US embassy cable - 03HANOI710

UNCLAS SECTION 01 OF 04 HANOI 000710 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR E, EB, and EAP/BCLTV 
STATE PASS USTR HUNTSMAN/BRYAN/SPOONER 
STATE ALSO PASS USAID FOR ANE/DEL MCCLUSKY 
TREASURY FOR OASIA 
USDOC FOR AUTO AFFAIRS SCOTT KENNEDY 
USDOC FOR 4430/MAC/AP/OPB/VLC/HPPHO 
USDOC PASS USPTO FOR NESS/FOWLER 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EINV, EIND, VM 
SUBJECT: VIETNAM: DUSTR HUNTSMAN MEETINGS-THE MANY TRACKS OF 
U.S.-VIETNAM ECONOMIC RELATIONS 
 
REF A) HANOI 199    B) 02 HANOI 3029 
 
1.  (SBU) SUMMARY:  During a visit to Hanoi in early March 
to chair the second annual U.S.-Vietnam Bilateral Trade 
Agreement (BTA) Joint Committee meeting (septel) and 
participate in the Asia Society Conference, DUSTR Jon 
Huntsman, accompanied by Ambassador Burghardt, met 
separately with Deputy Prime Minister (DPM) Vu Khoan, 
Minister of Trade (MOT) Truong Dinh Tuyen and Minister of 
Planning and Investment (MPI) Vo Hong Phuc.  DUSTR Huntsman 
reviewed the progress of BTA implementation, urged the GVN 
to consult further with auto industry representatives 
regarding a proposed policy to significantly increase 
tariffs on auto parts, and advised the GVN to provide a 
counterproposal on textile quotas and work to quickly 
conclude textile negotiations.  DUSTR Huntsman pointed out 
that the bilateral relationship needs to have both a 
"problem-solving track" and an "opportunity track" and noted 
that President Bush had clearly defined the opportunity 
track through the Enterprise for ASEAN Initiative (EAI).  In 
their meetings, DPM Vu Khoan, MOT Tuyen and MPI Phuc 
generally hit the right notes on most problems and 
opportunities.  However, the lack of a concrete response 
regarding the proposed increase in auto tariffs remains an 
area of concern, especially given its potential disastrous 
effect on the investment climate.  END SUMMARY. 
 
2.  (SBU) During DUSTR Jon Huntsman's March meetings with 
Deputy Prime Minister (DPM) Vu Khoan, Minister of Trade 
(MOT) Truong Dinh Tuyen and Minister of Planning and 
Investment, four recurring themes arose: implementation of 
the U.S.-Vietnam Bilateral Trade Agreement (BTA), auto 
tariffs, textile negotiations, and the future of Vietnam's 
global integration. 
 
BTA IMPLEMENTATION 
 
3.  (SBU) GVN counterparts universally heralded the positive 
development of the U.S.-Vietnam bilateral relationship since 
BTA implementation began, especially pointing to the rise in 
two-way trade.  Exports to the U.S. have more than doubled 
in value over the past year (up 129%), and exports from the 
U.S. to Vietnam are up by almost one-third (up 26%).  MOT 
Tuyen forecast that exports from Vietnam will rise more 
slowly in the future while American exports to Vietnam will 
accelerate.  All three GVN officials pointed out Vietnam's 
efforts to meet its BTA commitments, implementing some of 
them, such as insurance, ahead of schedule. (Note: Although 
GVN officials like to claim this, it is in fact not exactly 
true.  They have licensed one U.S. firm ahead of schedule as 
a 100% FIE in the life sector but there are several other 
outstanding requests in both the life and non-life sectors.) 
 
4.  (SBU) DUSTR Huntsman responded by characterizing the 
U.S.-Vietnam relationship as "fundamentally very good" and 
noting the additional interest in Vietnam brought by the 
BTA.  While acknowledging the GVN's progress on 
implementation, DUSTR Huntsman encouraged the GVN to 
continue to focus on outstanding issues, including 
transparency and IPR enforcement.  DPM Vu Khoan, MOT Tuyen 
and MPI Phuc replied by highlighting the GVN's various 
efforts on both fronts.  Regarding transparency, DPM Vu 
Khoan pointed to the fact that GVN decrees now do not take 
effect until fifteen days after they have been announced and 
are often launched on the government website.  MOT Tuyen 
noted that laws are made available to the public and are 
often published in the newspapers.  Meanwhile, MPI Phuc 
referred to GVN efforts build the capacity of civil servants 
in order to ensure that they have a good understanding of 
the laws and roadmaps in order to properly enforce them. 
 
5.  (SBU) On IPR, DUSTR Huntsman further explained that this 
issue will always be important to our relationship, because 
there are people in the U.S. and Vietnam creating and 
developing new technologies that fuel future growth.  The 
three Vietnamese counterparts acknowledged the significance 
of IPR for the GVN and that the lack of protection could 
hinder Vietnam's development.  Furthermore, many Vietnamese 
companies now realize the importance of protecting their own 
trademarks.  The large number of workshops and seminars 
conducted by the USAID-funded Support for Trade AcceleRation 
(STAR) project provide the groundwork for improving 
cooperation on IPR.  The three GVN officials acknowledged 
that the GVN must streamline the activities of the agencies 
responsible for IPR enforcement.  At the same time, DPM Vu 
Khoan attributed some problems in enforcement to 
difficulties in being able to tell if an import is 
counterfeit or not.  MPI Phuc stated that they are doing 
everything they can to fight piracy, but individual problems 
are beyond the GVN's control. 
 
6.  (SBU) DUSTR Huntsman also raised the problems 
experienced by one U.S. company (McCullagh) with the Dak Lak 
provincial government in its attempts to buy out its joint 
venture partner (Krong Ana).  He explained the necessity of 
ensuring that local governments do not overturn decisions 
made by the central government and urged the Ministry of 
Planning and Investment to do everything possible to resolve 
the situation in an amicable way.  MPI Phuc responded that 
he is aware of the case and has appointed officials who will 
follow and report on it.  DUSTR Huntsman also raised 
concerns about the GVN's commitment to enforce arbitral 
awards, specifically citing the ongoing Tyco case (see 
reftel A). MPI Phuc simply responded that he must check into 
the status of the case. 
 
AUTO TARIFFS 
 
7.  (SBU) DUSTR Huntsman raised the issue of a Ministry of 
Finance proposal to significantly raise import duties and 
apply a special consumption tax on the importation of 
automobile kits and cited the issue as an "area of concern" 
(see reftel B for discussion about a similar decree in 
December 2002 that had been temporarily suspended).  The 
GVN's inadequate consultation with the industry makes this 
issue even more worrisome.  Using the case of Ford as an 
example, DUSTR Huntsman explained that Ford has invested USD 
72 million in Vietnam.  However, if the new policy is 
implemented, Ford fears that it will be forced out of the 
market.  Before the GVN implements this policy, DUSTR 
Huntsman urged, the industry representatives should have the 
opportunity to sit down with the relevant departments to 
hear the plan and be able to discuss its effect on their 
long term investment plans in Vietnam.  DUSTR Huntsman 
advised that the GVN carefully consider the place of the 
international auto companies in Vietnam's market. 
 
8.  (SBU) The responses from the three Vietnamese officials 
were confusing and disjointed, showing a lack of clear 
comprehension of the true motives behind this proposed 
Decision.  DPM Vu Khoan tried to explain that the GVN's 
policy of adjusting tariff rates is designed to suit WTO 
standards.  The GVN needs to reduce the level of protective 
barriers, which are currently very high in Vietnam.  As an 
example, DPM Vu Khoan cited the high level of protection 
currently offered for automobiles produced domestically. 
Consumers pay 100 percent special consumption tax on 
automobiles imported into Vietnam but only 5 percent for 
those produced domestically.  DPM Vu Khoan argued that 
Vietnam needs to reduce the protective barriers as part of 
its negotiations with the WTO.  With respect to consultation 
with the industry, DPM Vu Khoan noted that the Ministry of 
Finance has already met with the automobile producers to 
discuss the issue.  He also stated that he would study the 
letters Ambassador Burghardt and the U.S. automobile 
association had sent him on this issue. 
 
9.  (SBU) MOT Tuyen acknowledged that the change to the 
tariff schedule was sudden and would have an adverse impact 
on producers.  He argued, however, that it did not violate 
the BTA because there is no binding commitment on auto 
tariff levels.  Auto producers in Vietnam, he claimed, make 
very high profits.  He stated that producers still do not 
produce many auto parts in Vietnam and that Vietnam very 
much wanted to develop an auto industry.  (Note: Tuyen was 
echoing an argument we have heard in many other areas - the 
idea of "too much" or "enough" profit.  GVN officials often 
do not understand or accept the concept of recovery of sunk 
costs and/or return on investment.  We continue to remind 
them that the amount of "profit" is not a GVN concern, and 
in fact, they should be happy since it generates tax 
revenue.) 
 
10.  (SBU) Finally, MPI Phuc responded by explaining that 
this strategy concerned import duties on spare parts and the 
special consumption tax (SCT).  Presently, imported cars are 
taxed at 300 per cent while locally manufactured cars are 
only subject to a 100 per cent tax.  Because importers and 
exporters reject this protectionism, the GVN must reconsider 
the SCT.  Furthermore, 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.  In 
response to this explanation, DUSTR Huntsman again 
underscored the importance of continued consultations with 
investors regarding this issue.  DUSTR Huntsman also pointed 
out Vietnam's tariff roadmap should approximate WTO rates 
and not have spikes, as the GVN negotiates to accede to the 
WTO.  In light of this process, Vietnam should, furthermore, 
consider phasing out local content requirements.  MPI Phuc 
replied that he understood this issue and that the GVN 
recently abolished the local content requirement for 
motorcycles. 
 
TEXTILE NEGOTIATIONS 
 
11.  (SBU) DUSTR Huntsman expressed appreciation that 
Vietnam had offered dates for a second round of textile 
negotiations (the week of April 7), but emphasized that 
Vietnam needs to offer a counterproposal in advance of these 
discussions.  There are buyers and company boards of 
directors who want to know what is coming and need this 
matter settled so that they can make business decisions. 
DUSTR Huntsman also pointed out that the USG waited 14 
months before beginning negotiations.  He assured his 
counterparts that the U.S. would be fair, but that the U.S. 
and Vietnam must wrap the negotiations up quickly. 
 
12.  (SBU) Both DPM Vu Khoan and MOT Tuyen affirmed that the 
GVN is ready to negotiate and implement an agreement. 
However, they argued Vietnam needs more time to fulfill the 
"vitality" of the BTA.  Furthermore, the U.S. should 
consider Vietnam's overall potential as a producer.  The 
U.S. should not simply look at current export numbers, 
because "sometimes reality is unrealistic."  While the 
increase in Vietnamese textile exports to the U.S. is 
remarkable, the value is still very small compared with the 
huge U.S. market. 
 
13.  (SBU) MOT Tuyen noted the large amount of U.S. cotton 
imported by Vietnam.  He stressed the importance of the 
textile and apparel industry to Vietnam, noting that 
textiles account for a significant portion of Vietnam's 
export revenue (after stripping out coffee and marine 
products).  Because Vietnam has less agricultural land per 
person than China, Vietnam has undertaken to move many 
redundant farm workers to industrial jobs, such as those 
offered in textile and garment production.  If Vietnam does 
not succeed in this effort, MOT Tuyen claimed that 
additional stresses on the forest and environment would 
occur.  He further emphasized that Vietnam is a growing 
market.  With additional quota, Vietnam would have more 
foreign exchange to purchase U.S. products, such as aircraft 
and other high-tech goods, as well as afford U.S. 
participation in infrastructure projects.  In addition, MOT 
Tuyen said that he did not think that the U.S. wants its 
market full of Chinese products. 
 
14.  (SBU) During his discussion on this subject, DPM Vu 
Khoan emphasized that the two sides should work to expand 
their bilateral relations with a long-term vision and on the 
basis of stability.  This concept is crucial for both sides 
and the Southeast Asian region as a whole.  The fact that 
negotiations have begun is a good step, DPM Vu Khoan added. 
Next April when negotiations resume, there will be good 
discussions and the GVN will present its ideas to the U.S. 
side. 
 
WTO AND BEYOND 
 
15.  (SBU) Although it will be important for Vietnam and the 
U.S. to make progress on some of the current difficulties in 
the relationship, such as improving IPR enforcement and 
finishing textile negotiations in April, DUSTR Huntsman 
emphasized that both sides should also focus on the long- 
term relationship.  This goal fits with President Bush's 
vision of the Enterprise for ASEAN Initiative (EAI), which 
recognizes the importance of ASEAN and ensures that the two 
sides grow and develop together through increased trade 
links.  The U.S. wants to help Vietnam join the WTO, then 
perhaps negotiate a Trade Investment Framework Agreement 
(TIFA), and finally undertake a Free Trade Agreement (FTA). 
DUSTR Huntsman noted that the USG will participate in the 
WTO working party on Vietnam's accession that is tentatively 
planned for May in Geneva.  The GVN must take advantage of 
this preparatory stage, DUSTR Huntsman advised.  There are 
several areas in which Vietnam can begin preparing for 
membership today by putting the right rules on the books. 
BTA implementation will also help prepare Vietnam for WTO 
accession. 
 
16.  (SBU) DPM Vu Khoan noted that the GVN is looking 
forward to the sixth working party.  Although a number of 
countries have indicated an interest in having bilateral 
negotiations with Vietnam, Vietnam has only held these talks 
with a limited number of countries, including the EU and New 
Zealand.  The GVN is, therefore, looking forward to the 
opportunity to assess its partners' sentiments during the 
working party.  DPM Vu Khoan agreed that Vietnam must use 
its time to prepare for WTO accession.  The National 
Assembly has 117 bills and amended laws on its agenda 
through 2005.  The National Assembly is also in the process 
of reforming the process of law making, which should help 
accelerate the reform process. 
 
17.  (SBU) MOT Tuyen welcomed the EAI as well as possible 
technical assistance WTO issues.  However, practical 
implementation remains an issue.  MOT Tuyen stressed his 
personal view that the U.S. should not seek to negotiate 
separate agreements with individual ASEAN member states, but 
should try to negotiate with ASEAN as a group.  As most 
tariff rates among ASEAN countries drop to between zero and 
five percent in 2006, the trend should be to work with 
ASEAN.  DUSTR Huntsman reaffirmed the U.S. commitment to 
working more closely with ASEAN and the increasing 
importance of an integrated market.  However, he noted, some 
members are clearly ready to move faster than others. 
 
18.  (SBU) COMMENT:  Throughout DUSTR Huntsman's meetings, 
he noted that the U.S.-Vietnam bilateral relationship has 
two tracks - a problem-solving track and an opportunities 
track.  While both sides must work on the "problem-solving 
track" in addressing the wide range of issues, they must 
also pursue the "opportunity track" to build the long-term 
relationship.  In their meetings, DPM Vu Khoan, MOT Tuyen 
and MPI Phuc generally agreed with this approach, hitting 
the right notes on most problems and opportunities. 
However, the lack of an organized, consistent or concrete 
response regarding the proposed increase in auto tariffs 
remains an area of concern, especially given its potential 
disastrous effect on Ford and GM/Daewoo investments and the 
investment climate in general. 
 
19.  This cable was cleared not cleared by USTR. 
 
BURGHARDT