US embassy cable - 05HOCHIMINHCITY366

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000366 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT PLEASE PASS USTR, ELENA BRYAN 
STATE FOR EAP/BCLTV AND EB/TPP/ABT/BTT 
USDOC FOR 4430/MAC/ASIA/OPB/VLC/HPPHO 
TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EINV, BEXP, PREL, VM, BTA 
SUBJECT: STATE TRADING IN VIETNAM -- LIMITS ON TRADING AND 
DISTRIBUTION 
 
REF:  A) HCMC 104 B) HCMC 178 C) HCMC 213 D) HCMC 294 
 
1. (U) This is the fifth in a series of cables on industry 
perspectives in southern Vietnam on the role of the state in the 
economy. 
 
2. (SBU) SUMMARY:  U.S. companies based in Ho Chi Minh City chafe 
at GVN restrictions that prohibit them from directly importing and 
distributing their goods.  They report that phase-ins of trading 
rights and distribution services provided in the U.S.-Vietnam 
Bilateral Trade Agreement are not being implemented in a timely 
fashion.  In addition, there are too many products that U.S. 
businesses are forbidden to import and distribute directly.  These 
limitations hinder U.S. exports to and investment in Vietnam and 
make products that do get in more expensive.  END SUMMARY. 
 
3. (SBU) U.S. invested enterprises may only import and export 
products used in, or in connection with, their production or 
export activities.  They are currently prohibited from importing 
and distributing goods for sale in Vietnam, with some exceptions. 
Only Vietnamese companies, which are frequently state-owned, are 
authorized to import and distribute products from U.S. and other 
foreign suppliers.  This has the effect of leaving U.S. companies 
virtually powerless to control how their goods reach the 
Vietnamese market, according to attorneys at the Ho Chi Minh City 
branch of Baker and McKenzie. 
 
4. (SBU) The U.S.-Vietnam Bilateral Trade Agreement (BTA) provides 
phase-ins through 2008 and beyond that gradually allow U.S. firms 
more control over the import and distribution of their goods in 
Vietnam.  As of December 2004, U.S. companies engaged in 
manufacturing in Vietnam should be able to import most goods, 
though they must continue to rely on a Vietnamese distributor. 
However, at least one U.S. company, Gannon International, has 
reported problems in availing itself of trading rights under the 
BTA.  A full service asset management company, Gannon 
International provides warehousing, logistic, and beverage 
production services for a variety of chemical, raw material, and 
consumer product companies in Vietnam.  An official at the 
Ministry of Trade acknowledged to Hanoi Econoff that the GVN has 
not issued the regulations necessary to implement the BTA's 
trading rights and distribution services obligations.  He said 
that MOT is in the process of drafting the necessary regulations, 
but the process is likely to take at least several more months. 
MOT still needs to circulate the draft regulations for inter- 
ministerial clearance and then seek approval from the Prime 
Minister. 
 
5. (SBU) There are currently a large number of goods listed in the 
BTA that the GVN bans from direct import and distribution and that 
will not benefit from any of the BTA phase-ins.  U.S. companies 
like Merck, Dow, Dupont, Diageo, Gannon and others are frustrated 
that there are currently no provisions for them to import and 
distribute their goods, including pharmaceuticals, chemicals, 
fertilizers, pesticides, wine and spirits, and audio-visual 
materials.  Merck and other U.S. pharmaceutical companies with 
representative offices in Ho Chi Minh City report difficulties in 
effectively marketing their products because they cannot control 
distribution.  Diageo and the Distilled Spirits Council of the 
United States note U.S. companies' inability to control import and 
distribution of spirits means there is a greater danger of 
counterfeiting, which endangers public health and brand 
reputations.  Monsanto, as well as Dow and Dupont in the United 
States, would like to expand their product lines to include more 
fertilizer and pesticide because of growing Vietnamese demand, but 
they are barred by restrictions on fertilizer and pesticide. 
Baker and McKenzie report many U.S. companies that are interested 
in selling their products - from audio-visual products to computer 
hardware - in Vietnam are unwilling to do so in the current 
environment. 
 
6. (SBU) Having to import and distribute through Vietnamese 
intermediaries raises the cost of U.S. goods and reduces the 
service benefits that traditionally help to make a U.S. product 
desirable.  Gannon estimates the bottlenecks created by having to 
go through a Vietnamese importer and distributor add about seven 
percent to the cost of imported goods.  The situation also opens 
up U.S. business to risks of fraud, unpaid receivables and 
cumbersome business practices that add further costs to goods sold 
in Vietnam.  Oregon-based OIASCM Supply Chain Management estimates 
the cost of having to work with a local partner at several 
thousand dollars a month.  OIASCM says having fewer intermediaries 
involved in their logistics business would mean lower cost, 
greater efficiency and better service.  OIASCM also observes that 
it is limited by the capabilities of its local partners; the 
company would like to grow its business in ways that it currently 
cannot because of local partner limitations.  Johnson, Stokes and 
Master, another law firm, reports that all their clients involved 
in selling goods in Vietnam - regardless of the sector - have 
voiced frustration at the costs involved in working through local 
importers and distributors, who often cheat on duties and demand 
significant percentages of profit margins.  Baker and McKenzie 
notes that U.S. products are often in demand because of their high 
quality and a U.S. company's ability to provide good customer 
service and technical assistance.  Many of these advantages are 
lost when the U.S. company does not have control over import and 
distribution. 
 
7. (SBU) Under the BTA, full distribution rights for 100 percent 
U.S. owned companies are not phased in until 2008.  U.S. 
enterprises doing business in Vietnam have expressed a strong 
interest in speeding up this timetable as part of Vietnam's WTO 
accession.  Carrier Corporation operates a 100 percent foreign 
invested subsidiary, which manufactures, sells, and services air 
conditioning equipment in Vietnam.  Carrier is interested in 
expanding its business in Vietnam, but views current limitations 
on distribution rights as a significant obstacle.  Carrier can 
currently only control the distribution of its products that are 
manufactured and assembled in Vietnam.  For distribution of 
Carrier products manufactured elsewhere, the company has to use a 
cumbersome and convoluted process that involves a third-country 
middleman.   Carrier representatives also note that limitations on 
distribution limit Vietnam's ability to attract foreign investment 
in infrastructure and logistical operations. 
 
8. (SBU) COMMENT: The issue of trading and distribution rights is 
a critical one to a broad cross-section of U.S. business, not to 
mention other foreign companies.  In Baker and McKenzie's view, 
the limits and prohibitions on import and distribution are 
creating a structural trade imbalance between the United States 
and Vietnam.  Many U.S. companies, particularly small and medium 
enterprises, are discouraged from doing business in Vietnam 
because they cannot control trading and distribution. 
WINNICK