Vietnam: Review of BTA Implementation

UNCLAS SECTION 01 OF 05 HANOI 002795

SIPDIS

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E.O. 12958: N/A
TAGS: ETRD EINV ECON EAID PREL VM IPROP BTA WTO
SUBJECT: Vietnam: Review of BTA Implementation

Sensitive but Unclassified -- Please protect accordingly.

REF: HANOI 199

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OVERVIEW
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1. (U) December 10 will mark the second anniversary of the
entry-into-force of the U.S.-Vietnam Bilateral Trade
Agreement (BTA). Ensuring timely and effective
implementation of the BTA remains a critical component of
our economic relations with Vietnam. We continue to provide
significant technical assistance to the GVN in support of
their efforts to implement the BTA through the USAID-funded
Support for Trade AcceleRation (STAR) Project, the U.S.-
Vietnam Trade Council (USVTC) and other USG sponsored
technical assistance programs provided by individual
agencies. The impact of the BTA on bilateral trade remains
impressive. In the first eight months of 2003, Vietnam's
exports to the U.S. reached USD 3.2 billion, up 142 percent
over the same period in 2002. U.S. exports to Vietnam
through August were USD 409 million (excluding USD 535
million in aircraft sales),up 29 percent (196 percent,
including aircraft sales) from the same period in 2003.


2. (U) This cable provides an overview of GVN efforts to
implement key aspects of the BTA and highlights obligations
that will come due on December 10 this year.

Chapter 1: Trade in Goods
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3. (SBU) The trade in goods chapter of the BTA includes
provisions on MFN and national treatment for goods, the
granting of trading rights, elimination on non-tariff
barriers, customs valuation, import licensing, and tariff
reductions. This year, Vietnam is obligated to begin
applying WTO-level standards for customs valuation for U.S.
imports. In December 2004, Vietnam must reduce tariff rates
on a number of agricultural and industrial products on
average by one-third to one-half their current rates.

-- Customs: Vietnam's current customs valuation procedures
are generally based on reference prices. In June 2002, the
Government issued Decree 60 establishing rules for customs
valuation based on transaction value, in accordance with WTO
principles. Decree 60 applies to goods imported from
countries to which Vietnam has made a commitment on customs
valuation. Under the BTA, Vietnam is obligated to begin
applying transaction value for U.S. imports in December.
The General Department of Customs expects to finalize
implementing legislation for Decree 60 in time to meet this
obligation. Despite the fact that no exceptions are
included in the BTA, Decree 60 reserves Vietnam the right to
apply minimum tax calculation prices on a number of items
"in order to protect the State's interests and domestic
production." The Ministry of Finance, in coordination with
concerned ministries and agencies, is working on a list of
the exempted items.

-- It is highly likely that implementation of the new
customs rules will be extremely problematic. The technical
capacity of the customs department is extremely low and
corruption is a serious problem. Inspections are
essentially manual, equipment is outdated, record keeping is
poor, and a significant portion of trade is still conducted
through bartering. The majority of customs officials have
not yet been trained in applying the new regulations.

-- Tariff Nomenclature: In July, the Ministry of Finance
promulgated a new harmonized tariff system, which took
effect on September 1. The tariff system is based on the
eight digit Harmonized System of Tariffs and conforms to
ASEAN's Harmonized Tariff Nomenclature (AHTN). It is the
most comprehensive change Vietnam has made in terms of
coding and tariff rates. The new system consists of 10,689
lines (4200 more than the old one),of which 5,300 lines are
at four and six digits. (Note: identical to the HS2K of the
World Customs Organization. End note.) It also has 5,400
lines at 8 digits. There are now 15 tariff rates (down from
20) and, according to the Ministry of Finance, the simple
average tariff rate increased from 16.8 to 18.2 percent.
The GVN raised tariff rates on 195 items and reduced them on
106 items. Protection on 72 items was converted from
special consumption taxes and supplemental taxes to tariffs.
-- Technical Barriers to Trade (TBT): On March 25, the GVN
established Vietnam's WTO/TBT Office within the Directorate
for Standards and Quality at the Ministry of Science and
Technology (MOST). This office is the notification
authority and enquiry point for all technical regulations,
standards and conformity assessment procedures concerning
TBT in accordance with WTO provisions. However, as Vietnam
is not yet a WTO member, the office currently focuses on
providing information and consultation services on Vietnam's
TBT regime, including inquiries regarding Vietnam's draft
TBT legislation.
-- National Treatment for imports: Vietnam currently
maintains differential VAT rates on several products in
contradiction to its BTA obligation on national treatment.
The VAT rate on domestic cultivation products (including
planted forest products),husbandry, and unprocessed
aquaculture products is zero percent, while the VAT rate for
imported products in these categories is five percent.
Additionally the VAT rate for processed cotton made
primarily from home-grown cotton is five percent while
processed cotton made from imported cotton is ten percent.
Chapter 2: Intellectual Property Rights
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4. (SBU) The Chapter on IPR is modeled on the WTO Agreement
on Trade-Related Aspects of IPR (TRIPs) and provides for
protection and enforcement of patents, trademarks,
copyrights, and other types of IP. Vietnam's commitments
related to trademarks and patents were due 12 months after
entry into force (December 2002); commitments on copyright
and trade secrets were due in May 2003. The GVN continues
its efforts to revise its IPR legislative framework and to
accede to various international IPR conventions. However,
lack of IPR enforcement, particularly with respect to
copyright and trademarks, remains a serious problem.
Vietnam committed in the BTA, upon entry-into-force, to
enforce existing laws, the U.S.-Vietnam Copyright Agreement,
and the Paris Convention. No such routine and reliable
enforcement exists; pirated and counterfeit goods are
readily available in all Vietnam's major cities.

-- Border measures: In October, the Ministry of Culture and
Information (MOCI) and the Ministry of Finance jointly
issued an inter-ministerial circular on the protection of
copyright at the border. The circular allows rights holders
to request that customs seize shipments, if the petitioner
can show evidence of copyright infringement. The MOF and
the Ministry of Science and Technology (MOST) are currently
finalizing a similar circular that deals with shipments of
counterfeit goods.

-- Accession to international IP conventions: The GVN has
been preparing to accede to several international IP
conventions. The formal applications to the Berne
Convention for the Protection of Literary and Artistic
Works, the Geneva Convention for the Protection of Producers
of Phonograms Against Unauthorized Duplication of their
Phonograms, the Convention Relating to the Distribution of
Program-Carrying Signals Transmitted by Satellite (Brussels
Convention),and the Rome Convention for the Protection of
Performers, Producers of Phonograms and Broadcasting
Organizations are awaiting signature by the President.
(Note: The Rome Convention is not required under the BTA.
End note.) National Assembly approval is not required. The
GVN is not yet ready to submit an application to the
International Convention for the Protection of New Varieties
of Plants (UPOV). The Ministry of Agriculture and Rural
Development (MARD) is currently restructuring authority for
UPOV. MARD will meet with a delegation from the UPOV
Secretariat later this year to make final edits to their

SIPDIS
application.

Chapter 3: Trade in Services
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5. (U) Vietnam's commitments to provide increased market
access, MFN and National treatment to US service providers
are phased in over 9 years after entry-into-force of the
agreement (depending on the sector). The Ministry of
Justice has submitted a draft Decree on Developing Trade in
Service to the Government for approval. This decree is
intended to address changes necessary for the concerned
ministries to implement Vietnam's upcoming BTA services
commitments. MOJ anticipates the decree will be approved by
the end of the year. In December, Vietnam must implement
market access liberalization in accounting, auditing and
bookkeeping services, architectural services and value-added
telecom services (except Internet).

-- Dong Deposits: Until recently, foreign bank branches
operating in Vietnam were prohibited from receiving deposits
in Vietnamese Dong (VND) above a level of 25 percent of the
branch's legal capital. Under the terms of the BTA, this
ratio increases annually for U.S. banks until full national
treatment is applied in year eight. In April, an official
letter from the State Bank of Vietnam (SBV) confirmed the
annual increases in the ration of legal capital for U.S.
banks. As stipulated in the BTA, U.S. banks are currently
allowed to accept Dong deposits at a level of 100 percent of
their legal capital. This ratio will rise to 250 percent in
December. (Note: In response to significant lobbying from
non-U.S. foreign banks, the SBV issued Decision 1084 in
September increasing their ratio to fifty percent of their
legal capital. End note.)

-- Legal Services: In September, the Government issued
Decree 87 significantly reforming the regulatory framework
for the operations of foreign law practices and foreign
lawyers in Vietnam and expanding the scope of operation for
foreign law firms. The decree substantially broadened the
scope of practice of foreign law firms in Vietnam.
Previously restricted to advising on foreign and
international law in the fields of business, investment and
commerce, foreign law practices are now permitted to
"provide legal consultancy services and other legal
services", including consultancy on Vietnamese law when the
foreign law firm employs a Vietnamese lawyer or a foreign
lawyer with a Vietnamese law degree. The Decree provides
for offshore foreign law firms to operate in three forms:
branches; foreign law firms; partnership with Vietnamese
firms. Previously, only branches were permitted.
Additionally, branch licenses are no longer limited to five-
year (extendable) periods. Participation by foreign lawyers
in Vietnamese court proceedings are still prohibited and
this exclusion was extended to Vietnamese lawyers and
trainee Vietnamese lawyers employed by foreign law
practices.

Chapter 4: Investment
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6. (SBU) Chapter 4 of the BTA is in many ways "WTO plus."
Obligations in this chapter include MFN and national
treatment for investment, a prohibition against
expropriation without payment of prompt, adequate and
effective compensation, repatriation of capital, freedom
from arbitrary and discriminatory measures, prohibitions on
technology transfer requirements and phasing out of trade-
related investment measures. The chapter also provides for
arbitration of disputes.

-- TRIMs: Vietnam committed to eliminate WTO-inconsistent
trade-related investment measures (TRIMs),including trade
balancing requirements and foreign exchange controls. In
March, the Government issued Decree 27 amending the 1996 Law
on Foreign Investment, including removing foreign exchange
controls. Subsequently, in April, the GVN abolished its
requirement for foreign currency surrender. Vietnam still
retains restrictions on foreign shareholding in Vietnamese
companies, although in March Government Decision 36
increased the ratio from twenty to thirty percent.

-- Export requirements: Vietnam took a seven-year National
Treatment exception in Annex H of the BTA to permit it to
require foreign investors operating in specified sectors to
export 80% of their production. On December 7, 2001, the
Ministry of Planning and Investment (MPI) issued Decree 718,
which eliminated export requirements in a majority of the
sectors to which this National Treatment exception applied.
However, at the same time, Decree 718 applied this export
requirement to eleven new sectors for which Vietnam did not
have an exception. U.S. delegations at the BTA joint
committees meetings in 2002 and 2003 emphasized that the GVN
must revoke this measure. MPI assured the U.S. side that
these export requirements would not be applied to U.S.
investments, but the GVN could not provide these assurances
in writing. In March, however, Decree 27 eliminated all
mention of export performance requirements.

-- Investment licensing: In the BTA, Vietnam committed to
gradually shift to an investment registration regime for
most sectors. Issuance of Decree 27 made significant steps
toward meeting Vietnam's obligation to remove investment-
licensing requirements from specified sectors by December

2003. The following types of investments are no longer
subject to investment licensing: investment projects that
export 80 percent of their products (as opposed to the
earlier 100 percent requirement); investments in an
"encouraged" or "specially encouraged" project located in
industrial zones (with the exception of certain types of
projects listed in Government Decree 24 (2000)); and
investment in the manufacturing sector with a value of up to
USD 5 million in investment capital.

-- Commercial Arbitration: Vietnam acceded to the New York
Convention on the Recognition and Enforcement of Foreign
Arbitral Awards in 1995, but limited its enforcement to
"commercial" disputes. However, the definition of
commercial acts in the Commercial Code is very narrow,
primarily relating to sale and purchase transactions. This
led to contradicting judgments by different Vietnamese
courts with regard to a foreign arbitral award in a case
between a subsidiary of a U.S. firm (Tyco) and an Australian-
Vietnamese joint venture (Leighton). As further elaborated
in reftel, the Supreme Court overturned the decision of the
municipal Economic Court, ruling that, as a construction
contract did not fit the narrow definition of commercial
contract found in the Commercial Code, a foreign arbitral
award relating to it could not be enforced in Vietnam.

-- In February, the GVN made an effort to address these
problems by issuing an Ordinance on Commercial Arbitration.
The ordinance defines "commercial activities" more broadly
than the Commercial Code to include, inter alia,
construction, consultancy, licensing, investment, financing,
banking, and insurance. The Ordinance grants Vietnamese
courts a number of grounds for non-enforcement that are
essentially in accordance with the New York Convention,
including: an invalid arbitration agreement, the settlement
does not fall under the jurisdiction of arbitration, the
arbitrator's award damages national interest, or the foreign
law applied is inconsistent with the basic principles of
Vietnamese legislation. Finally, while the ordinance allows
parties in a dispute with foreign elements to choose where
to arbitrate their case, it requires disputes involving only
Vietnamese companies to arbitrate in Vietnam with Vietnamese
arbitrators. It remains to be determined if, foreign
companies incorporated in Vietnam will be treated as
Vietnamese or foreign companies in arbitration cases.

Chapter 6: Transparency
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7. (SBU) Last year, the GVN made significant changes to the
"Law on Legal Normative Documents" (also known as the "Law
on Laws"),which governs the way laws are drafted and
published in Vietnam. These changes brought Vietnam
significantly closer to meeting the transparency obligations
that were due upon entry into force of the BTA. However,
the Law on Laws still does not require all types of legal
documents to be published. In particular, "official
letters" are excluded from this requirement. (Note: this is
because official letters are not included in the definition
of legal normative document (LND) in the Law on Laws. End
note.) Although official letters often provide the basis
for policy decisions made at the Ministerial and Government
level, they are not published and the GVN often responds
negatively to official Embassy requests for copies.
Additionally, although the BTA obligates the GVN to provide
("to the extent possible") the U.S. side an opportunity to
comment on draft legislation the Law on Laws does not
provide for such a comment period.

-- Comment period: Both the Office of the National Assembly
(ONA) and the Vietnam Chamber of Commerce and Industry
(VCCI) are looking at the possibility of posting draft laws,
ordinances, decrees and other sub-law regulations on the
internet to allow for public comment. While opportunities
for commentary on draft laws have increased since entry-into-
force of the BTA, currently draft laws and regulations are
made available only on an ad hoc basis.

-- Publication of Laws: As a result of the revisions to the
Law on Laws, the workload of the Official Gazette has
increased dramatically. To help meet this growing demand,
beginning July 1, the Official Gazette became a daily
publication. (Note: previously the Official Gazette was
published six times a month. End note.) To ensure timely
publication of LNDs, in March, the Government (OOG) issued
an official letter requiring any body promulgating an LND to
forward a copy to the Office of the Government within two
days of promulgation. The OOG must then publish LNDs within
15 days of promulgation.


8. (SBU) Comment: It is important to highlight the forward
momentum the GVN has established in continuing to issue the
laws and regulations required for BTA implementation.
However, actual implementation of key obligations still
falls short of what is required by the BTA. There are
numerous reasons for these shortcomings: lack of capacity,
lack of political will and corruption are just a few. For
example, as noted above, the GVN has been unable to reduce
the quantity of pirated and counterfeit goods, despite
ongoing changes in the IPR legal framework. Among upcoming
obligations, application of WTO-level customs valuation for
U.S. imports will also represent a significant challenge for
the GVN. We will maintain our efforts to engage the GVN on
the need to fully meet its obligations according to the
timeframe laid out in the BTA and to encourage ongoing legal
reform.
Burghardt