'Made' in the U.S.A.?

December 01, 1991

"Transplant factories," production plants set up in this country by overseas companies, offer several benefits. They help Japanese automakers ease friction over the U.S. trade deficit. They provide jobs to Americans. They provide training in team-oriented decision-making, just-in-time inventory control and the workings of keiretsu (tightly related groups of suppliers and clients) to boost product-development efficiency. Japanese investment repatriates the money Americans spend on Japanese products and helps re-industrialize America.

Yet complaints by the U.S. Customs Service, prompted by a comprehensive audit of the most successful transplant carmaker, Honda, challenge the basis of these beliefs.

A Customs audit of a Honda Civic plant in Canada checked the North American content of cars sold under the U.S.-Canada free-trade agreement. Auditors said major components, made with Japanese parts, shaped on Japanese machine tools, welded and assembled by Japanese equipment, "miraculously" became U.S. products from Japanese-controlled suppliers. Engines are one example. Honda bought only 5 percent of the parts from suppliers in this country. Yet manipulation of reporting rules allowed parts whose primary tooling was done in Japan to be counted as 50 percent U.S.-made, enabling Honda to call the parts "100 percent" U.S.-made.

Honda says its cars have "75 percent" U.S. content, but Customs says 16 percent. Instead of manufacturing plants, Honda's North American plants are glorified assembly works. Customs said Honda abused the free-trade pact, and owes $20 million in import duties. But U.S. Treasury officials blocked Customs' attempt to collect, and forced the Customs commissioner to apologize to Honda.

That turn of events rankles Congress. If Honda, the most Americanized transplant, uses far less U.S. products than it claims, how American can other transplants be? The Japanese are four times as likely as U.S.-owned plants to import parts.

The Customs audit conclusion still stands: Far less of the cars so many Americans love is really American. What that implies for U.S. officials weighing the impact of transplant sales in many other markets is a drastic reassessment of the benefits versus real costs.

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