Whose little car are you? Feds will decide.

Whose little car are you? Feds will decide

U.S. probing origin of parts in Hondas from Canada

The foreign-trade community in Los Angeles is awaiting word on an 18-month-old audit of Torrance-based American Honda Motor Co. by the U.S. Customs Service, the highest-profile customs investigation of an American-based operation.

The results may help clear up confusion over the 2-year-old U.S.-Canada Free Trade Agreement. Also, they may send an important signal to local companies contemplating trade with Mexico, with which a similar free-trade accord is being negotiated.

The audit concerns thousands of Honda Civic cars imported from a Canadian plant and whether more than 50 percent of its parts were of North American origin. If not, then they did not deserve the duty-free treatment enjoyed by the Torrance company in 1989 and 1990 under the U.S.-Canada Free Trade Agreement.

The audit will likely conclude in early November, said a spokesman at the U.S. Treasury Department, which oversees U.S. Customs.

Interviews last week with private customs brokers and attorneys yielded a range of reactions, including sympathy towards Honda and cynicism towards U.S. Customs.

The local Honda operation is a heavyweight. It oversees 980 Honda dealerships nationwide and is owned by giant Japan-based Honda Motor Co. Ltd., which did $32 billion in sales last year.

"There's going to be a lot of fighting, with that kind of money involved," said attorney Steven Zisser, who predicted no swift conclusion. Zisser is a customs specialist at a former Honda law firm, Stein, Shostack, Shostack & O'Hara in Los Angeles.

The New York Times this summer reported that Honda might soon have to pay $20 million in duties owed. That information was said to come from a leaked U.S. Customs confidential memorandum on "preliminary results" of the audit.

The memo, however, was vigorously challenged by Honda. It was "outraged" by the Customs leak, said American Honda attorney Donald Harrison. He called the Times report "baffling" and said Honda is confident the Civics contained more than 50-percent North American parts.

"You simply don't know what the Customs position is, even on major things," complained Hollywood-based customs broker Frank Cadenhead. Honda, like other importers, is struggling in the dark, because U.S. Customs hasn't issued clear guidelines to the Canadian pact, said Cadenhead. He ruled on similar issues involved in the Generalized System of Preferences as a customs specialist for U.S. Customs from 1970 to 1983. (The GSP allows duty-free import of certain goods from developing countries, based on content.)

The U.S. Senate Finance Committee held hearings on the Honda affair in June. If Honda is viewed as circumventing the 1989 U.S.-Canada accord, or the pact is perceived as Swiss cheese, congressional opponents of the Mexico agreement might use the Honda case as ammunition.

"What bothers me is the Japan bashing," said John E. Brady, president of the Los Angeles Customs & Freight Brokers Association. "As I hear through trade rumors, General Motors is in a far worse situation than Honda," said Brady, referring to similar questions over imports from the GM-Suzuki joint venture.

In any case, the affair may be important to local importers and exporters with strong ties to Mexico. The way Washington officials enforce free-trade agreements will be spotlighted in the high-stakes Honda affair.

The duty-free issue also concerns Southland businesses, especially real estate interests. Strict handling by the Customs Service of content allegations might prod foreign supply companies, especially Asians, to create assembly operations in California rather than making products in Mexico and shipping them into the U.S.

"They know exactly, to the dot, what their content is, but it's never black and white" to U.S. Customs inspectors, said real estate Vice President Nick Criss of Burnham de Mexico, which scouts plant sites for foreign firms. Criss said he is representing a major Asian electronics manufacturer in finding homes in California and Mexico for up to 12 of its supply houses. His client, which he declined to name, is more concerned with whether the threshold for Mexico will likewise be set at 50 percent.

"But they're not executing their plans right now until they know what the number will be," he said, referring to the 35-percent-to-75-percent content rule being knocked about in U.S.-Mexico talks.

"Obviously the Japanese, Koreans and Taiwanese want it as low as possible," said Criss. "They don't want to make any more capital investment in North America than they have to. When you make the number too high, the capital outlay is greater than the duty you'd have to pay."

Honda invested more than $2 billion in U.S. manufacturing plants in the 1980s. Some cars and motorcycles from its Ohio plants are exported to Canada. They have passed the 50-percent-content audit by Revenue Canada, the Canadian counterpart to U.S. Customs.

The Torrance company, however, would have to pay higher duties, if imposed. Currently a 2.5 percent tariff is levied against imported cars. That would add $250 to a $10,000 car and possibly more when marked up to the consumer.

Attorney Harrison declined to detail how many Civic imports were concerned. If $20 million is at stake, as the New York Times reported, that would represent cars worth some $800 million.

In the worst case, if fraud is found, a 100 percent penalty could be assessed, or $800 million, said customs attorney Zisser, but that is very unlikely.