US embassy cable - 05HOCHIMINHCITY914

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 000914 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/BCLTV AND EB/TPP/BTA/ANA 
STATE PASS USTR FOR EBRYAN and GHICKS 
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO 
TREASURY FOR OASIA 
 
E.O. 12958:  N/A 
TAGS: ETRD, ECON, PREL, VM, WTRO, BTA, WTO 
SUBJECT:  LIMITS ON TRADING AND DISTRIBUTION CONTINUE TO HAMPER 
U.S. BUSINESS 
 
REF:  A) HCMC 366 B) HANOI 1957 C) HCMC 879 
 
1. (SBU) SUMMARY:  U.S. businesses in southern Vietnam are 
frustrated by limits on trading and distribution rights.  Many 
company representatives report that relevant BTA provisions are 
not being implemented effectively.  One business that has been 
directly importing and selling its product for 10 years faces a 
claim by government authorities that its operating license does 
not permit it to import and sell directly.  All strongly agree 
that broad freedom to directly trade and distribute a wide range 
of products must continue to be a key focus of WTO negotiations. 
END SUMMARY. 
 
BTA OBLIGATIONS NOT BEING MET ADEQUATELY 
 
2. (SBU) In meetings with EconOff, legal experts and company 
representatives have raised recurring concerns about trading 
rights and distribution services.   When the U.S.-Vietnam 
Bilateral Trade Agreement (BTA) entered into force, U.S. companies 
could only directly import-export goods in connection with 
production or export activities.  Most U.S. companies wanting to 
import goods for sale in Vietnam had and still have to go through 
a Vietnamese trading company.  The situation is similar for 
distribution services.  A U.S. firm must use a Vietnamese company 
to distribute its goods within Vietnam.  Under phase-ins 
negotiated in the BTA, as of December 2004, U.S. companies in 
Vietnam engaged in manufacturing or U.S. companies with less than 
50 percent equity in a joint venture with a Vietnamese enterprise 
should be able to import-export most goods directly.  Similarly, 
as of December 2004, joint ventures with Vietnamese enterprises in 
the distribution services sector may be established, with U.S. 
companies holding no more than 49 percent equity.  At least two 
U.S. companies attempted to avail themselves of these rights early 
in 2005, Gannon International (ref A) and American Indochina 
Management (AIM).  Both were unsuccessful in their petitions to 
the GVN on this issue.  In the case of AIM, the marketing, 
distribution and logistics company was told by MOT in January that 
the company would not be allowed to avail itself of these rights 
for the time being. 
 
OTIS ELEVATOR CASE 
 
3. (SBU) Another U.S. company, Otis, has been directly importing 
and selling its elevators in Vietnam since 1994, but now faces 
restrictions.  According to a memo prepared by Otis' legal 
representatives, law firm Baker & McKenzie, following an attempt 
to bring in a shipment of elevators as it has done for the last 10 
years, Otis was told in June that it is not allowed to directly 
import and sell and that its activities over the last 10 years 
have been beyond the scope of its license.  This was the view of 
the Departments of Trade and Planning and Investment in Hanoi, 
where the import information was originally filed; it is unclear 
whether Otis will appeal to the Ministry of Planning and 
Investment on their case.  According to some of Embassy's economic 
growth consultants in Hanoi, Otis's problems with its license are 
symptomatic of a more general problem for U.S. investors in 
Vietnam.  Many old investment licenses contain provisions, such as 
trade related investment measures (TRIMS), that are not permitted 
under WTO rules.  However, if old investment licenses must be 
rewritten to eliminate onerous TRIMS requirements, firms run the 
risk that provisions that are favorable to their business, such as 
generous trading rights, might also be eliminated.  Many companies 
would prefer to "grandfather" their old licenses. 
 
STATUS OF DISTRIBUTION RIGHTS CURRENTLY MURKY IN DRAFT LEGISLATION 
 
4. (SBU) Legal experts in HCMC are divided on how well legislation 
being drafted in preparation for Vietnam's accession to the World 
Trade Organization (WTO) addresses the issue of trading and 
distribution.  In the area of trading, Fred Burke, managing 
partner of Baker & McKenzie Vietnam, expressed concern to EconOff 
regarding a draft Decree on Foreign Traders, which lists 15 
categories of foreign companies that can engage in trading 
activities, including warehouse, logistics, retail, cosmetics and 
catering firms.  Burke is concerned that if a company is not 
working in one of these 15 areas, then it will not be granted a 
license to trade directly, potentially narrowing the ability of 
U.S. companies to engage in trading. 
 
5.  (SBU) A decree on foreign traders that is being drafted in 
connection to the Commercial Law is also troubling to Burke.  In 
addition to limiting trading activities to only 15 categories of 
companies (ref A), the decree will require companies to obtain an 
MOT license for each category in which a company wishes to trade. 
Burke said that besides being yet another example of a burdensome 
documentary requirement, it was unclear how this licensing process 
affects companies' obligation to be licensed by the Ministry of 
Planning and Investment (MPI).  The decree also states that 
representative offices in place in Vietnam for more than three 
years will be "discouraged" so as to promote the formation of 
branches instead.  Burke said the intention of this clause is 
unclear, and it introduces uncertainty into the system of rep 
offices, a system to which foreign companies have become 
accustomed.  Finally, Burke noted an irony in the GVN drafting a 
decree on foreign traders at a time when it seeks to enter the 
WTO, where national treatment is a fundamental principle. 
 
6. (SBU) In the area of distribution, Dao Nguyen, partner at 
Johnson Stokes & Master law firm in Vietnam, told EconOff in a 
separate meeting that, in her view, the new Commercial Law does 
not adequately provide for distribution services.  It covers sales- 
purchase agreements and agents, which include aspects of 
distribution, but does not grant broad distribution rights in a 
way that would benefit the needs of Nguyen's clients, particularly 
foreign companies looking to distribute their goods directly in 
Vietnam.  However, another HCMC lawyer, Sesto Vecchi, noted he had 
seen a draft decree linked to the Commercial Law that included 
provisions for distribution services.  Dao Nguyen further observed 
that distribution is mentioned in the draft Common Investment Law, 
but rights under that law require regulations from the Prime 
Minister's office, which has not yet begun to draft such 
regulations.  Due to unclear language in draft decrees on trading 
and distribution, there could be a conflict between the Ministry 
of Planning and Investment (MPI) and the Ministry of Trade (MOT) 
as to whether an investor can acquire distribution rights by 
amending its investment license from MPI or should apply to MOT 
for a separate distribution license, according to Embassy economic 
growth consultants in Hanoi.  In their view, the legislation 
should be read to give an investor alternative ways to get 
distribution rights, but the two Ministries might want investors 
to get both licenses. 
 
TRADING AND DISTRIBUTION RIGHTS KEY TO U.S. BUSINESS ACTIVITIES IN 
VIETNAM 
 
7. (SBU) U.S. businesses in Vietnam rate the need for broad 
trading and distribution rights among their highest concerns in 
the run up to Vietnam's WTO accession.  Mark Gillen, director of 
AIM, met with EconOffs and outlined the kind of expensive and 
inefficient mechanisms AIM endures to import and distribute goods 
legally in Vietnam for its clients, which include the likes of 
Johnson Wax and Sealy.  AIM's representative office in Vietnam 
must work through a local company that in fact is completely 
supported by AIM and is located literally across the hall from 
AIM's office.  The result is two companies with two management, 
accounting and receivables structures to handle the import and 
distribution of the same goods.  Since the local company must show 
a profit and pay taxes, AIM must adjust the price of its goods to 
accommodate the financial needs of two companies.  This two- 
company structure also limits the amount of financing AIM can 
obtain to grow its business.  The local company can obtain some 
financing in Vietnam using inventory as collateral, but AIM, an 
American-owned and Hong Kong-registered company, finds it 
difficult to obtain more financing outside Vietnam; Hong Kong 
financial institutions, for example, demand a large amount of 
collateral for loans since AIM's inventory is in Vietnam and 
technically held by another company. 
 
8. (SBU) COMMENT:  Trading and distribution rights - both the BTA 
implementation and the prospects for broader rights under the WTO 
- are a continuing concern for U.S. firms in Vietnam.  An August 
12 USVTC report on the topic noted that Vietnam committed to 
extend trading rights at the May WTO working party meeting, except 
in areas like petroleum, pharmaceuticals, fertilizers, cultural 
products, and some agricultural products, which are already 
subject to lengthy phase-ins under the BTA.  Representatives of 
U.S. companies in HCMC have told us on a number of occasions that 
Vietnam's commitments on trading and distribution in the WTO 
should be "BTA-plus" and should shorten or eliminate phase-ins for 
products like fertilizers, chemicals, pharmaceuticals and cultural 
products, all areas in which U.S. business is strongly 
competitive. 
 
9.  (SBU) Comment continued:  These concerns are not new or unique 
to southern Vietnam.  Firms such as Carrier and General Electric 
have been complaining to the Government of Vietnam (GVN) that the 
restrictions on their ability to import and distribute are 
significant obstacles to the success of their businesses.  For 
Carrier, it means their air conditioning product line is limited 
to what they assemble in Vietnam.  For GE, it means they have to 
hire a Vietnamese firm as an intermediary to distribute medical 
equipment, thus raising costs, reducing profits and making doing 
business more complicated.  So far these firms continue to operate 
in Vietnam, but it is not easy.  End comment. 
WINNICK