STORM OVER RESTRICTIVE AUTO COMPONENT TARIFFS

UNCLAS SECTION 01 OF 02 HANOI 002540

SIPDIS

SENSITIVE

STATE FOR EB, E, EAP/BCLTV
STATE PASS USTR FOR EBRYAN
USDOC FOR AUTO AFFAIRS SCOTT KENNEDY
USDOC ALSO FOR 6500 AND 4431/MAC/AP/OKSA/VLC/HPPHO
TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: ETRD EIND EFIN EINV ECON ETRD VM
SUBJECT: STORM OVER RESTRICTIVE AUTO COMPONENT TARIFFS


SENSITIVE BUT UNCLASSIFIED -- PROTECT ACCORDINGLY.

REF: A. 02 HANOI 3029

B. 02 HANOI 3106

C. HANOI 7710

D. HANOI 1814


1. (SBU) SUMMARY: Since last year the GVN has sought to
develop Vietnam's auto industry by increasing the local
content in domestically produced vehicles. Tax and tariff
policy has been the main policy used to achieve this goal.
Reps of foreign automakers with production in Vietnam
believe these decisions will have a disastrous impact on
their operations and Vietnam's auto industry. Auto sales
have spiked as Vietnamese prepare for a potential
significant hike in car prices. GVN explanations for this
strategy are unclear. Embassy has raised this issue and its
potential impacts on various occasions with the GVN and the
international community. Apparently, the GVN believes it
has the right to change things in unpredictable ways once
foreign firms have started operations. We believe this
issue sends a mixed message to foreign investors and should
be raised during the upcoming visits of MPI Minister Phuc
and others to the U.S. END SUMMARY.


2. (U) A December 2002 Prime Ministerial decision (Ref A)
laid out a strategy to develop Vietnam's auto industry by
sharply increasing the local content in domestically
produced vehicles. The Ministry of Finance has pursued this
strategy by harmonizing duty and tax rates applied to
imported auto component kits (used by all automakers in
Vietnam to produce cars, vans, and trucks) with the high
tariff rates applied to imported completely built vehicles.
These efforts have persisted despite an effective joint
campaign by Ford Vietnam, GM Daewoo, and other auto
producers in Vietnam as well as Ambassador and like-minded
embassies (Refs A and B).


3. (U) In May, the National Assembly passed an MOF proposal
to include special consumption tax (SCT) and value added tax
(VAT) increases as part of a larger package of tax changes.
The NA decision will increase the VAT on all vehicles from
five to ten percent in 2004 and will increase the SCT on
cars manufactured from kits (CKDs) starting in 2004 and
going up to eighty percent on some models by 2007. In
addition, the MOF has completed a 2004-2010 roadmap to
harmonize tariff rates applied to CKDs and completely built
units (CBUs). Under this roadmap, the MFN rates applied to
CKDs will rise 5-10 percent per year until 2008, including a
five percent increase, which began on September 1.
Meanwhile, the MOF has stated that it plans to reduce rates
for CBUs in accordance with WTO accession negotiations.


4. (U) These changes already appear to be affecting the
market. According to recent press reports, car sales have
spiked in recent months. The first seven months of the year
saw a 42 percent increase in sales over the same period last
year, with more than 18,600 cars sold during the period.
Based on this trend, the Vietnam Auto Manufacturers
Association (VAMA) has said that the number of cars sold in
2003 could reach 32,000. Press reports also predict that
the price of locally produced cars will have to rise between
18 and 30 percent to accommodate the new tax rates.


5. (SBU) GVN officials are inconsistent in their
explanations for implementing the new auto policy.
Generally, MOF officials have cited the policy as part of
MOF's overall efforts to reform the tax system. MOF has
also cited the need to develop a local content industry, the
GVN to adhere to its commitments to the international
financial institutions (IFIs),and the harmonization of
taxes on CBUs and CKDs (see Ref C and D). Deputy Prime
Minister Vu Khoan tried to explain that this policy of
adjusting tariff rates is designed to suit WTO standards.
Minister of Trade Tuyen (and other MOT officials) have
argued that auto producers in Vietnam make very high
profits. He also cited the need for increased local content
and the development of an auto industry in Vietnam.
Minister of Planning and Investment Phuc has explained that
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. (See Ref C)


6. (SBU) Econoff has confirmed that this policy did not
originate with the local IMF and World Bank reps. Instead,
they share Embassy's displeasure with the proposal.
Although they agree with the need to harmonize tax rates for
CBUs and CKDs, they do not support any increase in tariffs.
Further, they are also concerned about how this decision was
made and its potential effect on investment. Until now, the
IFIs have viewed trade liberalization as the strongest part
of Vietnam's reform program, but this decision has cast some
doubt on their assessment.



7. (SBU) COMMENT: Although the reasons behind these changes
appear to vacillate, the GVN's commitment to increase the
taxes and tariffs on locally-manufactured cars is unwavering
despite intense pressure from many directions. Some in the
foreign auto industry here have cited this as a major threat
to their business since their investment analysis did not
assume car prices would suddenly rise by 25% or more. The
GVN clearly wants to attract foreign investment, hence the
mission to the U.S. by Minister of Planning and Investment
Phuc. Apparently, the GVN believes it has the right to
change things in unpredictable ways once foreign firms have
started operations. We believe this issue sends a mixed
message to foreign investors that should be raised during
the upcoming visits of MPI Minister Phuc and others to the
U.S.
PORTER