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Cablegate: Amcham Hcmc Says Pace of Reform Slowing

VZCZCXRO9146
RR RUEHDT RUEHPB
DE RUEHHM #0955/01 2601025
ZNR UUUUU ZZH
R 171025Z SEP 07
FM AMCONSUL HO CHI MINH CITY
TO RUEHC/SECSTATE WASHDC 3114
INFO RUEHHI/AMEMBASSY HANOI 2178
RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHHM/AMCONSUL HO CHI MINH CITY 3322

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000955

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS
STATE PASS TO USTR DBISBEE
COMMERCE FOR HPPHO

E.O. 12958: N/A
TAGS: ECON ETRD BEXP VM
SUBJECT: AMCHAM HCMC SAYS PACE OF REFORM SLOWING

REF: HANOI 1616

HO CHI MIN 00000955 001.2 OF 002


1. (SBU) SUMMARY. Members of the Ho Chi Minh City (HCMC) AmCham
Board of Governors (BOG) are united in their sense that
Vietnam's forward progress on economic reform has slowed in
recent months as the Government of Vietnam (GVN) is in
"digestion mode" trying to come to grips with the scope of its
WTO commitments. Members suggested this noticeable lull is
caused by lack of GVN institutional capacity and, in a few
cases, protectionism. Regulations limiting distribution rights
and express delivery demonstrate that Vietnam's road to reform
will mean rough patches for U.S. business. Broader issues of
corruption, opaque land use regulations and human resources also
continue to hinder U.S. trade and investment. End Summary.

Digesting the Change
--------------------
2. (SBU) Vietnam seems to be 'pulling in the reins after WTO
accession' while the bureaucracy works to implement Vietnam's
WTO commitments, AmCham HCMC BOG members told the Consul General
on September 5. As a result, U.S. businesses perceive that the
Vietnamese bureaucracy is slowing down. Banking applications
that that had been routine are now taking five to six months and
new service and non-tariff barriers (e.g., State Bank of Vietnam
and Ministry of Finance measures affecting money supply and
liquidity) are squeezing the inflow of capital that U.S.
financial services firms rely on. One client applying for a
subsidiary license in banking was told that the FVN would prefer
that a weaker, less competitive bank enter first. Some
companies are finding that their import licenses effectively
convey only the right "to pay taxes or duties" before handing
their goods over to a local distributor.

Trouble on Distribution and Express Delivery
--------------------------------------------
3. (SBU) The director of a prominent legal firm pointed to
Ministry of Trade Circular 9 as indicative of a reaction against
the brisk pace of reform in recent years. He argued that
existing regulations effectively carve out a range of in-house
activities that many importers had previously been allowed to
conduct (e.g., logistics and marketing) and defines these as
services that wholly-owned foreign invested enterprises cannot
perform until the WTO phase-in for those services. Various
members offered the observation that the authors of Circular 9
appear to have considered only the typical consumer products
distribution chain when drafting the regulations even though
they apply to all goods, including heavy equipment and
hi-technology materials.

4. (SBU) As a result, some companies are being told to stop
using their distribution networks, in certain cases potentially
forcing companies into breaches of contract. Others are being
forced to rely on distribution networks where none was required
before. For example, one high-tech industrial chemical importer
had routinely received annual ad hoc approval to sell its
products directly to the end user in an infrastructure project,
but now finds itself cut off from the project without a
distribution mechanism. In other cases, such as high-tech
finishing materials, alternative distribution systems do not
exist. Vietnam's undeveloped distribution networks mean that
U.S. chemical companies have resorted to different distribution
systems (generally based on personal connections) for
State-owned enterprises and private companies.

5. (SBU) Another BOG member referred to the Decree on Delivery
Services, which restricts pricing of air express delivery and
gives more power to local postal departments to monitor the
express delivery industry. Licenses will still be issued by the
central government, but provincial postal authorities can now
require that the foreign delivery services submit "reports."
When one U.S. company asked for clarification about what reports
might be required, a provincial official told them "whatever you
generally report back to headquarters" -- a wide-ranging
interpretation with the potential for serious personal and
corporate confidentiality issues.

Contributing Factors
--------------------
6. (SBU) To explain the apparent loss of momentum, BOG members
suggested that bureaucratic capacity is a major constraint in
the face of booming demand. In the securities sector, nearly
one hundred equity funds are applying for securities licenses on
which the GVN simply does not have the capacity to act quickly.
The thin pool of talent and rapidly increasing staff turnover
also act as constraints on virtually every organization in
Vietnam. One bank said it needed to increase its expatriate
staff from three to 10 just to teach new local hires about

HO CHI MIN 00000955 002.2 OF 002


business systems and processes. Another reported bringing in
more expatriate workers due to an absolute inability to find
enough highly skilled local staff. BOG members said that the
crunch appears to be more acute in HCMC than Hanoi, but the lack
of skilled labor is a nationwide problem that is only getting
worse. Even the use of expats could be coming under pressure.
While a draft circular from Ministry of Labor, Invalids, and
Social Affairs proposes increasing the overall number of
expatriate workers allowed into Vietnam, it also threatens to
tighten restrictions on their activities while in Vietnam.

7. (SBU) BOG members report that last July's cabinet reshuffle
and government reorganization has paralyzed some offices. The
newly formed Ministry of Culture, Sports, and Information has
put its long-anticipated tourism master-plan on the backburner
while it sorts itself out, much to the consternation of U.S.
companies. Corruption is as big an issue as ever on large
infrastructure projects.

8. (SBU) Turning to the trade side of the GVN, the governors see
an increasing propensity by some parts of the GVN toward
stifling competition that borders on protectionism. While the
Ministry of Planning and Investment (MPI) has told AmCham that
WTO commitments are a floor, not a ceiling, the Ministry of
Industry and Trade (MOIT) takes the opposite approach, using its
authority to ensure that Vietnam will only do as much it is
committed to in its trade agreements. U.S. business assessed
MOIT as increasingly protectionist in its drafting application
of new rules, citing Circular 9 as a prime example.

Comment:
--------
9. (SBU) The Amcham Ho Chi Minh City Board of Governors (BOG),
which represents a broad range of industries, is unified in its
assessment that many GVN offices are losing reform momentum.
Many problems, most of which are outside Vietnam's immediate
control, contribute to the slow-down. The Trade and Investment
Framework Agreement and Bilateral Trade Agreement annual reviews
are crucial forums for encouraging further reform. The Support
for Trade Acceleration (STAR) project in particular continues to
provide much-needed support to government drafting offices. The
GVN itself is clearly divided, as reflected in the divergent
paths of MPI and MOIT. It is critical, however, that the USG and
the American business community here to redouble collaborative
efforts to emphasize at all levels that Vietnam needs to meet
the spirit and the letter of Vietnam's WTO commitments. End
Comment.

10. (U) This cable was coordinated with Embassy Hanoi.
FAIRFAX

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