This Changes Everything --DaimlerChrysler deal will redefine 'domestic' and'foreign'

It's tricky to talk out of both sides of your mouth.

But with Chrysler Corp.'s expected transformation from an American icon into a German-owned industrial giant, the turn of a phrase might make all the difference in how the deal plays out in policy and international trade circles.

The No. 3 U.S. automaker, never one to be shy about waving the American flag, suddenly must incorporate the German tricolor into its new global identity.

Among the many ironies this $38 billion deal has exposed was the scene on May 1 when Canadian Auto Workers President Buzz Hargrove found himself celebrating the first batch of Chrysler's new 300M sedans coming off the line at Chrysler's Bramalea assembly plant. Mr. Hargrove launched into a fiery speech urging employees to fight against foreign interlopers who might finagle their way into the AutoPact trade agreement.

AutoPact is a 30-year-old deal that grants Chrysler, Ford Motor Co., General Motors Corp. and Volvo AG import duty exemptions when shipping motor vehicles assembled outside North America into either the U.S. r Canada. The pact expressly excludes Toyota Motor Co. and Honda Motor Co., both of which have assembled cars in Ontario for more than a decade. The Canadian government is reviewing whether AutoPact should be changed.

The Asian automakers have argued that their expanding manufacturing base in Canada means they should get the same breaks as the others. Mr. Hargrove and the U.S. automakers have opposed such talk at every turn. The U.S. automakers employ CAW members. The Asian don't.

But when Chrysler announced the merger with Daimler, Mr. Hargrove was equally passionate in his support of the deal and argued Chrysler should be allowed to stay in the pact even as a German-controlled company.

Because DaimlerChrysler will maintain its U.S. headquarters it believes it qualifies under AutoPact.

Indeed, Canadian civil servants seem to support Chrysler's position on the issue, says Dennis DesRosiers, a Canadian auto analyst.

But Honda and Toyota almost certainly will sue to force the issue, he says.

Ironically, if there is a legal challenge, it will use the language specifically developed by Chrysler and its allies to prevent foreign companies from buying in.

In addition to the so-called Big Three and Volvo, AutoPact covers dozens of small vehicle companies that build fire trucks, street sweepers and other specialty vehicles.

As Toyota and Honda increased their investments in Canada, AutoPact members started to worry that one of them might buy a streetsweeping manufacturer just to gain AutoPact status.

So the AutoPact companies got together with Canadian authorities in the late 1980s during negotiation of the U.S.-Canada free trade agreement, and built in a "poison pill" provision into the AutoPact.

Any company that both changed ownership and substantially changed its primary business would be kicked out.

But someone might also argue that a car company bought by a German conglomerate that now also will be involved in aerospace, railroads and other non-automotive heavy industries should be excluded as well.

The complexity of AutoPact is one of the milder questions the DaimlerChrysler deal raises.

Among other key issues: membership in the American Automobile Manufacturers' Association (AAMA), participation in United States Council for Automotive Research (USCAR) and the Partnership for a New Generation of Vehicles (PNGV).

The deal should not change Chrysler's standing under the North American Free Trade Agreement because the treaty recognizes manufacturing locations, not nationality.

But the new company might have serious trouble meeting the Corporate Average Fuel Economy (CAFE) requirements for import cars. Mercedes Benz AG currently pays CAFE penalties for import cars, but Chrysler is in compliance for all vehicle types. Mercedes '98 models again are expected to violate passenger car CAFE.

Both U.S. Environmental Protection Agency and National Highway Traffic Safety Administration officials say it's premature to discuss the CAFE implications.

The AAMA issue probably has the fewest overall policy implications because the lobbying group is private. But getting kicked out would be a political setback. Chrysler Chairman Robert J. Eaton says he expects Chrysler to stay in the AAMA.

An AAMA spokesman says he anticipates Chrysler will remain in the organization for the time being.

But Toyota and Honda are likely to increase pressure to gain AAMA entry if Chrysler stays in the group. The Japanese automakers argue that with their rapidly growing U.S. manufacturing bases, they qualify as much as anyone else. The DaimlerChrysler deal bolsters their case.

"We'll let DaimlerChrysler into the Association of International Automobile Manufacturers (AIAM) if they let us into AAMA," jokes a Toyota spokeswoman.

But other implications are more serious. If Chrysler were kicked out of USCAR or PNGV it would lose access to some of the cutting-edge U.S. research. Both programs involve significant federal seed money and are designed to maintain the U.S. competitive advantage.

A U.S. Department of Commerce spokesman says membership in USCAR is required to qualify for membership in PNGV, but PNGV has no separate U.S.-only requirements.

USCAR officials also say Chrysler's status hasn't changed.

The White House has announced an initiative to examine the wave of mega-mergers involving foreign companies snatching up U.S. firms and to determine if policy changes are needed. We'll see.