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Cablegate: Vietnam: Mot Proposes Changes to Textile Quota

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

UNCLAS SECTION 01 OF 02 HANOI 001181

SIPDIS

STATE ALSO PASS USTR
USDOC FOR 6500 AND 4430/MAC/AP/OPB/VLC/HPPHO
TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: KTEX ETRD VN
SUBJECT: Vietnam: MOT Proposes Changes to Textile Quota
Allocation Regime for 2005

1. This is a joint Embassy Hanoi/Congen Ho Chi Minh City
message.

2. Summary: The Ministry of Trade (MOT) recently proposed
changes to Vietnam's textile/garment quota allocation regime
for 2005. The new regime would allocate quota based on
factories' export revenue rather than on quantities (number
of pieces) exported the previous year. Apparel firms worry
that this will make it even more difficult to do business
here in Vietnam. End summary.

The New Rule
------------

3. The MOT, in coordination with the Ministry of Industry
(MOI), issued a notice on March 16 announcing that it
intended to change the basis for allocating textile quota in
2005. Rather than basing quota allocation on the previous
year's export quantities, as it did for 75 percent of all
quota allocated this year, in 2005 MOT plans to allocate
quota based on the previous year's export revenues (for
exports to quota-restricted countries such as the U.S. and
the EU). The GVN also announced it would reserve ten
percent of quota in some "hotly demanded" categories for
contracts or orders with high prices. This would be the
first time the GVN has based its allocation system on export
revenues. Mr. Le Van Thang, Deputy Director of MOT's Export
Import Department, acknowledged enterprises might face
difficulties in adjusting to this new system. However, Mr.
Thang stated he believes that only relatively few garment
and textile enterprises will be disadvantaged by the new
allocation system.

Reasons for the new rule
------------------------

4. According to the announcement, the MOT is making the
change to encourage higher value exports. The GVN has
expressed its concerns that Vietnam's export capacity is
much greater than the textile quota allotted by its biggest
markets (primarily the U.S. and EU). MOT believes that
encouraging factories to export higher-valued items will
result in more efficient quota utilization. In 2003,
Vietnam exported about USD 3.7 billion worth of textiles and
garments to its quota- (total of about 40 million dozen) and
non-quota (primarily Japan) markets. The GVN wants to
increase textile and garment exports in 2004 by 16 percent
to USD 4.2 billion. This will be difficult to achieve, as
annual growth rates of quota arrangements Vietnam has with
quota-restricting countries are significantly lower than 16
percent. (Note: The U.S. Vietnam bilateral textile
agreement allows for seven percent annual growth (two
percent for wool products.) End note.) Vietnam has a
bilateral agreement with the EU that would increase textile
and garment quotas 60 to 75 percent (depending on the
category) this year. However, the EU has not actually
allotted Vietnam the higher quota as yet because Vietnam has
not implemented the commitments it made on banking sector
liberalization for the EU in exchange for the larger quotas.

5. MOT is concerned that enterprises are using quota
inefficiently, exporting low quality apparel at low prices.
In the period immediately preceding negotiation of the U.S.-
Vietnam bilateral textile agreement (starting in February
2003) the GVN actively encouraged Vietnamese enterprises to
export as many textiles/garments to the U.S. as possible to
expand the export basis upon which quota levels would be
negotiated with the U.S. However, according to Mr. Thang,
the GVN now wants enterprises "to pay more attention to
quality and prices." The GVN believes that producing high-
end textiles and apparel is the only way to make it
competitive with China, especially when the Agreement on
Textiles and Clothing (ATC) expires in 2005. The GVN also
understands that its local producers, (rather than foreign
invested enterprises), will be the ones most negatively
affected by this new rule "which is painful, but needs to be
done," according to Mr. Thang.

Enterprises ARE CONCERNED
-------------------------

6. Foreign apparel buyers and producers are critical of the
new proposal. Representatives of HCMC companies told
Econoff that it would likely make the system less
transparent and would not have its intended effect - to
increase the value of Vietnam's exports. On the contrary,
they say, it will make Vietnam even less competitive in a
world where apparel producers in other countries will no
longer be bound by quota in 2005. They point out that much
of the value in any garment (75 percent, on average) is the
materials, most of which is imported into Vietnam. For most
garments, only a small part represents the value-added in
Vietnam -- typically the labor of cutting, making, and
packing (CMP). Under the proposed system, clothing made
with more expensive cloth will generate more quota, even if
the Vietnam added value is the same or less. It also
invites companies to inflate invoice prices in order to
obtain more quota.

7. Firms are so concerned about the new proposal that the
Vietnam Textile and Apparel Association (VITAS), which
includes both Vietnamese and foreign-invested garment and
textile firms, has invited the Vice Ministers of Trade and
Industry responsible for textiles to Ho Chi Minh City next
week to meet with them and air their views.

Even Bigger Worries
-------------------

8. Foreign and private sector Vietnamese firms have
expressed reservations about the GVN's quota allocation
methodology. Foreign firms have been clear that they wish
for the GVN to allocate as much quota as possible based on
prior year performance, but in the last two years only 75
percent of quota was allocated that way. The rest of the
quota was split up according to a variety of criteria such
as increased capacity, additional investment, bonuses for
remote and impoverished areas, big buyers, etc. Typically
it was large state-owned firms that would meet the criteria
for extra quota. This became particularly problematic this
year, when as one foreign producer stated: 75 percent of
this year's quota was allocated based on past performance,
but past performance was based on last year's quota
allocation in which only 75 percent of quota was based on
past performance. So for this year, essentially, producers
are getting 75 percent of 75 percent for past performance,
which is closer to 56 percent.

9. The concerns about the quota system are underscored by
larger worries about the viability of the garment business
in Vietnam after the rest of the world goes quota free at
the end of this year. One foreign producer noted that
Vietnam should be simplifying the quota allocation system
and reducing the cost of doing business to compete. High
electricity and telecom costs (although telecom costs have
fallen), and admin fees for quota (40-50 US cents/dozen) all
raise the cost of doing business here for apparel producers.
He also complained about costs surrounding customs hassles
with importing fabric, in theory duty free if used in
manufacturing export apparel. Although the trading rate for
quota (to buy from another quota rights-holder) of $6-$12
per dozen is currently cheaper than in China, it is rising
as quota becomes more scarce. When quotas disappear
everywhere but Vietnam, firms producing in other countries
will not need to pay this cost.

10. Private sector Vietnamese firms are also worried about
the proposal. Mr. Diep Thanh Kiet, who owns a garment firm
in HCMC and head's that city's association of garment
producers, was also highly critical of the government's
plan. He has also criticized the current allocation system
as one designed to favor state-owned firms.

11. Comment: The recent proposal to shift quota allocation
to a value- rather than volume-based system lacks specifics
for implementation and appears to be more of a warning to
firms to pay closer attention to quality and prices. Our
contacts in HCMC believe the GVN can be persuaded not to
implement the new system. Their concern about the overall
competitiveness of Vietnam in a mostly quota-free world may
be far more important. Over the past few years, companies
doing business here have consistently said Vietnam
represents a good alternative to China for sourcing apparel.
However, after 2005, if Vietnam cannot stay competitive on
price and speed, firms may question whether it is worth it
to keep doing business in Vietnam.
BURGHARDT

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