Cablegate: Vietnam Scenesetter for Commerce Secretary Carlos

VZCZCXRO2656
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHHI #1858/01 3030816
ZNR UUUUU ZZH
R 300816Z OCT 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 6615
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
INFO RUEHHM/AMCONSUL HO CHI MINH 3876
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 04 HANOI 001858

SIPDIS

SENSITIVE
SIPDIS

FOR THE SECRETARY OF COMMERCE FROM THE AMBASSADOR

TAGS: ETRD ECON EINV KCOR PGOV SOCI VM
SUBJECT: VIETNAM SCENESETTER FOR COMMERCE SECRETARY CARLOS
GUTIERREZ'S NOVEMBER VISIT

HANOI 00001858 001.2 OF 004

1. (U) Your visit, coming almost one year after President Bush's, is
well timed to press Vietnam to continue its rapid pace of opening to
the world. The national leadership remains eager to learn from the
United States on economic matters, and will be attentive to what you
have to say. Your visit will also underscore the high level of
attention the private sector and the USG are paying to the
development of Vietnam as an investment destination and as an export
market for U.S. goods and services. The media here is signaling a
warm welcome, and your visit will resonate favorably here.

VIETNAM'S EAGERNESS TO PROVE ITSELF AS THE NEXT TIGER
--------------------------------------------- --------

2. (U) Mission Vietnam very much looks forward to your visit to
Hanoi and Ho Chi Minh City from November 4 to 8, as your personal
engagement will directly support our important, broad-based efforts
to influence developments in this increasingly important country.
After decades of isolation and failed economic policies, Vietnam is
determined to catch up with the Asian tigers. The government of
Vietnam (GVN) aims to achieve the ranks of middle-income developing
countries by 2010 and to be an industrialized country by 2020. In
its efforts to modernize the economy, the GVN has focused on pushing
exports and investment as key drivers in its policy of fast economic
growth to reach its goals.

3. (SBU) When Vietnam started its "doi moi" (renovation) program of
economic reforms in 1986, the economy was in shambles and the vast
majority of the population lived in poverty. Vietnam's economic
reforms have set the country on a successful market economy path
demonstrated by average annual economic growth of 7.5% during the
last decade. This year the economy is growing at a rate of 8.5%.
Poverty rates have tumbled from 58% in 1993 to under 14% in 2006,
according to the GVN's latest figures. A recent World Bank study
described this poverty reduction rate as the most significant in
such a short period of time of any nation in history. The middle
class is growing and retail markets are booming.

The U.S. AS A KEY PLAYER
------------------------

4. (SBU) The IMF reports that, from 1993 to 2006, Vietnam's exports
as a percentage of world imports quadrupled. Since 2003, the United
States has been Vietnam's largest export market with purchases of
$8.5 billion of Vietnamese goods in 2006, and already $6.9 billion
in the first eight months of 2007. According to Vietnam's
statistics, the United States is the seventh largest investor in
Vietnam with $2.6 billion in registered FDI since 1988 (South Korea
is the largest with $11 billion). According to a 2007 study,
however, "U.S.-related investment" would be at least $2 billion more
if one counts investment via overseas U.S. subsidiaries. For
example, normal FDI accounting methods credit Intel's recent $1
billion investment not to the United States but to Hong Kong because
it was conducted from the chip maker's subsidiary there. By any
measure, we are the big player here as both Vietnam's most important
export market and a substantial source of investment.

5. (SBU) What many don't realize is that, over the past decade, the
United States has also been a key player in helping Vietnam
implement its policy decision to choose markets over central
planning. The Bilateral Trade Agreement (BTA), which entered effect
at the end of 2001, helped set the stage for Vietnam's successful
accession to the WTO on January 11, 2007. The business community
and the Vietnamese people welcomed these milestones as providing
further opportunities for developing the economy. Individual
elements of Vietnam's implementation of its WTO commitments have had
some problems, such as on IPR as well as some questions on trading
rights, but overall it has been proceeding on track.

CHALLENGES: SKEWED GROWTH, INFLATION, BLOATED STATE SECTOR
--------------------------------------------- -----

6. (SBU) Despite these achievements, Vietnam still faces substantial
challenges. For example, while per capita GDP rose to $728 in 2006,
the benefits of economic growth have been skewed in favor of the
urban areas. Income disparity between the haves and have-nots is
growing. Over 20% of children under age five still suffer from
malnutrition. Corruption continues to be a problem in Vietnam, and
Transparency International's perception index ranks Vietnam at 123
of 179 countries, a continuous backsliding since 2002.

7. (SBU) Inflation is another problem, and prices have increased
during the last several months, measuring 8.8% year-on-year in
September 2007. The GVN has taken some steps to limit price hikes,
such as reducing some import tariffs and subsidizing fuel prices by
as much as 30%, but these have not stemmed the steady rise. Another
issue is the size of Vietnam's state sector. It accounts for about
37% of GDP and includes state-owned enterprises (SOEs) that dominate
in key sectors such as banking, energy and airlines. While the GVN

HANOI 00001858 002.2 OF 004

works to attract more FDI and promote the domestic private sector,
it also intends to maintain a major role for the state sector in the
economy. For now, the government is focusing on a process known as
"equitisation" as way to help improve the competitiveness of the
state sector. By allowing private parties to buy shares of an SOE,
even if less than a controlling share, the government hopes that
this will force the companies to perform better. There have been
delays in equitising more SOEs, as well as state owned commercial
banks (SOCBs).

RELATIONS WITH THE UNITED STATES - TRADE AND AID
--------------------------------------------- -

8. (U) Despite our fractious history, Vietnam and the United States
are forging closer ties each day. Vietnam's motivation to seek
stronger ties is clear. As noted above, we are Vietnam's largest
market, and one of its closest trading partners. The GVN also sees
the United States as a critical source of financial and technical
assistance. Hanoi also increasingly sees the United States as an
important force in maintaining a stable regional environment and
balancing a rising China. For our part, Vietnam provides for us an
important opportunity in East Asia for advancing U.S. national
interests in securing a stable and peaceful Asia-Pacific region. We
are also encouraged by the steady liberalization of the government's
role in the life of its citizens. Problems remain, as noted below,
but all agree that basic trends are positive with regard to personal
freedoms, when viewed over time.

9. (U) For these reasons, over the past ten years Washington has
very effectively invested limited aid dollars to support Vietnam's
transition to an open market economy by strengthening trade
liberalization, particularly the reforms needed to implement the
commitments under the BTA and WTO. Two of our programs, Support for
Trade Acceleration ("STAR") and the Vietnam Competitiveness
Initiative, support Vietnam's efforts to create an
internationally-driven, open private sector economy and the legal
framework to govern that. The STAR team has been involved directly
the overhaul of Vietnam's civil procedure code, new investment laws
providing for equal treatment of state-owned and private companies,
a securities law to help develop Vietnam's capital market,
protecting intellectual property rights, and numerous other projects
to shore up greater transparency, rule of law, and civil society.

10. (U) Eighty five percent of all U.S. Official Development
Assistance to Vietnam focuses on health issues, and our cooperative
efforts to prevent and treat HIV/AIDS and combat Avian Influenza are
the hallmarks of our bilateral health relationship. Vietnam will
receive approximately $88 million in PEPFAR funding in FY2007 aimed
at preventing new infections, providing care to 40,000 persons,
including orphans and vulnerable children, and support
anti-retroviral treatment for 9,000 patients. Our target is to
support treatment for 22,000 HIV-infected persons by September
2009.

11. (U) U.S. Avian Influenza-related assistance has totaled nearly
$23 million over the past three years and has focused on
strengthening emergency preparedness, building veterinary laboratory
capacity, animal vaccination campaigns, animal surveillance and
response, and public awareness. Approximately $4 million of FY2007
USAID funding will go to continuing vaccination programs, assist
health surveillance, and farmer and general population education and
best sanitary practices.

12. (U) The Department of Energy's National Nuclear Security
Administration assisted Vietnam last September to convert its only
civilian research nuclear from high to low enriched uranium fuel,
and will assist Vietnam to develop the necessary physical and
regulatory safeguards to establish a civilian nuclear power sector.

13. (U) The current indications from the planning figures in the
FY2008 and FY2009 budgetary process is that USAID will be in a
position to expand its assistance, especially in the areas of
economic growth and reform. Given the expansion of the program and
in recognition of the growing development relationship between the
United States and Vietnam, in 2008 USAID in Hanoi will become a full
stand-alone USAID presence mission.

LITTLE PROGRESS ON HUMAN RIGHTS
-------------------------------

14. (SBU) As you know, we have repeatedly expressed our strong
concerns over Vietnamese actions to suppress peaceful political
dissent. We also have greatly stepped up our diplomatic efforts by
pointing out to contacts, and through a variety of media, that
imprisoning people for merely expressing political views and
labeling political dissidents "terrorists" is injurious to relations
with the United States. This message was most recently reinforced
during the Ambassador's initial calls on a host of GVN officials,

HANOI 00001858 003.2 OF 004

which echoed the message President Bush gave to President Nguyen
Minh Triet in the White House last June.

15. (SBU) Earlier this year, Senator Patrick Leahy wrote to
President Triet and suggested greater bilateral cooperation in the
areas of good governance, anti-corruption and rule of law. Senator
Leahy's views reflect those of a number of senior lawmakers, many of
whom have been strong supporters of engagement though programs of
capacity building, technical assistance and exchanges. Deputy Prime
Minister and Foreign Minister Pham Gia Khiem responded positively to
the Leahy letter. We believe that your visit could provide a good
opportunity to extract explicit GVN buy-in towards greater
cooperation in these areas. By ensuring that any public remarks
underscore our shared commitment to further engagement on these
issues, we can frustrate efforts of those in Vietnam intent on
torpedoing the deepening U.S.-Vietnam relationship.

PROGRESS ON RELIGIOUS FREEDOM
-----------------------------

16. (SBU) In spite of the arguments of some linking the recent
crackdown on dissidents to a rollback of progress on religious
freedom, we can unambiguously state that religious freedoms for
Vietnam's people continue to improve. This progress has included:
registering and recognizing a number of churches, congregations and
denominations; freeing all the individuals whom we believed were
imprisoned for religious reasons; and, promulgating and implementing
a new framework on religion. Some previously troublesome provincial
areas, such as the Central and Northwest Highlands, have also showed
distinct signs of improvement. For example, Christmas services were
reported to have gone well in these two areas. The evidence here
continues to support Washington's decision last year to lift Country
of Particular Concern status for Vietnam. Your visit can serve to
underscore the importance of Vietnam staying the course, especially
as the U.S. Senate prepares to put Vietnam's human rights and
religious freedom practices under the microscope.

VIETNAM'S INTERNATIONAL PROFILE
-------------------------------

17. (SBU) Vietnam will serve as a non-permanent member of the UNSC
during the 2008-2009 term. We have made clear that with a stronger
international role also comes a responsibility to take a stand on
certain issues of global concern. To date, Vietnam has not yet
spoken out about Iran, Burma or North Korea, and we have been
encouraging the GVN to stake out a more proactive stance on these
and other matters. In this regard, the GVN's (relatively) critical
statement of the DPRK's nuclear test last October was a welcome step
in the right direction.

FULLEST POSSIBLE ACCOUNTING
---------------------------

18. (SBU) We continue to enjoy good cooperation with the Vietnamese
in the fullest possible accounting of our personnel missing from the
war, but there are a number of issues in which we would like to see
more progress, including underwater recovery operations and archival
access. We would appreciate if you could thank your interlocutors
for Vietnam's continued cooperation to date and express the USG's
hope for further assistance in the future.

HANOI: THE SEAT OF POWER
------------------------

19. (SBU) The Government of Vietnam remains extremely centralized in
Hanoi. It has promoted decentralization, but the pace has been
slow. For years, Hanoi and the north played second fiddle to the
booming south, but the gap has closed. Hanoi has attracted $11
billion in investment since 1988, compared to $15 billion in Ho Chi
Minh City, the former Saigon. So far this year, five of the top ten
provinces attracting investment are from the north or center of the
country, including a $5 billion project near Hanoi announced this
summer by Taiwanese electronics-maker Foxcon.

HO CHI MINH CITY: LABORATORY AND ENGINE OF GROWTH
--------------------------------------------- ----

20. (U) Demographics, local culture and even official GVN policy
combine to ensure that Ho Chi Minh City (HCMC) serves as the cradle
of experimentation and innovation in Vietnam's rapidly opening
economy. Whether via new products brought in by joint ventures
targeting HCMC's emerging middle class or industrial zones
experimenting with new strategies to leverage capital to grow small-
to medium-sized enterprises, the city is a bellwether for reform
trends throughout Vietnam. While Vietnam's impressive 2006 8.2%
growth was the second fastest in Asia, HCMC bounded ahead at 12.2%,
and the city's per capita income ($2,200) was triple the national
average.

HANOI 00001858 004.2 OF 004

21. (U) Dynamic, outward-looking local business leaders who have
risen to prominence through business acumen rather than political
affiliations now dominate most sectors of the HCMC business
environment. The positions of this new class of business magnates
on key issues such as the importance of strict adherence to the rule
of law, greater transparency in decision making and the proper role
of the government in economic spheres are generally in sync with
those of U.S. and other international business persons active in
Vietnam.

22. (U) The government and business leaders that you meet are eager
to maintain this growth, and will look to your delegation for
practical approaches to increasing U.S. trade and investment.
Meeting basic international labor standards, including the right to
form independent trade unions, would likely improve the function of
labor markets. The GVN maintains a tight grip on communication
infrastructure and technology-intensive companies complain that lack
of internet capacity affects business activities and investment
plans. HCMC and the surrounding provinces that make up Vietnam's
"Southern Economic Focus Zone" also suffer from an opaque decision
making process.

23. (U) The U.S. business community remains concerned over the U.S.
apparel monitoring system (Assistant Secretary Spooner's September
visit to HCMC drew more than a hundred local companies), our $8.5
billion trade deficit with Vietnam, market access for U.S. firms,
and lack of GVN (central and local) support for major U.S. projects
or sales.

A WORD ON CHINA
---------------

24. (SBU) The China dynamic is of obvious importance to Vietnam, and
there is an understandable competitive flavor to Hanoi's ties to
Beijing and Washington. Far from trying to manipulate its two huge
"partners," however, Vietnam -- understanding its relative power --
seeks to balance its ties with each. With recent heightened
tensions with China over sovereignty issues, and with us over human
rights, Hanoi's task is at present not an easy one.

CONCLUSION
----------

25. (U) Again, I warmly welcome your visit. It will prove critical
in promoting further economic reforms, signaling our desire to
invest and expand markets for our exports and thus the future course
of bilateral relations.

MICHALAK

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