All eyes are on Honda Motor parts probe.

U.S. Customs Service audit might set trade precedent

The Los Angeles foreign-trade community is waiting eagerly to see how the U.S. government handles a highly sensitive investigation of Honda Motor Co.

The U.S. Customs Service is auditing the Japanese automaker's books and has promised to wrap up the inquiry this month.

At stake is whether Honda might owe $20 million in overdue import duties on cars it imported from Canada for its Torrance sales headquarters since 1989.

A troubling factor is Washington's current tense trade relations with Japan, and whether that might influence the outcome in what has become one of the nation's highest-profile customs investigations.

For two years, U.S. Customs had tried to determine if the giant automaker has illegally escaped paying duties on Civics it imported from Canada by claiming duty-free status under the 1989 U.S.-Canada Free Trade Agreement.

Under that accord, products imported from Canada may enter duty-free if more than 50 percent of their contents are of North American origin. Honda paid no import duties, claiming its Civics easily exceeded the 50-percent threshold.

If Honda is charged back duties, that might fuel pressure for price increases at American Honda Motor Co., its Torrance-based headquarters for U.S. sales. About 230,000 Honda Civics were sold last year in America, making it the nation's sixth-best seller. American Honda won't reveal what fraction of those were imported via Canada.

Various Japanese politicians, including Prime Minister Kiichi Miyazawa, have slammed America's work ethic in recent weeks, creating a new chapter in the two nations' rocky trade relationship. And in an election year, President Bush is under pressure to please Americans who want a get-tough trade policy, especially with Japan.

The two officials with ultimate control over the audit, Customs Commissioner Carol Hallett and her boss -- Treasury Secretary Nicholas Brady -- are Bush political appointees.

Several customs brokers interviewed in recent weeks have said they have no clue what role politics might play in the Honda audit. But politics indeed became a hot factor last year in congressional hearings concerning Honda's lobbying of Bush administration officials for favorable treatment.

Concern mounted after the New York Times reported last June that U.S. Customs' preliminary results showed Honda had improperly avoided import duties, and that Customs had decided to collect $20 million in duties for vehicles imported in 1989 and 1990. The Times' source was a confidential memo from Commissioner Hallett to the Treasury Department.

Honda officials and attorneys said their actions were legal and that they were outraged by the leak and its insinuation. Commissioner Hallett then gave them a written apology for the leak, stating no final conclusions had been made.

Honda Attorney Donald Harrison has defended Honda's position and called the New York Times report "baffling." And Honda officials have fully cooperated with U.S. Customs investigators, said Harrison, a Washington-based attorney with L.A. law firm Gibson, Dunn & Crutcher.

Soon after the Times report, Honda officials secured a meeting with Deputy Treasury Secretary John E. Robson, also a Bush appointee, to press their case.

Hallett later said the audit would be complete by November, and in November promised a February finale, citing no special reasons for the delays.

In a worst-case scenario, if U.S. Customs found fraud, a 100 percent penalty could be assessed against Honda, totaling some $800 million. That is considered highly unlikely by local trade attorneys who also noted that any unpopular decision may be appealed by an importer in the courts.

Ironically, Honda manufactures 60 percent of its U.S.-sold cars at American plants. That's more than any other foreign-owned automaker and a feather in its cap on Capitol Hill.

Politics aside, many local traders hope the Honda audit could result in U.S. Customs clarifying how it determines content of imports. That's a prickly issue that confuses importers and the customs brokers they hire to advise them on customs law.

"Foreign automobile manufacturers that import here have asked Washington many times about these same questions that are going to make or break Honda's situation," said Long Beach customs broker Jack Brady, who represents Toyota and Isuzu, also based in Torrance.

"The government has refused to take a position," claimed Brady. He echoed criticism by other brokers that Washington has reacted vaguely on the "nitty-gritty" issues of content. For instance: May an importer consider the interest payment on a construction loan from his Canadian bank as part of the end-product's value?

"We would be helped by a clarification, particularly the smaller companies who can't afford huge law firms that are necessary to litigate this kind of audit," Brady said.

Matt Cuddy, broker at Emery Customs, said the content rule "is really kind of an arbitrary thing."

The vexing question, which one trade-association executive called "hideous," greatly concerns Mexico. Duty-free treatment for goods meeting a certain content threshold is on the table at U.S. Mexican free-trade talks. Los Angeles-Mexico imports and exports now run at nearly $600 million a year, not including goods from maquiladora assembly plants, and that figure is expected to leap under a Mexico trade pact.