Daimler-Chrysler is exploring manufacturing cars in China for import back into the United States.

This news comes amid the company’s “Valentine Day Massacre” announcement yesterday of more closings of U.S. auto plants and a further layoff of nearly 13,000 workers, some 16 percent of the company’s workforce.

Structural trade advantages in China, including cheap labor, a government-subsidized currency and a Value Added Taxation policy that rebates the tax on Chinese exports are driving auto manufacturing from Detroit to Beijing.

David Elshoff, a spokesman for Daimler-Chrysler, confirmed to WND the company is in talks with the Chinese state-owned Chery Automobile Co. to joint venture the manufacture of a car in China for import to the U.S. market.

“In December 2006, we confirmed we signed a letter of agreement with Chery to manufacture small cars for import to the U.S.,” Elshoff told WND. “The agreement is pending the agreement of Daimler-Chrysler’s supervisory board and the approval of Chinese authorities.”

Elsoff explained the agreement with Chery is for small vehicles, and Daimler-Chrysler has not yet specified which of the Chrysler group brands – Chrysler, Jeep or Dodge – the vehicles would be built under. They will be marketed internationally, including the European Union market, the NAFTA market and possibly other regions.

Elsoff also explained the discussions in China were about producing vehicles in market segments in which the Chrysler group does not currently compete.

“We’re not talking about replacing plants or moving jobs,” he said. “This joint venture effort would be incremental to our current lineup.”

Elsoff argued it’s a “general consensus among automakers and analysts that it’s impossible to build competitively a small car in North America.”

“The margins on small cars are so thin that the venture requires a low-cost source,” he said. “It’s no different than General Motors importing their Aveo from Korea. You can’t make money in the North American market with a North American-produced vehicle.”

Daimler-Chrysler underwent a restructuring in 2001 that has resulted in closing 16 plants in North America. Since 1998, Chrysler’s job rolls have dropped by 44,000.

“We underwent a few years ago the restructuring that GM and Ford are going through now,” Elsoff told WND.

Yesterday, at a press conference in Auburn Hills, Mich., Daimler-Chrysler’s Chairman Dieter Zetsche announced the company was looking for further strategic options with partners for Chrysler. Zetsche said all options were on the table, including a possible divestiture of Chrysler.

Lloyd Wood, a spokesman for American Manufacturing Trade Action Coalition, told WND China is positioning to be a major player in car manufacturing and in the car parts business worldwide.

“The Chinese themselves have not been able to manufacture cars of the quality required to import them to the United States,” said Wood. “But with a world class joint venture partner like Daimler-Chrysler, the Chinese will make great strides, not only in car manufacture, but in the automotive parts business where China has already begun to make an impact.”

Wood confirmed to WND the Value Added Tax, or VAT, is playing an important role in driving auto manufacturing to China.

“The VAT is a little-understood structural element of our free trade agreements,” Wood pointed out. “But if Chrysler establishes a joint venture in China, the cars made by the Chinese joint venture will get favorable VAT treatment, even though Chrysler is a U.S. company.”

WND reported that under WTO agreements, the U.S. suffers a disadvantage in that countries with Value Added Taxes give rebates to domestic manufacturers that ship overseas, while at the same time applying their VAT taxes to U.S. imports entering their markets.

The U.S. has no tax similar to a VAT to impose on Chinese imports to the American market.

“China needs Daimler-Chrysler to go into China to set up a world class manufacturing operation,” Wood explained. “China will begin importing the Daimler-Chrysler joint venture cars over here. Then some of the other Chinese companies will bleed off the expertise. In five or 10 years, I wouldn’t be surprised to see ‘Made in China’ cars and auto parts gain a major U.S. market share.”

Wood added than given time, China “will flood the world auto market, just like China has flooded every other market where China has competed, from toys to clothes to electronics.”

“Unfortunately,” Wood concluded, “the U.S. VAT trade policy is so messed up that we end up creating more of an incentive for Daimler-Chrysler to make cars in China than to make them here in the United States.”

WND contacted the United Auto Workers for comment on this story, but the union declined.

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