US embassy cable - 03HANOI1814

UNCLAS SECTION 01 OF 03 HANOI 001814 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB and EAP/BCLTV 
STATE PASS USTR BRYAN 
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 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EINV, EIND, VM, BTA, WTO 
SUBJECT: TRYING TO GET THE MOF BEYOND CENTRAL PLANNING 
 
 
SENSITIVE BUT UNCLASSIFIED -- PROTECT ACCORDINGLY. 
 
REF: 02 HANOI 3029 
 
1.  (SBU) SUMMARY: In a July 11 meeting, the Ambassador 
urged the Ministry of Finance (MOF) to issue investment 
licenses to three U.S. insurance companies and to be ready 
to meet BTA obligations related to customs valuation that 
come due in December 2003.  Ambassador also raised USG 
concerns over recent GVN efforts to raise taxes and tariffs 
on auto parts and apply tariff-rate quotas to certain 
agricultural products not previously under quota, 
highlighting the connection between many of these issues and 
Vietnam's bid to join the World Trade Organization (WTO). 
While positive on the need for opening the insurance sector, 
MOF did not commit to any specific time frame for issuing 
licenses to U.S. insurance companies.  End Summary. 
 
2.  (U) During a lengthy meeting on July 11, the Ambassador 
and Vice Minister of Finance Le Thi Bang Tam discussed a 
wide range of important bilateral issues.  (The discussion 
of bilateral cooperation and taxation of donor assistance 
will be reported septel.)  Vice Minister Tam is a good 
interlocutor whose name has occasionally been bandied about 
as a potential successor to the GVN's current lead WTO 
negotiator, Vice Minister of Trade Luong Van Tu. 
 
INSURANCE LICENSES 
------------------ 
 
3.  (U) Ambassador emphasized the necessity of opening up 
the insurance sector to competition in order to assist 
implementation of the U.S.-Vietnam Bilateral Trade Agreement 
(BTA) and accession to the World Trade Organization (WTO). 
Many non-life insurance products needed for trade 
development, such as product liability insurance, do not yet 
exist in Vietnam, he noted, while arguing that opening this 
market is a development issue.  With only around 10 per cent 
of the money collected from insurance policies staying in 
Vietnam, a significant amount of capital -- which could be 
used to finance needed projects -- is going overseas for re- 
insurance.  The Ambassador raised an additional concern 
regarding the GVN's tendency to treat the granting of 
licenses as a favor to be doled out among countries, which 
he was commented reflected "old, central planning thinking." 
 
4.  (U) Vice Minister Tam claimed in response that Vietnam 
had opened its insurance market even faster than China. 
Before 1996, only one insurance company and a few 
representative offices existed.  Now, Vietnam has 21 
insurance companies and 30 representative offices, many of 
which have some foreign ownership.  In the BTA and Vietnam's 
insurance development strategy, Vietnam has committed to 
opening this sector, she reiterated.   Vice Minister Tam 
pledged that Vietnam would open in accordance with its 
commitments, ensuring a balance between the life and non- 
life markets.  She also informed Ambassador of the GVN's 
decision to establish a separate Insurance Department within 
MOF and asked for assistance in building the capacity of the 
new department's regulatory staff. 
 
5.  (U) Vice Minister Tam stated her desire to grant 
licenses to the three U.S. companies (ACE, New York Life, 
and AIG) with pending applications.  However, because they 
are large companies with a significant amount of experience, 
their entry to the market must be phased in, she said.  The 
GVN has recommended to these companies that they study the 
insurance market and cooperate with existing enterprises to 
help develop the market so that they would be effective when 
they are granted licenses.  (Note: When queried, Vice 
Minister Tam clarified that this was not meant to signal 
that they must form joint ventures. End note.) The GVN could 
not simultaneously grant licenses to all three, she said, 
but would gradually issue the licenses based on the 
companies' respective contribution to the market's 
development. 
 
6.  (U) Stating that all countries want BTA-level treatment 
for insurance, Vice Minister Tam asserted that strict 
implementation of the BTA is necessary for WTO accession. 
In her view, early opening under the BTA would obligate 
Vietnam to offer the same conditions to other countries 
under the WTO.  However, Vietnam preferred gradually to 
expand its insurance market in order to ensure a smooth 
opening.  The Ambassador noted that there is nothing in the 
BTA that prevents early implementation of Vietnam's 
commitments.  If Vietnam undertakes to open before the 
deadline, a new MFN obligation does not necessarily develop 
as a result.  Additionally, deferring implementation of this 
sector's obligations until absolutely required by the BTA -- 
rather than implementing them sooner to benefit the economy 
-- could hurt Vietnam's development. 
 
AUTO TAXES AND TARIFFS 
---------------------- 
 
7.  (U) The Ambassador pointed out that the GVN appears to 
be taking a number of protectionist steps as it nonetheless 
proceeds with the WTO accession process.  One example of 
these actions is MOF's efforts to raise import duties and 
the special consumption tax (SCT) on automobile kits (CKDs). 
(See reftel for discussion about a similar decree in 
December 2002 that had been temporarily suspended.)  In May, 
the National Assembly passed a proposal to impose a 10 
percent VAT on all cars and increase the SCT on CKDs 
starting in 2004 and going up to 80 percent on some models 
by 2007.   In addition, the MOF continues to consider a 
proposal to harmonize upward the tariff rates applied to CKD 
kits and completely built units (CBUs).  The Ambassador 
argued that the GVN's approach to harmonization runs counter 
to what the GVN should be doing:  the GVN is increasing 
taxes when it should be decreasing them.  While the 
Ambassador admitted that taxes are the provenance of the 
GVN, he emphasized that the results of such a policy will 
not encourage the industry or potential investors.  Such 
policies imply that the GVN is willing to take actions that 
can suddenly undermine a foreign investment. 
 
8.  (U) Vice Minister Tam urged the Ambassador to see the 
issue from both sides.  Although the GVN granted licenses 
that required a gradual increase in local content and 
provided incentives to achieve this end, auto investors 
concentrated on assembly and did not create the promised 
local parts production.  In response to the Ambassador's 
argument that the GVN could accomplish its goal of removing 
the protection by simply decreasing the taxes on CBUs, Vice 
Minister Tam asserted that the GVN is indeed gradually 
reducing the rates for CBUs.  However, the GVN will 
simultaneously slightly increase the tariff rate on parts 
and components between now and 2006, and thereafter will 
reduce the rates again. 
 
9.  (U) Arguing that a policy of enforcing the level of 
local content is contrary to the WTO and an example of 
creating new problems as Vietnam prepares for WTO accession, 
the Ambassador pointed out that, in market economies, 
companies decide to localize based on market conditions. 
Vietnam's rejection of this fact is another attempt to 
continue planning its economy.  The Ambassador further 
highlighted that this policy will drive most auto companies 
out of business.  Only those companies with parts 
manufacturing plants in the ASEAN Free Trade Area (AFTA) 
will be able to compete, because imports from AFTA are now 
subject to lower rates under the Common Effective 
Preferential Tariff (CEPT). Therefore, the Ambassador 
argued, this difference in tariff rates creates a 
"loophole."  Vice Minister Tam responded that they are more 
concerned about parts from China than about those from AFTA. 
However, she acknowledged that some companies will be unable 
to keep up with the "integration" and will go bankrupt. 
 
TARIFF-RATE QUOTAS 
------------------ 
 
10.  (U) The Ambassador raised the Prime Minister's recent 
decision to apply tariff-rate quotas (TRQs) on certain 
agricultural products not previously under quota (dairy, 
cotton, salt, and other items) as an additional example of 
Vietnam moving in the wrong direction while seeking to 
accede to the WTO.  Vice Minister Tam defended this action 
by pointing out that, although Vietnam is in the process of 
removing non-tariff barriers in order to integrate into the 
world economy, many regional countries apply such measures. 
Because the affected items must currently be imported, the 
policy aims to give the domestic industry time to make 
itself competitive so that Vietnam can balance imports with 
domestic production.  Under the new policy, the tariff rate 
will be MFN within quota, but it will be one and a half 
times higher for imports above the quota quantity.  Like 
other countries, Vice Minister Tam asserted, Vietnam plans 
to increase and then remove the quota over time.  The actual 
timing will depend upon Vietnam's commitments under trade 
agreements.  The Ministry of Trade is responsible for 
providing guidelines for the implementation of the TRQs. 
 
CUSTOMS ISSUES 
-------------- 
 
11.  (U) The Ambassador also reminded MOF that several 
customs-related BTA obligations will come into effect in 
December 2003, including determining customs valuation based 
on the transaction value and limiting other customs fees and 
charges to the cost of the service rendered.   He emphasized 
that - as the U.S. side noted during the last meeting of the 
BTA Joint Committee in March - customs valuation is an 
important BTA obligation, and the USG expects the GVN to 
meet this obligation on time. 
 
12.  (U) Vice Minister Tam claimed that implementation of 
this BTA obligation is on course.  At the beginning of 2003, 
MOF had issued a decree asking Customs to formulate a 
circular on this issue.  This circular is presently being 
"perfected" due to some changes required by AFTA.  Despite 
some technical problems in the Customs Department, the GVN 
will follow the timeline prescribed by the BTA.  Vice 
Minister Tam has also asked Customs to formulate a plan for 
technical assistance to address these difficulties, and they 
will work with the USAID-funded Support for Trade 
AcceleRation (STAR) project on these issues starting in 
September.  (Note:  This will give customs at most four 
months to deal with its "technical problems" and begin 
assessing customs duties according to it BTA obligations. 
End note.) 
 
13.  (U) The Ambassador also raised the Vietnamese-EU draft 
agreement that, when implemented, will eliminate minimum 
import prices for wines, spirits, and ceramic tiles of EU 
origin.  He highlighted that the USG expects the same 
treatment for U.S. goods in these categories based on the 
guarantee of MFN application of customs duties. 
Furthermore, he once again urged MOF to make its applied 
tariff schedule available, pointing out that WTO 
negotiations cannot occur until members have this document. 
 
14.  (SBU) COMMENT: Termed by Vice Minister Tam a "frank and 
open" discussion, this meeting presented a good opportunity 
for the Ambassador to engage the Ministry of Finance on a 
range of issues and lay markers on areas of disagreement - 
including auto tariffs and TRQs.  In the past six months, 
the GVN has refined its argument on insurance licenses, no 
longer arguing that it has implemented its BTA obligations 
in insurance early because one U.S. company has a license. 
This meeting also gave the Ambassador an important chance to 
correct some of the GVN's current misconceptions, including 
the belief that opening a sector early under the BTA will 
create new MFN commitments.  Vice Minister Tam did not 
commit to any specific time frame for issuing licenses to 
U.S. insurance companies, even though she recognized the 
need to expand this sector.  It is disappointing but not 
surprising that she was also unable to agree to reverse the 
GVN's policies on auto taxes and tariffs or TRQs -- despite 
potential impact on Vietnam's WTO accession bid -- since 
this decision was likely taken at political levels well 
above her. 
BURGHARDT