No Way to Treat a Friend : Honda flap with Canada is ludicrous in the extreme

Canada and the United States have long worked in partnership. But now our good neighbor to the north is hopping mad. The U.S. Customs Service has slapped some hefty duties on cars produced in Canada. Now Ottawa is accusing Washington of undermining the 1989 free-trade agreement between the two countries.

An audit by the Customs Service concluded that Honda Motor Co. must pay $16.5 million in duties on 90,000 cars because the 1989 and 1990 vehicles did not contain enough “North American content” to quality for duty- free status. The disputed Civic cars were built in Alliston, Ontario, but include engines manufactured at the Honda plant in Anna, Ohio. Honda maintains that the cars contained 69% of North American content. Customs has reportedly determined it was “only” 46%, less than the required 50% content rule under the free-trade agreement--designed to lower trade barriers with Canada, our biggest trading partner.

The problem stems from the complicated process of valuing North American content--a formula based on labor, parts, direct processing costs and even depreciation of equipment. The U.S. government and Honda are interpreting rules on valuation differently.

As a result, harsh words are coming from Canada, which has demanded a meeting with Washington to discuss the Honda ruling. Canadian officials claim the retroactive duties create uncertainty among potential investors who are interested in taking advantage of the free-trade agreement. They also believe the Bush Administration is jeopardizing talks aimed at widening the free-trade agreement to include Mexico.

The sticky trade dispute is even causing the Japanese to question whether the ruling was politically motivated to show that the President is taking a harder line toward Japan in an election year.

The cause of this trade dispute, in addition to pigheadedness on the U.S. side, is the lack of clarity in the content rules. The fuzziness in the rules should be eliminated in the current negotiations for the North American free-trade pact.

Canada would find that to be more neighborly.