U.S. Auto Makers Fret About Threat of Mexican Imports : Vehicles: European rivals could take advantage of a free trade agreement to build factories south of the border, then send cars north.

Thirty years ago, when Detroit was the world’s undisputed car-making capital and Canadians streamed through the Detroit-Windsor Tunnel every day to work in its factories, Mexico had virtually no automotive industry.

Decades of government-industry coordination that rivals the cooperation among Japanese leaders and business executives have changed that scenario.

Today, as the three North American countries negotiate a free trade agreement, Mexico is emerging as an automotive powerhouse, a country that in the next decade could rise from its current 12th-place standing among world automobile producers to fourth place, according to a Massachusetts Institute of Technology study.

That worries U.S. and Canadian auto workers, who fear that they will lose more jobs to Mexico. And it worries U.S. auto makers, who see Japanese and European rivals increasing their presence in Mexico--a market Detroit has dominated--as a base to further penetrate a consolidated North American market.

Those concerns have combined with the dispute over 90,000 Honda Civics assembled in Ontario, Canada, which were denied duty-free entry to the United States, to make the automotive industry one of the hottest topics in trilateral trade negotiations.

In theory, all three countries want the same thing: better access to each others’ markets. However, Mexico and Canada do not want to give up the prospect of substantial investments from European and Asian auto makers, while Canada and the United States do not want to give an advantage to Mexico, where the automotive industry remains highly protected.

Mexico has made tentative steps toward opening up, allowing limited auto imports beginning in 1990. Consumers stood in line to buy Corvettes, Lincoln Town Cars and the dozen other models available here--at more than double U.S. prices.

Despite the appetite for foreign-made autos, government restrictions assured that only 9,371 imported cars were sold here last year.

That was barely a trickle against the northward flow of auto exports. Even without a free trade agreement, Mexico’s international auto sales rose 30% last year, to 358,666. About 90% of the Mexican exports are driving along roads to the north, accounting for about 4% of U.S. and Canadian imports.

Nearly one-third of the vehicles made here are exported. And that does not count the 2 million engines sold to other countries, mainly the United States and Canada.

Automobiles and parts are Mexico’s top manufactured export. General Motors is second only to the government oil monopoly among Mexican exporters. While U.S. car manufacturing shrinks, Mexico’s industry is growing; auto makers last year announced combined investments in Mexico of $2.7 billion.

About the same time GM announced plans to close 21 plants in the United States and Canada, the company began expanding production at its Saltillo plant, 200 miles south of Laredo, Tex.

Ford, which makes Escorts and Mercury Tracers at a state-of-the-art factory in northwest Mexico, is investing $740 million to refit its export-oriented Chihuahua engine plant. Half the sales of Chrysler’s Mexican subsidiary were from exports last year.

For money-losing U.S. auto makers, shifting production to Mexico--where wages are lower, unions are more pliant and the market is growing--is a logical strategy for turning around multibillion-dollar losses.

Not surprisingly, U.S. union officials vociferously disagree.

“A better response to the current crisis would be to revise anti-U.S. GM corporate policies that favor production in Mexico and other countries at the expense of U.S. workers,” United Auto Workers President Owen Bieber said in December when the plant closings were announced.

Canadians, who lack a home-grown automotive industry, also worry about the trends. From 1986 to 1991, 60% of foreign investment in the sector flowed to Mexico. As a result, Mexico makes 9% of the cars manufactured in North America, close on the heels of Canada’s 11%, but still far behind the United States, with 80%.

Those concerns did not faze the U.S. Big Three until Volkswagen and Nissan began major expansions and Mercedes Benz announced plans for a Mexican auto assembly plant.

Now, the prospect of Mexican-made cars from German- and Japanese-owned factories entering the United States and Canada duty-free has solidified the argument for strict rules of origin.

Those rules will determine whether a product benefits from the proposed three-way free trade agreement. In the case of automobiles, that status probably will be determined by what percentage of the parts (or of their value) used to make a car or truck were manufactured in North America.

The UAW supports an 80% regional content requirement, far higher than the 50% level required in the three-year-old U.S.-Canada free trade agreement.

Mexican negotiators have refused to put a number, publicly, on their preferred content requirement, saying only that “the agreement should not be an impediment to promoting investment in Mexico, either within the region or from other countries.” Meanwhile, Mexico’s 500 auto parts makers are pressuring their negotiators to maintain a 36% Mexican content requirement for cars sold as domestic products here.

All three countries want a definition clear enough to avoid a repeat of the conflict surrounding the Hondas assembled in Alliston, Ontario.

Under current agreements, Canadian-made cars are supposed to enter the United States duty-free, as long as 50% of their components are North American. But last month, the U.S. Commerce Department ruled that Canadian Hondas did not meet the requirement. Costly foreign parts are added to the Civics’ engines after they are cast and assembled in Ohio--rendering the engines, and therefore the cars, foreign-made, according to the U.S. government.

“We think this goes against the letter and the spirit of the free trade agreement,” said Barbara Jean McDougall, Canada’s secretary of state for external affairs. “We find this disturbing, and we will try to get the decision reversed.”

Customs officials say such problems arise because they were not consulted early enough in the U.S.-Canada negotiations. As a result, they contend, many sections of that agreement are difficult to understand and harder to enforce.

The three-country agreement, with customs agencies included from the start, will attempt to correct such problems.

Voices of Free Trade No industry better embodies the bitter debate over a North American free-trade agreement than autos. U.S. labor unions say a trade pact would only accelerate the exodus of high-paying jobs south of the border. Mexicans not only want to expand their production of cars for export to the United States, but want to be able to buy American cars, which long have been unavailable because of protectionist laws.

‘This plant has already lost business to Mexico. I’m going to lose my job along with 2,600 other employees here. And that, you can almost say, is a direct result of allowing a free, unrestricted trade agreement with Mexico, a Third World nation.’ --John Dominguez, union electrician at the General Motors plant in Van Nuys, which is scheduled to close this summer.

‘When the first imports arrived, they sold quickly to the people who could afford them. Now we sell an import once in a while. The import tariffs make the cars cost a lot.’ --Javier Otero, salesman at the Havre Chevrolet dealership in Mexico City.

Car Trade With Mexico

Even without a free-trade pact, commerce in autos and auto parts between the United States and Mexico has steadily expanded.

Source: Commerce Department

Times staff writer George White in Los Angeles contributed to this story.