the continent duty-free. But Canadians and Mexicans like the looser content definition. It makes it easier for them to lure foreigners to set up shop to get duty-free access to the U.S.
Customs provoked the current debate. On Mar. 2, it ruled that Honda Civics made in Alliston, Ont., didn't qualify to enter the U.S. duty-free under the 1988 U.S.-Canada trade pact.
One problem was uniforms. At Honda plants, everyone from the president to the janitor wears a white coverall with a folksy namepatch. The uniforms boost teamwork and Honda's egalitarian management style. But Customs auditors balked. They excluded such items from North American content because they aren't "direct costs" of manufacturing, as the free-trade pact specifies. The same goes for the salary of the plant nurse who bandages workers' cuts and sprains. On the other hand, Customs lets Honda count toward "local content" the depreciation of the plant's machinery--mostly from Japan.
The verdict: Honda's engine consists mostly of Japanese parts added to an aluminum block cast at a Honda plant. Thus, dropping it into Civic chassis at Alliston didn't meet the 50% rule. The bottom line: A $17 million bill to Honda for back tariffs on 91,000 Civics that were shipped to the U.S. through Mar. 31, 1990.
Canada will take Honda's side in appeals. The U.S. has been "changing rules in midstream and making unilateral decisions on the rules of origin," says a Canadian spokesman.
To Canada, the uproar also shows how hard it may be to expand the U.S.-Canada pact into a NAFTA accord. "What's the point of negotiating something new if we can't successfully implement what we have?" asks Ambassador to Washington Derek H. Burney.
Difficult or not, the current trilateral negotiations are the best way to proceed, building on what has already been learned from U.S.-Canada trade. In the trade talks, North American content must be measured solely by the value of parts manufactured--not merely assembled--in North American plants. It's not a perfect solution: It may shortchange some labor-intensive manufacturers. But it's better than hiring lawyers to count Band-Aids.