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Cablegate: Vietnam: Dustr Huntsman Meetings-the Many Tracks Of

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 HANOI 000710

SIPDIS

SENSITIVE

STATE FOR E, EB, and EAP/BCLTV
STATE PASS USTR HUNTSMAN/BRYAN/SPOONER
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
USDOC PASS USPTO FOR NESS/FOWLER

E.O. 12958: N/A
TAGS: ETRD ECON EINV EIND VM
SUBJECT: VIETNAM: DUSTR HUNTSMAN MEETINGS-THE MANY TRACKS OF
U.S.-VIETNAM ECONOMIC RELATIONS

REF A) HANOI 199 B) 02 HANOI 3029

1. (SBU) SUMMARY: During a visit to Hanoi in early March
to chair the second annual U.S.-Vietnam Bilateral Trade
Agreement (BTA) Joint Committee meeting (septel) and
participate in the Asia Society Conference, DUSTR Jon
Huntsman, accompanied by Ambassador Burghardt, met
separately with Deputy Prime Minister (DPM) Vu Khoan,
Minister of Trade (MOT) Truong Dinh Tuyen and Minister of
Planning and Investment (MPI) Vo Hong Phuc. DUSTR Huntsman
reviewed the progress of BTA implementation, urged the GVN
to consult further with auto industry representatives
regarding a proposed policy to significantly increase
tariffs on auto parts, and advised the GVN to provide a
counterproposal on textile quotas and work to quickly
conclude textile negotiations. DUSTR Huntsman pointed out
that the bilateral relationship needs to have both a
"problem-solving track" and an "opportunity track" and noted
that President Bush had clearly defined the opportunity
track through the Enterprise for ASEAN Initiative (EAI). In
their meetings, DPM Vu Khoan, MOT Tuyen and MPI Phuc
generally hit the right notes on most problems and
opportunities. However, the lack of a concrete response
regarding the proposed increase in auto tariffs remains an
area of concern, especially given its potential disastrous
effect on the investment climate. END SUMMARY.

2. (SBU) During DUSTR Jon Huntsman's March meetings with
Deputy Prime Minister (DPM) Vu Khoan, Minister of Trade
(MOT) Truong Dinh Tuyen and Minister of Planning and
Investment, four recurring themes arose: implementation of
the U.S.-Vietnam Bilateral Trade Agreement (BTA), auto
tariffs, textile negotiations, and the future of Vietnam's
global integration.

BTA IMPLEMENTATION

3. (SBU) GVN counterparts universally heralded the positive
development of the U.S.-Vietnam bilateral relationship since
BTA implementation began, especially pointing to the rise in
two-way trade. Exports to the U.S. have more than doubled
in value over the past year (up 129%), and exports from the
U.S. to Vietnam are up by almost one-third (up 26%). MOT
Tuyen forecast that exports from Vietnam will rise more
slowly in the future while American exports to Vietnam will
accelerate. All three GVN officials pointed out Vietnam's
efforts to meet its BTA commitments, implementing some of
them, such as insurance, ahead of schedule. (Note: Although
GVN officials like to claim this, it is in fact not exactly
true. They have licensed one U.S. firm ahead of schedule as
a 100% FIE in the life sector but there are several other
outstanding requests in both the life and non-life sectors.)

4. (SBU) DUSTR Huntsman responded by characterizing the
U.S.-Vietnam relationship as "fundamentally very good" and
noting the additional interest in Vietnam brought by the
BTA. While acknowledging the GVN's progress on
implementation, DUSTR Huntsman encouraged the GVN to
continue to focus on outstanding issues, including
transparency and IPR enforcement. DPM Vu Khoan, MOT Tuyen
and MPI Phuc replied by highlighting the GVN's various
efforts on both fronts. Regarding transparency, DPM Vu
Khoan pointed to the fact that GVN decrees now do not take
effect until fifteen days after they have been announced and
are often launched on the government website. MOT Tuyen
noted that laws are made available to the public and are
often published in the newspapers. Meanwhile, MPI Phuc
referred to GVN efforts build the capacity of civil servants
in order to ensure that they have a good understanding of
the laws and roadmaps in order to properly enforce them.

5. (SBU) On IPR, DUSTR Huntsman further explained that this
issue will always be important to our relationship, because
there are people in the U.S. and Vietnam creating and
developing new technologies that fuel future growth. The
three Vietnamese counterparts acknowledged the significance
of IPR for the GVN and that the lack of protection could
hinder Vietnam's development. Furthermore, many Vietnamese
companies now realize the importance of protecting their own
trademarks. The large number of workshops and seminars
conducted by the USAID-funded Support for Trade AcceleRation
(STAR) project provide the groundwork for improving
cooperation on IPR. The three GVN officials acknowledged
that the GVN must streamline the activities of the agencies
responsible for IPR enforcement. At the same time, DPM Vu
Khoan attributed some problems in enforcement to
difficulties in being able to tell if an import is
counterfeit or not. MPI Phuc stated that they are doing
everything they can to fight piracy, but individual problems
are beyond the GVN's control.

6. (SBU) DUSTR Huntsman also raised the problems
experienced by one U.S. company (McCullagh) with the Dak Lak
provincial government in its attempts to buy out its joint
venture partner (Krong Ana). He explained the necessity of
ensuring that local governments do not overturn decisions
made by the central government and urged the Ministry of
Planning and Investment to do everything possible to resolve
the situation in an amicable way. MPI Phuc responded that
he is aware of the case and has appointed officials who will
follow and report on it. DUSTR Huntsman also raised
concerns about the GVN's commitment to enforce arbitral
awards, specifically citing the ongoing Tyco case (see
reftel A). MPI Phuc simply responded that he must check into
the status of the case.

AUTO TARIFFS

7. (SBU) DUSTR Huntsman raised the issue of a Ministry of
Finance proposal to significantly raise import duties and
apply a special consumption tax on the importation of
automobile kits and cited the issue as an "area of concern"
(see reftel B for discussion about a similar decree in
December 2002 that had been temporarily suspended). The
GVN's inadequate consultation with the industry makes this
issue even more worrisome. Using the case of Ford as an
example, DUSTR Huntsman explained that Ford has invested USD
72 million in Vietnam. However, if the new policy is
implemented, Ford fears that it will be forced out of the
market. Before the GVN implements this policy, DUSTR
Huntsman urged, the industry representatives should have the
opportunity to sit down with the relevant departments to
hear the plan and be able to discuss its effect on their
long term investment plans in Vietnam. DUSTR Huntsman
advised that the GVN carefully consider the place of the
international auto companies in Vietnam's market.

8. (SBU) The responses from the three Vietnamese officials
were confusing and disjointed, showing a lack of clear
comprehension of the true motives behind this proposed
Decision. DPM Vu Khoan tried to explain that the GVN's
policy of adjusting tariff rates is designed to suit WTO
standards. The GVN needs to reduce the level of protective
barriers, which are currently very high in Vietnam. As an
example, DPM Vu Khoan cited the high level of protection
currently offered for automobiles produced domestically.
Consumers pay 100 percent special consumption tax on
automobiles imported into Vietnam but only 5 percent for
those produced domestically. DPM Vu Khoan argued that
Vietnam needs to reduce the protective barriers as part of
its negotiations with the WTO. With respect to consultation
with the industry, DPM Vu Khoan noted that the Ministry of
Finance has already met with the automobile producers to
discuss the issue. He also stated that he would study the
letters Ambassador Burghardt and the U.S. automobile
association had sent him on this issue.

9. (SBU) MOT Tuyen acknowledged that the change to the
tariff schedule was sudden and would have an adverse impact
on producers. He argued, however, that it did not violate
the BTA because there is no binding commitment on auto
tariff levels. Auto producers in Vietnam, he claimed, make
very high profits. He stated that producers still do not
produce many auto parts in Vietnam and that Vietnam very
much wanted to develop an auto industry. (Note: Tuyen was
echoing an argument we have heard in many other areas - the
idea of "too much" or "enough" profit. GVN officials often
do not understand or accept the concept of recovery of sunk
costs and/or return on investment. We continue to remind
them that the amount of "profit" is not a GVN concern, and
in fact, they should be happy since it generates tax
revenue.)

10. (SBU) Finally, MPI Phuc responded by explaining that
this strategy concerned import duties on spare parts and the
special consumption tax (SCT). Presently, imported cars are
taxed at 300 per cent while locally manufactured cars are
only subject to a 100 per cent tax. Because importers and
exporters reject this protectionism, the GVN must reconsider
the SCT. Furthermore, the GVN must decrease certain taxes,
such as the SCT, and impose similar tax rates between
locally manufactured and imported cars in order to follow
their commitments to international institutions. In
response to this explanation, DUSTR Huntsman again
underscored the importance of continued consultations with
investors regarding this issue. DUSTR Huntsman also pointed
out Vietnam's tariff roadmap should approximate WTO rates
and not have spikes, as the GVN negotiates to accede to the
WTO. In light of this process, Vietnam should, furthermore,
consider phasing out local content requirements. MPI Phuc
replied that he understood this issue and that the GVN
recently abolished the local content requirement for
motorcycles.

TEXTILE NEGOTIATIONS

11. (SBU) DUSTR Huntsman expressed appreciation that
Vietnam had offered dates for a second round of textile
negotiations (the week of April 7), but emphasized that
Vietnam needs to offer a counterproposal in advance of these
discussions. There are buyers and company boards of
directors who want to know what is coming and need this
matter settled so that they can make business decisions.
DUSTR Huntsman also pointed out that the USG waited 14
months before beginning negotiations. He assured his
counterparts that the U.S. would be fair, but that the U.S.
and Vietnam must wrap the negotiations up quickly.

12. (SBU) Both DPM Vu Khoan and MOT Tuyen affirmed that the
GVN is ready to negotiate and implement an agreement.
However, they argued Vietnam needs more time to fulfill the
"vitality" of the BTA. Furthermore, the U.S. should
consider Vietnam's overall potential as a producer. The
U.S. should not simply look at current export numbers,
because "sometimes reality is unrealistic." While the
increase in Vietnamese textile exports to the U.S. is
remarkable, the value is still very small compared with the
huge U.S. market.

13. (SBU) MOT Tuyen noted the large amount of U.S. cotton
imported by Vietnam. He stressed the importance of the
textile and apparel industry to Vietnam, noting that
textiles account for a significant portion of Vietnam's
export revenue (after stripping out coffee and marine
products). Because Vietnam has less agricultural land per
person than China, Vietnam has undertaken to move many
redundant farm workers to industrial jobs, such as those
offered in textile and garment production. If Vietnam does
not succeed in this effort, MOT Tuyen claimed that
additional stresses on the forest and environment would
occur. He further emphasized that Vietnam is a growing
market. With additional quota, Vietnam would have more
foreign exchange to purchase U.S. products, such as aircraft
and other high-tech goods, as well as afford U.S.
participation in infrastructure projects. In addition, MOT
Tuyen said that he did not think that the U.S. wants its
market full of Chinese products.

14. (SBU) During his discussion on this subject, DPM Vu
Khoan emphasized that the two sides should work to expand
their bilateral relations with a long-term vision and on the
basis of stability. This concept is crucial for both sides
and the Southeast Asian region as a whole. The fact that
negotiations have begun is a good step, DPM Vu Khoan added.
Next April when negotiations resume, there will be good
discussions and the GVN will present its ideas to the U.S.
side.

WTO AND BEYOND

15. (SBU) Although it will be important for Vietnam and the
U.S. to make progress on some of the current difficulties in
the relationship, such as improving IPR enforcement and
finishing textile negotiations in April, DUSTR Huntsman
emphasized that both sides should also focus on the long-
term relationship. This goal fits with President Bush's
vision of the Enterprise for ASEAN Initiative (EAI), which
recognizes the importance of ASEAN and ensures that the two
sides grow and develop together through increased trade
links. The U.S. wants to help Vietnam join the WTO, then
perhaps negotiate a Trade Investment Framework Agreement
(TIFA), and finally undertake a Free Trade Agreement (FTA).
DUSTR Huntsman noted that the USG will participate in the
WTO working party on Vietnam's accession that is tentatively
planned for May in Geneva. The GVN must take advantage of
this preparatory stage, DUSTR Huntsman advised. There are
several areas in which Vietnam can begin preparing for
membership today by putting the right rules on the books.
BTA implementation will also help prepare Vietnam for WTO
accession.

16. (SBU) DPM Vu Khoan noted that the GVN is looking
forward to the sixth working party. Although a number of
countries have indicated an interest in having bilateral
negotiations with Vietnam, Vietnam has only held these talks
with a limited number of countries, including the EU and New
Zealand. The GVN is, therefore, looking forward to the
opportunity to assess its partners' sentiments during the
working party. DPM Vu Khoan agreed that Vietnam must use
its time to prepare for WTO accession. The National
Assembly has 117 bills and amended laws on its agenda
through 2005. The National Assembly is also in the process
of reforming the process of law making, which should help
accelerate the reform process.

17. (SBU) MOT Tuyen welcomed the EAI as well as possible
technical assistance WTO issues. However, practical
implementation remains an issue. MOT Tuyen stressed his
personal view that the U.S. should not seek to negotiate
separate agreements with individual ASEAN member states, but
should try to negotiate with ASEAN as a group. As most
tariff rates among ASEAN countries drop to between zero and
five percent in 2006, the trend should be to work with
ASEAN. DUSTR Huntsman reaffirmed the U.S. commitment to
working more closely with ASEAN and the increasing
importance of an integrated market. However, he noted, some
members are clearly ready to move faster than others.

18. (SBU) COMMENT: Throughout DUSTR Huntsman's meetings,
he noted that the U.S.-Vietnam bilateral relationship has
two tracks - a problem-solving track and an opportunities
track. While both sides must work on the "problem-solving
track" in addressing the wide range of issues, they must
also pursue the "opportunity track" to build the long-term
relationship. In their meetings, DPM Vu Khoan, MOT Tuyen
and MPI Phuc generally agreed with this approach, hitting
the right notes on most problems and opportunities.
However, the lack of an organized, consistent or concrete
response regarding the proposed increase in auto tariffs
remains an area of concern, especially given its potential
disastrous effect on Ford and GM/Daewoo investments and the
investment climate in general.

19. This cable was cleared not cleared by USTR.

BURGHARDT

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