US embassy cable - 04HANOI1181

UNCLAS SECTION 01 OF 02 HANOI 001181 
 
SIPDIS 
 
STATE ALSO PASS USTR 
USDOC FOR 6500 AND 4430/MAC/AP/OPB/VLC/HPPHO 
TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: KTEX, ETRD, VN 
SUBJECT: Vietnam:  MOT Proposes Changes to Textile Quota 
Allocation Regime for 2005 
 
1. This is a joint Embassy Hanoi/Congen Ho Chi Minh City 
message. 
 
2. Summary:    The Ministry of Trade (MOT) recently proposed 
changes to Vietnam's textile/garment quota allocation regime 
for 2005.  The new regime would allocate quota based on 
factories' export revenue rather than on quantities (number 
of pieces) exported the previous year.  Apparel firms worry 
that this will make it even more difficult to do business 
here in Vietnam. End summary. 
 
The New Rule 
------------ 
 
3. The MOT, in coordination with the Ministry of Industry 
(MOI), issued a notice on March 16 announcing that it 
intended to change the basis for allocating textile quota in 
2005.  Rather than basing quota allocation on the previous 
year's export quantities, as it did for 75 percent of all 
quota allocated this year, in 2005 MOT plans to allocate 
quota based on the previous year's export revenues (for 
exports to quota-restricted countries such as the U.S. and 
the EU).  The GVN also announced it would reserve ten 
percent of quota in some "hotly demanded" categories for 
contracts or orders with high prices.  This would be the 
first time the GVN has based its allocation system on export 
revenues.  Mr. Le Van Thang, Deputy Director of MOT's Export 
Import Department, acknowledged enterprises might face 
difficulties in adjusting to this new system.  However, Mr. 
Thang stated he believes that only relatively few garment 
and textile enterprises will be disadvantaged by the new 
allocation system. 
 
Reasons for the new rule 
------------------------ 
 
4. According to the announcement, the MOT is making the 
change to encourage higher value exports.  The GVN has 
expressed its concerns that Vietnam's export capacity is 
much greater than the textile quota allotted by its biggest 
markets (primarily the U.S. and EU).  MOT believes that 
encouraging factories to export higher-valued items will 
result in more efficient quota utilization.  In 2003, 
Vietnam exported about USD 3.7 billion worth of textiles and 
garments to its quota- (total of about 40 million dozen) and 
non-quota (primarily Japan) markets.  The GVN wants to 
increase textile and garment exports in 2004 by 16 percent 
to USD 4.2 billion.  This will be difficult to achieve, as 
annual growth rates of quota arrangements Vietnam has with 
quota-restricting countries are significantly lower than 16 
percent.  (Note:  The U.S. Vietnam bilateral textile 
agreement allows for seven percent annual growth (two 
percent for wool products.) End note.)  Vietnam has a 
bilateral agreement with the EU that would increase textile 
and garment quotas 60 to 75 percent (depending on the 
category) this year.  However, the EU has not actually 
allotted Vietnam the higher quota as yet because Vietnam has 
not implemented the commitments it made on banking sector 
liberalization for the EU in exchange for the larger quotas. 
 
5. MOT is concerned that enterprises are using quota 
inefficiently, exporting low quality apparel at low prices. 
In the period immediately preceding negotiation of the U.S.- 
Vietnam bilateral textile agreement (starting in February 
2003) the GVN actively encouraged Vietnamese enterprises to 
export as many textiles/garments to the U.S. as possible to 
expand the export basis upon which quota levels would be 
negotiated with the U.S.  However, according to Mr. Thang, 
the GVN now wants enterprises "to pay more attention to 
quality and prices."  The GVN believes that producing high- 
end textiles and apparel is the only way to make it 
competitive with China, especially when the Agreement on 
Textiles and Clothing (ATC) expires in 2005.  The GVN also 
understands that its local producers, (rather than foreign 
invested enterprises), will be the ones most negatively 
affected by this new rule "which is painful, but needs to be 
done," according to Mr. Thang. 
 
Enterprises ARE CONCERNED 
------------------------- 
 
6. Foreign apparel buyers and producers are critical of the 
new proposal.  Representatives of HCMC companies told 
Econoff that it would likely make the system less 
transparent and would not have its intended effect - to 
increase the value of Vietnam's exports.  On the contrary, 
they say, it will make Vietnam even less competitive in a 
world where apparel producers in other countries will no 
longer be bound by quota in 2005.  They point out that much 
of the value in any garment (75 percent, on average) is the 
materials, most of which is imported into Vietnam.  For most 
garments, only a small part represents the value-added in 
Vietnam -- typically the labor of cutting, making, and 
packing (CMP).  Under the proposed system, clothing made 
with more expensive cloth will generate more quota, even if 
the Vietnam added value is the same or less.  It also 
invites companies to inflate invoice prices in order to 
obtain more quota. 
 
7. Firms are so concerned about the new proposal that the 
Vietnam Textile and Apparel Association (VITAS), which 
includes both Vietnamese and foreign-invested garment and 
textile firms, has invited the Vice Ministers of Trade and 
Industry responsible for textiles to Ho Chi Minh City next 
week to meet with them and air their views. 
 
Even Bigger Worries 
------------------- 
 
8.  Foreign and private sector Vietnamese firms have 
expressed reservations about the GVN's quota allocation 
methodology.  Foreign firms have been clear that they wish 
for the GVN to allocate as much quota as possible based on 
prior year performance, but in the last two years only 75 
percent of quota was allocated that way.  The rest of the 
quota was split up according to a variety of criteria such 
as increased capacity, additional investment, bonuses for 
remote and impoverished areas, big buyers, etc.  Typically 
it was large state-owned firms that would meet the criteria 
for extra quota.  This became particularly problematic this 
year, when as one foreign producer stated:  75 percent of 
this year's quota was allocated based on past performance, 
but past performance was based on last year's quota 
allocation in which only 75 percent of quota was based on 
past performance.  So for this year, essentially, producers 
are getting 75 percent of 75 percent for past performance, 
which is closer to 56 percent. 
 
9.  The concerns about the quota system are underscored by 
larger worries about the viability of the garment business 
in Vietnam after the rest of the world goes quota free at 
the end of this year.  One foreign producer noted that 
Vietnam should be simplifying the quota allocation system 
and reducing the cost of doing business to compete.  High 
electricity and telecom costs (although telecom costs have 
fallen), and admin fees for quota (40-50 US cents/dozen) all 
raise the cost of doing business here for apparel producers. 
He also complained about costs surrounding customs hassles 
with importing fabric, in theory duty free if used in 
manufacturing export apparel.  Although the trading rate for 
quota (to buy from another quota rights-holder) of $6-$12 
per dozen is currently cheaper than in China, it is rising 
as quota becomes more scarce.  When quotas disappear 
everywhere but Vietnam, firms producing in other countries 
will not need to pay this cost. 
 
10.  Private sector Vietnamese firms are also worried about 
the proposal.  Mr. Diep Thanh Kiet, who owns a garment firm 
in HCMC and head's that city's association of garment 
producers, was also highly critical of the government's 
plan.  He has also criticized the current allocation system 
as one designed to favor state-owned firms. 
 
11. Comment:  The recent proposal to shift quota allocation 
to a value- rather than volume-based system lacks specifics 
for implementation and appears to be more of a warning to 
firms to pay closer attention to quality and prices.  Our 
contacts in HCMC believe the GVN can be persuaded not to 
implement the new system.  Their concern about the overall 
competitiveness of Vietnam in a mostly quota-free world may 
be far more important.  Over the past few years, companies 
doing business here have consistently said Vietnam 
represents a good alternative to China for sourcing apparel. 
However, after 2005, if Vietnam cannot stay competitive on 
price and speed, firms may question whether it is worth it 
to keep doing business in Vietnam. 
BURGHARDT