Cablegate: Scenesetter for Codel Baucus, Dec 16-20, 2008

DE RUEHHI #1342/01 3441030
P 091030Z DEC 08




E.O. 12958: N/A

HANOI 00001342 001.2 OF 004


1. (SBU) Embassy Hanoi looks forward to welcoming you to Vietnam.
Prime Minister Nguyen Tan Dung's June visit to Washington
exemplifies a U.S.-Vietnam relationship that
continues to broaden and mature, in the process spurring
economic, social and technological development that has eased the
path for a limited expansion of personal freedom and expression for
the people of Vietnam. A majority of Vietnamese view partnership
with the United States as key to Vietnam's current development and
future successful global integration. High-level visits like yours
create opportunities for us to influence developments and respond to
Vietnam's interest in globalization, reform, combating corruption,
and enhancing educational opportunities for its people. Your
particular interest in trade and investment coincides with one of
the Government of Vietnam's (GVN) greatest challenges and
priorities, as Vietnam's economy is going through a period of
adjustment following tremendous growth in 2007. For these reasons,
and despite our differences, Vietnam's leaders are committed to
continued progress in bilateral relations and will speak with you
optimistically about the future of U.S.-Vietnam ties. End summary.


2. (SBU) After a decade of isolation and failed economic
policies, Vietnam is determined to catch up with the Asian
tigers. Vietnam's "doi moi" (renovation) program of economic
reform, begun in 1986, has set the country on a successful market
economy path, with an average growth rate of 7.5 percent over the
past decade. A recent World Bank study described Vietnam's poverty
reduction rate as the most significant in such a short period of any
nation in history. The GVN focuses on exports and foreign direct
investment in its drive to achieve middle-income status by 2010.
Vietnam is second only to Thailand in rice exports, and second to
Brazil in coffee. Other leading exports include crude oil, apparel,
footwear and aquatic products. Vietnam is also "moving up the value
chain" by increasing its exports of furniture, machinery, cameras,
computers, printers, consumer electronics, and other diverse
products. U.S. investors tell us the key challenges they face in
Vietnam are underdeveloped infrastructure, a shortage of skilled
workers and managers, the considerable level of state participation
in the economy, and corruption. The Japanese government recently
announced a freeze on low-interest loans to Vietnam until the GVN
takes "meaningful" steps to eliminate corruption.

3. (U) The United States is currently Vietnam's largest export
market and third largest overall trade partner. Total two-way trade
in goods with the United States in 2007 was USD 12.53 billion, up 29
percent over 2006. One of the most positive stories from 2007 was
the surge in U.S. exports to Vietnam, from USD 1.1 billion to USD
1.9 billion, driven by agricultural exports such as cotton (up 92
percent), soybeans (up 1,480 percent), and wheat (up 1,120 percent).
U.S. commodities including hardwood, hides and skins, tree nuts,
fresh fruit, and poultry and red meats also posted record gains in
2007. Driven by the technology industry, the United States is
Vietnam's seventh largest investor, with USD 2.6 billion in
registered FDI since 1988, and USD 2 billion more in "U.S.-related

4. (U) Despite the global economic uncertainty, two-way trade in
2008 looks likely to once again break new ground and surpass last
year's mark. Agricultural products continue to show exceptional
growth. Chicken is up 564 percent, red meats up 983 percent, coarse
grains 304 percent, soybeans 382 percent, wheat flour 675 percent,
seeds 454 percent, and cotton 115 percent.

5. (U) Due to the sharp rise in meat imports, which generated
complaints from Vietnamese producers, the GVN raised meat tariff
rates. Some of the tariff increases were quite large. Due to WTO
bindings negotiated during the accession talks, however, the tariff
increase for the types of meats exported by the United States
(generally frozen cuts and offal) are actually relatively small.
The added cost for U.S. poultry meat exports will be about 7
percent, while the increases for beef and pork will be even

6. (U) At the same time that the GVN raised meat tariffs, they
lowered tariffs on another group of U.S. exports--dry peas and
lentils. With this latest reduction, tariffs on dry peas and
lentils have fallen from 25 percent last year to 13 percent
currently. Compared with other ASEAN countries, these tariffs are
still relatively high, so U.S. volumes shipped here remain small.

HANOI 00001342 002.2 OF 004

7. (SBU) While the great majority of experts consider Vietnam's
long-term economic prospects to be bright, short-term macroeconomic
problems, which predate the current global financial crisis, caused
major difficulties for the government earlier this year. These
problems were high inflation (24.2 percent year-on-year November), a
large current account deficit that put pressure on the currency, and
inefficient allocation of resources due to the disproportionate
amount of state assets devoted to powerful State Owned Enterprises
(SOEs). In response, the Vietnamese implemented a series of fiscal
and monetary tightening measures that were effective in stabilizing
the currency, cutting the trade deficit, and reducing price

8. (U) As these measures were taking hold, however, global economic
problems worsened. Vietnamese banks were not heavily invested in
sub-prime debt and were therefore not directly impacted by the U.S.
financial crisis. Nonetheless, indirect impacts are now being felt
in decreasing foreign direct investment, exports and capital
markets. Vietnam has responded vigorously (too vigorously, some
economists feel) by dropping interest rates 4 times in recent
months, trimming reserve requirements, and widening the currency
trading band. The GVN has also revised its 2009 GDP growth estimate
down to 6.5 percent, although that figure is viewed as optimistic.
Local economists predict that 5 percent will be more achievable.


9. (U) We have a broad trade agenda. Our focus is on maintaining
momentum for improved market access for our exporters and investors.
We have encouraged Vietnam to consider joining the Trans-Pacific
Partnership regional free trade negotiations. We expect them to
indicate soon whether they will participate. The first round of
negotiations for a Bilateral Investment Treaty (BIT) will take place
this month in Washington. Vietnam has requested GSP and we have
told them they need to make improvements in labor rights and IPR
protection. A Department of Commerce team will soon arrive in Hanoi
for the first round of discussions on Market Economy Status for
Vietnam. Commerce also recently determined in its third and last
report on textiles and garments that Vietnam was not dumping in the
U.S. We signed an Open Skies civil aviation agreement for cargo
services last September.

10. (SBU) Vietnam currently accepts U.S. beef from cattle less than
30 months of age. USDA/APHIS has requested that Vietnam expand this
access to allow all products and all ages of beef. The Vietnamese
have drafted a risk assessment to address this issue and, from
November 17-21, 2008, a delegation led by Vietnam's Director General
for Animal Health came to review the U.S. BSE control system. The
Embassy has indicated to the GVN the value of positively responding
to this request in time for a formal announcement during your visit
and the Embassy will continue to press for a response.


11. (U) Part of Vietnam's recent inflation problem was due to its
booming banking sector. Credit growth was over 50 percent in 2007,
with some newer joint stock banks growing loans at close to 90 to
100 percent. The economic downturn in early 2008 exposed weaknesses
in the system and there are now a number of small banks receiving
liquidity support from the State Bank of Vietnam (SBV). Vietnam is
entering a stage where similar emerging countries have experienced
failure of newly formed private banks. Analysts predict that an
increase in non-performing loans at the end of the calendar year may
bring about additional instability if local investors lose
confidence in the banking system. State domination is a factor
here, too, as state-owned commercial banks own 50-60 percent of
banking assets.


12. (SBU) Vietnam's economic successes have translated into
greater international standing. Vietnam has taken seriously its
responsibilities this past year as a non-permanent member of the
U.N. Security Council, chairing the UNSC in July, and has boosted
its participation in regional bodies such as ASEAN and APEC. While
GVN leaders are not fully sure how to handle all the attention, they
understand that the United States plays a direct role in fostering
the conditions and providing strategic technical assistance for
their nation's success. Leaders here are thankful, in particular,

HANOI 00001342 003.2 OF 004

for the high-value assistance we have provided over the past seven
years. USG technical assistance has earned a rare level of
confidence and effectiveness at the heart of Vietnam's
policy-making. Top GVN officials continue to request deeper and
broader USAID assistance in many transformational areas and make
clear their preference for U.S. expertise over that of other donors.
The magnitude of our impact is limited only by current resource


13. (SBU) Challenges remain, of course. GVN leaders assume the
Communist Party's preeminent political role to be the linchpin of
stability, and human rights remain a major sticking point in the
bilateral relationship. China remains a critical strategic
preoccupation, a fact that tempers Vietnam's willingness to
accelerate ties with the United States. Still, most Vietnamese are
enthusiastic about improved relations with the United States,
viewing this as a key indicator of the tremendous progress since the
dark days of international isolation in the 1970s and 1980s. For
these reasons, and despite our differences, Vietnam's leaders are
committed to continued progress in bilateral relations and will
speak with you optimistically about the future of U.S.-Vietnam


14. (U) U.S. assistance in areas other than HIV/AIDS and influenza
remains very modest in relation to spending in smaller neighboring
nations, but increased substantially in FY08 to more than USD 10
million due to earmarks for governance programming and de-mining.
U.S. programs such as Support for Trade Acceleration (STAR) and the
Vietnam Competitiveness Index have helped to reshape trade and
economic regulation, with positive impact on governance throughout
the country. Treasury is also starting to engage on economic
issues, with programs in areas such as anti-money laundering,
taxation, insurance and bond market development.

15. (U) Vietnam's schools and universities employ an antiquated
teaching methodology (a theory-intensive instructional style), lack
qualified instructors, and have poor facilities, all of which
exacerbates the widespread incongruity between skills and
requirements in the country's job market. GVN officials recognize
the structural weaknesses in Vietnam's education system and are
working to upgrade it. The United States is involved in education
in Vietnam in several ways. The Fulbright Program provides
scholarships for two-year Master's Degree programs at American
universities for 25 Vietnamese students each year, and the Vietnam
Education Foundation sends more than 40 students to the U.S. for
Ph.D. study in the hard sciences every year. The Fulbright Economic
Teaching Program, in Ho Chi Minh City, provides high quality
training in economics and public policy for mid-level
administrators. In addition, the U.S. Mission actively assists
American universities and colleges wanting to set up programs at
Vietnamese schools, which helps increase the number of graduates
with the skills needed by American companies in Vietnam. In
addition, EducationUSA Centers in Hanoi and Ho Chi Minh City provide
information and counseling to students wanting to study in the U.S.


16. (SBU) Serious deficiencies related to human rights in
Vietnam include lack of freedom of speech, assembly, and the press.
One of our key objectives is to end the use of catchall "national
security" provisions for the prosecution of peaceful dissent. Since
September 2008 alone, over a dozen political activists have been
arrested for their peaceful dissent against Vietnam's policies. We
continue to call for the release of all prisoners of conscience, but
where we see individuals expressing their political opinions, many
of our government interlocutors see "lawbreakers" trying to
destabilize the regime.

17. (SBU) The recent conviction of two award-wining Vietnamese
reporters in the wake of their reporting on a high-level corruption
scandal, and the conviction of a noted blogger on unfounded charges
of tax evasion reveal the declining state of freedom of the press.
A new draft Press Law, including a draft circular on measures to
register and control blogs, further illustrates the suspicion and
unease the government has for any expansion of expression. The
continued existence of groups in the United States that advocate
regime change complicates human rights engagement by providing

HANOI 00001342 004.2 OF 004

ammunition to hard-liners who want to stoke the fading paranoia that
we are indeed still "the enemy." Reassuring the GVN that the USG
does not support separatist groups, while reinforcing the role of
the media in stemming corruption can assist in building a better
human rights dialogue based on mutual trust.

18. (SBU) Real progress has been made in the area of religious
freedom. The government continues to recognize new religions,
including several new Protestant faiths in the past six months, and
religious observance in Vietnam is quickly growing. While problems
remain, particularly in outlying areas, we removed Vietnam from our
list of countries of particular concern for religious freedoms in
late 2006 due to overall continued improvement.


19. (SBU) While debate continues over the possible human effects of
exposure to dioxin, a contaminant in the wartime defoliant Agent
Orange, recent environmental studies show that dioxin contamination
is concentrated in several "hotspots" within former U.S. airbases
where Agent Orange was stored, loaded and transferred. Areas
subjected to heavy aerial spraying do not have soil concentrations
considered hazardous. The United States and Vietnam have not
reached agreement on the scope of possible health effects, with
Vietnam continuing to argue that over three million handicapped can
trace their disabilities to dioxin exposure. We do not believe that
this figure can be supported by scientifically sound data and
analysis. Statements that describe every child born with a birth
defect anywhere in Vietnam as a "victim of agent orange" are common
and remain a favorite propaganda tool for persons opposed to closer
U.S.-Vietnam relations. However, our engagement on this issue has
accomplished much, in both transforming the tone of the dialogue and
capacity building to address environmental issues and provide
assistance for the disabled. USAID has started to implement a USD 3
million Congressional appropriation for "dioxin mitigation and
health activities," with the recent announcement of USD 1 million in
grants to three partner organizations to strengthen services for the
disabled in Da Nang. We continue to work with the GVN, UNDP, Ford
Foundation and other donors to form a multilateral coalition for
environmental remediation of three priority hotspots in Da Nang, Hoa
Binh and Phu Cat airfields.


20. (SBU) While Vietnam's engagement with the United States will
continue to broaden, China necessarily constitutes Vietnam's most
important strategic preoccupation. Vietnam's leadership is
sophisticated enough to realize that relations with China and the
United States do not represent a zero sum game: it is possible to
have good relations with both. Nevertheless, while China
constitutes a vital and necessary commercial partner -- and shares
many facets of Vietnam's single-party, market-oriented development
model -- it is also perceived as a significant constraint on
Vietnam's freedom of action, affecting, for example, the speed with
which Vietnam can improve its relations with the United States.
Territorial disputes in the South China Sea are a perennial source
of tension with China, as well as a sensitive issue domestically.
Vietnam is aware of Chinese pressure on U.S. firms with interests in
the South China Sea, and your interlocutors may ask Congress to take
a "tougher" stance.


21. (SBU) You can expect your interlocutors to not only be
articulate and well informed, but also to speak in terms generally
supportive of growth in the bilateral relationship. As noted above,
lingering suspicions still exist among conservatives about the
development of closer ties with the United States. Nonetheless, we
fully expect the overall tenor to be one of support and interest at
a measured pace that will not upset the GVN's calibrated attempts to
maintain balance among its other regional partners. There may be
media interest among Vietnamese outlets and you should expect
photographers at some GVN meetings.

22. (U) Again, we look forward to your visit and stand ready to do
everything we can to make your visit to Vietnam as productive as


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