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Cablegate: Paying Heed to Business Concerns, Vietnam Opens the Door

VZCZCXRO9417
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #0451/01 1090918
ZNR UUUUU ZZH
P 180918Z APR 08 ZDK
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 7649
INFO RUEHHM/AMCONSUL HO CHI MINH 4610
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 000451

SENSITIVE
SIPDIS

SINGAPORE FOR TREASURY
TREASURY FOR SCHUN
USTR FOR DBISBEE

E.O. 12958: N/A
TAGS: EINV ECON KTDB VM
SUBJECT: PAYING HEED TO BUSINESS CONCERNS, VIETNAM OPENS THE DOOR
WIDER ON FOREIGN DISTRIBUTION

REF: A) 07 Hanoi 1616 ("Some Commitments Are Harder");
B) Hanoi 358 ("TIFA Meetings")

HANOI 00000451 001.2 OF 002


(U) This cable is Sensitive But Unclassified. For official use
only, not for dissemination outside USG channels or posting on the
internet.

1. (SBU) Summary: Hoping to put to rest one of the most
controversial WTO-implementing regulations to date, the Government
of Vietnam (GVN) will further open its distribution sector ahead of
schedule and allow foreign-invested businesses in Vietnam to sell
imported goods directly to multiple distributors. The new rules,
which become effective on April 29, will amend the previous
regulation which limited foreign-invested businesses to sell
imported goods in-country to a single distributor. In the nick of
time, Mission Vietnam enlisted the AmChams and the EU to help lobby
the GVN to simplify its amendments prior to issuing the final
version. End summary.

DISTRIBUTION SECTOR OPENS WIDER AND EARLIER
-------------------------------------

2. (U) On April 14, the GVN announced that it had finally discarded
its controversial July 2007 regulations (known as "Circular 9") that
limited the sale of imported goods by foreign-invested businesses to
one distributor per shipment. (Note: The term "foreign-invested"
refers to non-Vietnamese businesses registered to do business and
with a commercial presence in Vietnam.) The restriction was the
source of much controversy, and many in the international and
business communities feared at first that it posed restrictions on
existing importing (or trading) rights (REF A). Eventually, and
after substantial discussions, the GVN demonstrated that the
regulations were meant to be as liberal as possible for foreign
firms seeking to sell imported goods inside Vietnam while protecting
the short transition period for full foreign participation in the
distribution sector negotiated under the WTO services schedule, and
were not intended to curtail existing trading rights.

A MISUNDERSTOOD AND UNLOVED EXPERIMENT
--------------------------------------

3. (U) According to this interpretation, Circular 9 allowed
foreign-invested businesses in Vietnam which did not otherwise have
the right to conduct sales inside the country, to import goods, take
possession of them and look for a buyer in Vietnam -- in essence an
exercise of distribution rights that Vietnam was not obligated to
extend until 2008 for joint ventures and 2009 for fully
foreign-owned businesses. Circular 9, however, imposed a
significant restriction on these sales in order to protect against
de facto full participation of foreign businesses in the
distribution services sector. For those foreign-invested companies
seeking to conduct in-country sales of imported products, Circular 9
restricted them to sell to only one distributor per category of
goods per import shipment.

4. (SBU) Many foreign businesses complained that they had no
available distributors, and wanted to be able to sell directly to
multiple buyers or end-users. Others misunderstood the regulation
to apply to trading rights, and thus claimed that Circular 9
restricted their ability to act as importer of record for multiple
buyers. Some businesses demanded full distribution rights
immediately, regardless of the WTO schedule of commitments. In
practice, however, the GVN allowed many exemptions from these
restrictions and, even before this new amendment to Circular 9,
provided dozens of waivers to U.S. firms to conduct a broad range of
distribution activities above what is currently required under WTO
commitments.

THE NEW RULES
-------------

5. (U) Under the new rules, the GVN continues to allow limited
distribution rights to 100 percent foreign-owned firms (joint
ventures gained these rights in January 2008). Gone is the
much-hated "one distributor" restriction, but it appears that
foreign-invested firms must still sell the goods that they import
directly to distributors, and neither distribute those goods
themselves nor sell them directly to end-users. The restriction on
direct distribution activities does not appear to trouble any of the
100 percent U.S.-owned businesses with which we have spoken, but the
Embassy knows of businesses that want to be able to sell to
end-users directly either because there is no established
distribution network (e.g. chemicals) or their end-users are

HANOI 00000451 002.2 OF 002


commercial / industrial operations (e.g. robotics and machinery).
It appears that the GVN will continue to entertain waivers to
end-user sales until the sector opens completely in 2009, and
Mission Vietnam will continue to engage with the GVN to promote the
most liberal application possible of existing regulations.

6. (U) The new amendment to Circular 9 also includes a reporting
requirement calling on all foreign businesses that avail themselves
of the limited distribution rights but have no distribution license
(either because they are fully foreign-owned or for other reasons)
to report quarterly to the Ministry of Industry and Trade (MOIT) on
their in-country sales. The notification requirement does not apply
to firms with distribution licenses, so we anticipate MOIT will
phase it out after the sector opens fully in 2009.

TRIMMING AWAY FURTHER CONFUSION
-------------------------------

7. (SBU) In the second week of April, the GVN shared with Embassy
Hanoi a draft revision of Circular 9 that it had intended to issue
"immediately." MOIT had shared the general outline of its plans for
revisions with the private sector at two USAID-sponsored workshops
in HCMC and Hanoi in late March (REF B), but we noted that the
proposed amendments were much more complex than anyone had
anticipated. The initial draft created a convoluted mechanism to
keep foreign businesses from acting as their own distributors or
being able to sell to end-users directly, and set up what seemed
like onerous reporting requirements on all importing activities.

8. (SBU) Working with Congen HCMC, we notified the Hanoi and HCMC
AmChams, and asked them to contact the drafters directly to persuade
them not to issue the draft until all stakeholders had a chance to
weigh in. After consulting with the Department and USTR, Embassy
Econoff met with the MOIT drafters on April 10 to explain U.S.
concerns and included our EU counterparts in the discussion, as they
have also been actively lobbying Vietnam to simplify its
distribution and trading rights regulations.

9. (SBU) After hearing our concerns, the MOIT drafters told us later
that day that the amendments to Circular 9 would be cut by about two
thirds to eliminate the convoluted separation scheme and reporting
requirements. The GVN told us, however, that it wanted to still go
ahead and issue the draft at the earliest. The Chairman of the
Hanoi AmCham told us that the amended Circular 9 was "very good" and
"meets all of our basic requirements," while our EU counterpart
reported that the Eurocham was also pleased with the resulting
draft.

COMMENT: WHAT IS THE GVN TRYING TO DO?
--------------------------------------

10. (SBU) The MOIT has told us in private that many in the GVN fear
a stampede by foreign businesses into the retail sector (which is
included in distribution rights) and/or foreign domination of
Vietnam's domestic distribution networks. Other well-placed
contacts tell us that the leadership's anxiety at the rising trade
deficit ($12.4 billion last year and already at $7.3 billion in the
first quarter of 2008) makes it reluctant to facilitate the flow of
imports any sooner than Vietnam must. Pushing in the other
direction is the camp that wants to remain competitive at attracting
foreign investment and improving the overall business climate.
Support for their efforts from the international and the business
community strengthens their hand, and in this occasion, seems to
have carried the day.

MICHALAK

4

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