US embassy cable - 03HANOI2540

UNCLAS SECTION 01 OF 02 HANOI 002540 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB, E, EAP/BCLTV 
STATE PASS USTR FOR EBRYAN 
USDOC FOR AUTO AFFAIRS SCOTT KENNEDY 
USDOC ALSO FOR 6500 AND 4431/MAC/AP/OKSA/VLC/HPPHO 
TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ETRD, EIND, EFIN, EINV, ECON, ETRD, VM 
SUBJECT: STORM OVER RESTRICTIVE AUTO COMPONENT TARIFFS 
 
 
SENSITIVE BUT UNCLASSIFIED -- PROTECT ACCORDINGLY. 
 
REF: A. 02 HANOI 3029 
     B. 02 HANOI 3106 
     C. HANOI 7710 
     D. HANOI 1814 
 
1.  (SBU) SUMMARY:  Since last year the GVN has sought to 
develop Vietnam's auto industry by increasing the local 
content in domestically produced vehicles.  Tax and tariff 
policy has been the main policy used to achieve this goal. 
Reps of foreign automakers with production in Vietnam 
believe these decisions will have a disastrous impact on 
their operations and Vietnam's auto industry. Auto sales 
have spiked as Vietnamese prepare for a potential 
significant hike in car prices.  GVN explanations for this 
strategy are unclear.  Embassy has raised this issue and its 
potential impacts on various occasions with the GVN and the 
international community.  Apparently, the GVN believes it 
has the right to change things in unpredictable ways once 
foreign firms have started operations.  We believe this 
issue sends a mixed message to foreign investors and should 
be raised during the upcoming visits of MPI Minister Phuc 
and others to the U.S.  END SUMMARY. 
 
2.  (U) A December 2002 Prime Ministerial decision (Ref A) 
laid out a strategy to develop Vietnam's auto industry by 
sharply increasing the local content in domestically 
produced vehicles.  The Ministry of Finance has pursued this 
strategy by harmonizing duty and tax rates applied to 
imported auto component kits (used by all automakers in 
Vietnam to produce cars, vans, and trucks) with the high 
tariff rates applied to imported completely built vehicles. 
These efforts have persisted despite an effective joint 
campaign by Ford Vietnam, GM Daewoo, and other auto 
producers in Vietnam as well as Ambassador and like-minded 
embassies (Refs A and B). 
 
3. (U) In May, the National Assembly passed an MOF proposal 
to include special consumption tax (SCT) and value added tax 
(VAT) increases as part of a larger package of tax changes. 
The NA decision will increase the VAT on all vehicles from 
five to ten percent in 2004 and will increase the SCT on 
cars manufactured from kits (CKDs) starting in 2004 and 
going up to eighty percent on some models by 2007.  In 
addition, the MOF has completed a 2004-2010 roadmap to 
harmonize tariff rates applied to CKDs and completely built 
units (CBUs).  Under this roadmap, the MFN rates applied to 
CKDs will rise 5-10 percent per year until 2008, including a 
five percent increase, which began on September 1. 
Meanwhile, the MOF has stated that it plans to reduce rates 
for CBUs in accordance with WTO accession negotiations. 
 
4.  (U) These changes already appear to be affecting the 
market.  According to recent press reports, car sales have 
spiked in recent months.  The first seven months of the year 
saw a 42 percent increase in sales over the same period last 
year, with more than 18,600 cars sold during the period. 
Based on this trend, the Vietnam Auto Manufacturers 
Association (VAMA) has said that the number of cars sold in 
2003 could reach 32,000.  Press reports also predict that 
the price of locally produced cars will have to rise between 
18 and 30 percent to accommodate the new tax rates. 
 
5.  (SBU) GVN officials are inconsistent in their 
explanations for implementing the new auto policy. 
Generally, MOF officials have cited the policy as part of 
MOF's overall efforts to reform the tax system.  MOF has 
also cited the need to develop a local content industry, the 
GVN to adhere to its commitments to the international 
financial institutions (IFIs), and the harmonization of 
taxes on CBUs and CKDs (see Ref C and D).  Deputy Prime 
Minister Vu Khoan tried to explain that this policy of 
adjusting tariff rates is designed to suit WTO standards. 
Minister of Trade Tuyen (and other MOT officials) have 
argued that auto producers in Vietnam make very high 
profits.  He also cited the need for increased local content 
and the development of an auto industry in Vietnam. 
Minister of Planning and Investment Phuc has explained that 
the GVN must decrease certain taxes, such as the SCT, and 
impose similar tax rates between locally manufactured and 
imported cars in order to follow their commitments to 
international institutions. (See Ref C) 
 
6.  (SBU) Econoff has confirmed that this policy did not 
originate with the local IMF and World Bank reps. Instead, 
they share Embassy's displeasure with the proposal. 
Although they agree with the need to harmonize tax rates for 
CBUs and CKDs, they do not support any increase in tariffs. 
Further, they are also concerned about how this decision was 
made and its potential effect on investment.  Until now, the 
IFIs have viewed trade liberalization as the strongest part 
of Vietnam's reform program, but this decision has cast some 
doubt on their assessment. 
 
 
7.  (SBU) COMMENT: Although the reasons behind these changes 
appear to vacillate, the GVN's commitment to increase the 
taxes and tariffs on locally-manufactured cars is unwavering 
despite intense pressure from many directions.  Some in the 
foreign auto industry here have cited this as a major threat 
to their business since their investment analysis did not 
assume car prices would suddenly rise by 25% or more.  The 
GVN clearly wants to attract foreign investment, hence the 
mission to the U.S. by Minister of Planning and Investment 
Phuc. Apparently, the GVN believes it has the right to 
change things in unpredictable ways once foreign firms have 
started operations.  We believe this issue sends a mixed 
message to foreign investors that should be raised during 
the upcoming visits of MPI Minister Phuc and others to the 
U.S. 
PORTER