US embassy cable - 03HANOI1967

UNCLAS SECTION 01 OF 02 HANOI 001967 
 
SIPDIS 
 
STATE FOR EAP/BCLTV AND EB/TPP/ABT/BTT 
STATE ALSO PASS USTR SPOONER/MILLER 
USDOC FOR OTEXA 
 
E.O. 12958: N/A 
TAGS: ETRD, KTEX, VM 
SUBJECT: Vietnam: GVN PLANS REDESIGN OF TEXTILE ALLOCATION 
SYSTEM 
 
REF:  HCMC 500 
 
1. SUMMARY:  An inter-ministerial GVN committee has begun a 
comprehensive verification of the capacity of all factories 
allocated quota to export to the U.S. in 2003.  MOT has 
already revoked quota from factories that were found to have 
over-reported their production capacity in their 
applications for quota allocation.  MOT plans to revise the 
allocation system for 2004, basing allocation on production 
capacity rather than past performance.  This plan has raised 
concerns with at least one U.S. buyer.  Vinatex, Vietnam's 
state-owned textile conglomerate may be the biggest 
beneficiary of this change.  Demonstrating an unprecedented 
willingness to make the allocation system transparent, the 
Ministry of Trade has been publishing all information 
related to quota allocation on its website.  End Summary. 
 
2. As reported reftel, The Ministry of Trade's (MOT) quota 
allocation system for Vietnam's 2003 exports of textiles and 
garments to the U.S. was established May 27, just over one 
month after the bilateral textile agreement was initialed in 
Washington on April 25.  (Note:  The agreement was 
officially signed July 17 in Hanoi.  End note.) MOT based 
most of its allocation on past performance as well as on 
factories' reports of their production capacity.  Smaller 
amounts of quota were allocated for new investment, firms 
operating in remote areas, and firms that use locally- 
produced materials. 
 
3.  In early July 2003, after the majority of the textile 
quota for export to the U.S. had been allocated, an inter- 
agency committee comprised of representatives from the 
Ministries of Trade, Planning and Investment (MPI), and 
Industry (MOI) was formed to review the outcome of the quota 
allocation.  The committee assembled inspection teams 
comprised of representatives from the three ministries as 
well as officials from the local trade and customs 
departments.  The teams were tasked with undertaking three 
rounds of inspection visits to all of the factories that had 
been allocated quota for 2003, including 550 enterprises 
allocated  "past performance quota" and 250 enterprises 
allocated "new investment" quota. 
 
4. During the first round of inspections, which took place 
July 9 to July 16, over 100 enterprises, mainly those that 
had been allocated "new investment" quota, were inspected. 
51 enterprises were found to have presented misleading 
information to MOT in their application for quota.  Of 
these, the 43 enterprises that were found to have over- 
reported their production capacities had their extra quota 
plus twenty percent revoked. The remaining eight enterprises 
were either trading companies with no production capacity, 
or factories not yet operating.  These companies' entire 
quota was revoked.  The total quantity of quota revoked 
during the first round of investigation was 178,210 doz., 
mainly from categories 347/348 and 338/339.  This is equal 
to about 0.8 percent of Vietnam's total quota in these 
categories for export to the U.S. in 2003. 
 
5. The second round of inspections began July 23 and will be 
finished on August 4. The third round will start begin after 
the visit of a U.S. Customs Textile Verification Production 
Team August 2 - 22. 
 
New Mechanism for 2004 
---------------------- 
 
6. MOT has begun working on a revised quota allocation 
mechanism for 2004, which is to be announced mid August. 
According to MOT officials, there will be significant 
changes to the system used for 2003. MOT is considering 
basing the new quota allocation system on factories' 
production capacity rather than past performance in 2004. 
The draft allocation system will be sent first to MPI and 
MOI for review.  The final draft will then be sent to the 
textile industry for comment before it becomes effective. 
 
7. A U.S. buyer told econoff July 30 that the AmCham textile 
subcommittee is already planning to submit suggestions to 
MOT on the design of next year's allocation system.  The 
buyer is opposed to a system based on production capacity, 
noting that factories can easily stockpile machines in order 
to garner additional quota.  The best mechanism for fairly 
allocating quota next year, the buyer advised, would be for 
MOT to use export performance for May to December 2003 (the 
period when Vietnam was under quota this year) and 
extrapolate the figures to get a full year's allocation. 
 
8.  It is possible that MOT's new proposed approach could 
favor Vinatex, Vietnam's enormous textile and apparel 
conglomerate.  Vinatex officials have told HCMC Econoff that 
they plan to invest in major expansion and plan to increase 
their share of Vietnam's apparel exports to the US from the 
current 25 percent share to 40 percent in the future.  This 
could be a good first step. 
 
9. COMMENT:  The GVN has received overall positive comments 
from the industry for a relatively fair and transparent 
quota allocation process this year.  The GVN clearly 
internalized the mission's and the industry's repeated calls 
for a fair and transparent allocation system.  MOT has been 
responsive both to USG and industry suggestions regarding 
the quota allocation system and has even published all 
decisions and information regarding quota allocation on 
MOT's website.  It will be interesting to see how well the 
concerns of foreign buyers and producers will be considered 
in the ongoing discussion of quota allocation for 2004. 
They have been major supporters of distributing quota based 
on past performance. 
BELLARD