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Cablegate: Trying to Get the Mof Beyond Central Planning

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

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

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