Gunfight At The Customs Corral

A dispute over Honda Motor Co.'s cross-border shuttling of cars and auto parts is threatening to erupt into a bitter showdown between Washington and Ottawa. The U.S. Customs Service ruled on Feb. 12 that Honda must pay duties on cars it ships to the U.S. from Canada. Customs says Civics built by Honda in 1989-90 in Alliston, Ont., with engines from its Anna (Ohio) plant and Japan, failed to meet the 50% North American content requirement of the U.S.-Canada Free Trade Agreement.

That ruling could have far-reaching implications for free trade in North America. "We are getting sideswiped by American Japan-bashing," says Prime Minister Brian Mulroney, who vows to get the ruling overturned. But Mulroney is likely to collide with Washington's determination to set tough local-content standards both for the U.S.-Canada pact and for the proposed North American Free Trade Agreement (NAFTA), which includes Mexico as well as Canada. NAFTA talks resumed in Dallas on Feb. 17.

So far, Canadian concerns are being dismissed almost contemptuously by Washington. "Nobody at the White House has given three minutes of thought" to strains the decision is causing in U.S.-Canada relations, says a U.S. trade official.

`BACKLASH.' Canadians fear that Customs' tough interpretation of the local-content rule will crimp Canadian exports to the U.S. and frighten away future investment in Canada. Customs levied $19 million in back duties on Civics imported in 1989-90. If its finding that the cars fail to meet the content rule isn't overturned, Honda will have to pay a 2 1/2% duty, or about $180 apiece, on the 80,000 Civics it ships to the U.S. annually. Honda Canada warns that if that happens, it "will have a major impact on Honda's future investment decisions."

Washington officials say their target is the Japanese, not the Canadians. They argue that Honda's main aim in Canada is to entrench itself in the North American market by enlisting Ottawa's support. "Honda is in Canada for political reasons, not economic reasons," says a U.S. official. "Otherwise, they would have put the plant in the U.S."

Seen from north of the border, however, U.S. trade actions look like a series of moves against Canadian exports. The Commerce Dept. launched a countervailing duty case against Canadian lumber last fall, even though Canada's share of the U.S. market is dropping. And a preliminary Commerce ruling could require Norsk Hydro Canada to pay duties and dumping charges of up to 66% on exports of magnesium to the U.S. from its $500 million Quebec plant. The result could be a "backlash" in Canada, warns Thomas P. d'Aquino, head of the Business Council on National Issues, Canada's leading business organization.

In the NAFTA talks, the U.S. is pushing to boost the North American content requirement above 50%. If that happens, Canada is likely to reject the agreement, thus reducing it to a U.S.-Mexican trade deal. More serious is the likelihood that ongoing tensions will wipe out the already slim reelection chances next year for Mulroney, a free trader who values close ties with the U.S.

MEMO TO BUSH. That could drastically change the mood of the U.S.-Canadian trade relationship. On Feb. 14, Liberal Party Leader Jean Chretien, Mulroney's chief opponent, told President Bush that it's time to renegotiate the U.S.-Canada pact. With most Canadians now against the pact, there is growing pressure to abrogate it if such talks fail.

Resentment is even rising in Quebec, which strongly backed Mulroney's free-trade agenda in the 1988 elections. Quebeckers see the Norsk Hydro ruling as an ominous portent. The U.S. claims Norsk's magnesium exports are subsidized with cheap power from Hydro Quebec, the utility that is the cornerstone of Quebec's industrial strategy. Despite the free-trade pact, says John Ciaccia, Quebec's International Affairs Minister, the U.S. is treating Canada "just like the Japanese."

Canada will try to challenge the U.S. actions in dispute-settlement panels under the trade pact. Ottawa won in the system's first major test, over Canadian pork exports, last year. But with the U.S. playing hardball on trade, many Canadians fear that the odds of success have fallen. If Canada loses, pressure to reopen or repudiate the trade pact could become unstoppable.