US embassy cable - 03HOCHIMINHCITY500

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 000500 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/BCLTV AND EB/TPP/ABT/BTT BOYNTON 
STATE ALSO PASS USTR BRYAN/SPOONER/MILLER/CLATANOFF 
USDOC FOR 6500 AND 4430/MAC/AP/OPB/VLC/HPPHO 
USDOC ALSO PASS OTEXA LEONARD/FOOTE/MARTELLO 
CUSTOMS FOR RICHARD CRICHTON 
LABOR FOR ANA VALDES 
 
E. O. 12958: N/A 
TAGS: ECON, ETRD, KTEX, VM 
SUBJECT: VIETNAM ISSUES TEXTILE QUOTA ALLOCATION GUIDELINES 
 
REF:  HCMC 297 
 
1.  (SBU) SUMMARY:  The GVN has announced quota allocation 
criteria for textile and garment exports to the U.S.  Sixty- 
five to seventy percent of quota will be allocated based on 
past performance over the period of calendar year 2002 and the 
first quarter of 2003.  The remainder will be issued to new 
companies and firms meeting a range of other criteria.  AMCHAM 
and others had lobbied strongly for quota to go first to past 
performance.  The allocation of the performance-based quota 
should be a relatively transparent process, but criteria for 
the remainder has yet to be clarified.  Many buyers and 
producers worry that this could allow quota to be steered to 
politically connected firms.  The biggest problem, however, is 
that contrary to the circular itself, which calls for 80% of 
performance quota to be allocated by the end of May, no such 
allocation has yet occurred. Producers and buyers are becoming 
increasingly nervous that as all companies, whether eligible 
for performance-based quota or not, continue to ship, available 
quota shrinks every day.  Producers still argue, however, that 
quota is still a competitive advantage over China.  End 
Summary. 
 
Quota Criteria allocates 65-70% to Past Performance 
--------------------------------------------- ------ 
 
2.  (U) In a joint circular issued by the Ministries of Trade, 
Planning and Investment, and Industry, the GVN spelled out 
guidance for quota allocation for export of textile and apparel 
to the U.S. market.  The circular, dated May 27 and released a 
few days later, covers quota allocation for the period from May 
1 to December 31, 2003. 
 
3.  (U) Depending on quota category, 65-70% of available quota 
will be allocated based on past performance, with past 
performance defined as shipments to the U.S. market during 
calendar year 2002 and the first quarter of 2003.  Most of the 
remaining quota (from 23-28%, again depending on category) will 
be allocated according to a variety of criteria: 
 
--To enterprises with high production and export capacity, but 
which just began to export in late 2002 or early this year. 
 
--To enterprises which have no "past performance" record of 
export, but which now have export contracts which can be filled 
with current capacity.  "Priority [will be] given to 
enterprises that have invested in modern equipment and 
technology to produce textile and apparel products of high 
quality for export." 
 
--Three percent in this category will be reserved for companies 
that have signed contracts directly with U.S. importers and 
distributors. 
 
Ministry of Trade officials explained that they decided to 
establish a range on quota distribution to allow them the 
flexibility to fine tune the system as they are implementing 
it. 
 
4.  (U) The remaining 7 percent of quota will be reserved for 
enterprises using "significant" amounts of materials and 
fabrics made in Vietnam or for enterprises located in 
"economically difficult areas" which have production capacity 
and export contracts. 
 
 
Schedule is Already Slipping 
---------------------------- 
 
5.  (U) The circular directs that the quota be allocated 
according to a schedule that has already slipped.  Eighty 
percent of performance-based quota for companies that had 
already properly documented past performance was to have been 
issued by the end of May.  This has yet to occur.  Eighty 
percent of performance-based quota for other companies and 
quota based on the other criteria is to be issued by the end of 
June.  According to Ministry of Trade officials, they plan to 
allocate the remaining 20% of the quota once the Visa 
Certification system is in place. 
6.  (SBU) The circular prohibits quota from being transferred 
or sold between companies and notes that companies that do not 
utilize all their quota must surrender the excess quota in 
writing by October 1 to qualify for the same quota level next 
year.  Visas will be required for shipments after July 1. NOTE: 
Privately, MOT officials has expressed their concern about the 
task of administering the quota system, especially in light of 
the minimal prep time they have had to get it up and running. 
We're not surprised that they are running behind schedule but 
believe that they are making a sincere effort in the face of 
intense pressure and outside scrutiny. 
 
The Devil is in the Details 
--------------------------- 
7.  (SBU) Several foreign buyers and producers have told 
econoff that they believe the performance-based quota will be 
allocated in a relatively fair and transparent manner, but they 
are much more pessimistic about the allocation of the quota 
based on the other criteria.  Rumors have already started to 
circulate that one Jaguar-driving son of the key MOT official 
responsible for quota is an avenue for obtaining quota. 
Although the circular states that allocation shall be "carried 
out in a transparent, reasonable manner" the devil is in the 
details and evidently buyers and producers here believe in the 
devil.  For all of the efforts at transparency - the circular 
as well as export data for the month of May appears on the 
Ministry of Trade website, and the ministries involved 
solicited comments from buyers and producers - it is far from 
clear how the non-performance quota will be allocated. Although 
Ministry of Trade officials verbally explained to us their 
intended process and assured us of their intent to be as 
transparent and as fair as possible, the published criteria are 
vague and could create a situation where decisions are made on 
a case-by-case basis, allowing for outside pressure to be 
brought to bear on MOT.  And even though quota is not to be 
sold or transferred, some producers have told econoff that they 
are already looking for quota from companies that might have a 
surplus. 
 
8.  (SBU) For example, 7% of the quota is reserved for 
companies using local materials or located in "economically 
difficult areas," but the circular did not define "economically 
difficult areas," nor did it specify local content criteria. 
(Note:  We assume that MOT will use the GVN's list of 
economically depressed or underdeveloped regions as established 
by the Ministry of Planning and Investment under its poverty 
alleviation program.)    MOT has assured us they are working on 
the criteria and procedures to evaluate the applications of new 
enterprises seeking quota or those that just began shipping at 
the end of last year, but was unable to provide details or a 
firm implementation date.    One sweater manufacturer which has 
invested $5 million in a plant in Ho Chi Minh City told econoff 
that although his company had been registered here for about 
two years, exports to the U.S. have so far been relatively 
small, because of the time it took to get the factory up and 
running and to hire and train his staff.  The criteria as 
issued do not give him any hint of whether or how he will get 
quota. 
 
Picking Favorites 
----------------- 
 
9.  (SBU) Buyers, producers and even Vietnamese officials point 
out that this lack of clarity will help connected firms get the 
quota they need to export.  Some of the criteria seem designed 
to benefit state-owned enterprises (SOEs) - such as the 
criteria which base some allocation on "capacity of production 
and export".  The guidance measures capacity in part as number 
of workers, machinery, etc, which SOEs have in abundance. 
AMCHAM, by contrast, had suggested that any additional quota be 
based on paid-in capital, which would have favored foreign- 
invested firms (Reftel).  SOEs are also more likely to locate 
in those economically difficult areas which will receive 
additional quota. 
 
10.  (SBU) All business sector interlocutors stressed, however, 
that the lack of clarity in assigning the non-performance quota 
would not simply benefit SOEs, but would benefit firms with 
strong political connections or those seeking to make them. 
Many producers stressed that some large private Vietnamese 
firms were very well connected and would have little problem 
obtaining the quota that they needed.  One Vietnamese private 
sector factory owner close to high-level officials told econoff 
weeks before this guidance was released he had absolutely no 
concerns about obtaining the quota that he needed. 
 
11.  (U) Small private firms were likely to do less well 
however.  Many of these firms have limited "past performance" 
and even fewer political connections.  One Hong Kong producer 
noted that many of these private firms worked as subcontractors 
for larger firms when producing for the U.S. market.  In such 
cases performance quota would accrue to the consignor, not to 
the subcontractor. 
 
12.  (SBU) According to one Vietnamese official, Korean firms 
also influenced the design of the allocation process.  A large 
group of foreign buyers and producers had been recommending 
through a joint AMCHAM committee that companies with past 
performance receive quota which at least matched past 
performance.  Koreans, many of whom recently opened factories 
and had little or no past performance argued for limiting quota 
based on past performance to allow for quota allocations to new 
firms.  According to this official, representations were made 
by the Korean Ambassador to Trade Minister Tuyen, and the Prime 
Minister of Korea made the same appeal in writing to the 
highest levels of the GVN.  Evidently, it worked.  However, we 
should note that several U.S. firms expressed exactly the same 
concern to us and are very pleased that MOT included provisions 
for new firms. 
 
Quota Disappearing by the Day 
----------------------------- 
 
13.  (U) A larger worry among foreign buyers and producers is 
the timing of the actual quota allocations, which have yet to 
occur.  MOT officials told us in late May that they intended to 
allocate quota by the end of May for those firms that had met 
the May 15 deadline for applications.  The circular in fact 
states that 80% of the performance quota will be allocated "by 
the end of May."  As of June 5, this had yet to occur, although 
firm hear that the allocation is coming "any day."  Quota 
covers the eight-month period from May 1 to the end of the 
year.  Without quota allocations, product continues to be 
shipped madly to the U.S.  Producers are worried that when 
quota is finally allocated, much of it will have already been 
used up - and with good reason.  According to the Ministry of 
Trade website (www.mot.gov.vn), as of June 3, nine of the 22 
categories have already shipped over 25% of the available quota 
for the rest of the year. (Note:  because the textile agreement 
took effect on May 1 this year, only two-thirds of the total 
annual quota is available in each category for the period May 1 
- December 31, 2003.)    In the two largest categories 338/339 
22% of the available quota has already been shipped and 
category 347/348 has already shipped 30% of the available 
quota. 
 
14.  (SBU) Comment:  Even though the MOT circular instructions 
lacked adequate detail (not uncommon), and despite the delay in 
quota allocation, buyers and producers are still bullish on 
Vietnam.  They are pleased the circular calls for a sizable 
portion of quota to be allocated based on past performance. 
Vietnam's competitive advantage is still quota, one producer 
told econoff.  He estimated that production costs are still 15% 
higher than China and operating costs are 20% higher, but quota 
is still cheaper than in China.  With most of it free here for 
past producers, he would somehow acquire the rest of what he 
needed from the allocation process or, although technically 
illegal, by buying surplus from other producers.  The biggest 
problem now is getting quota allocations issued before even 
more available quota is used up. 
 
YAMAUCHI