VIETNAM ISSUES TEXTILE QUOTA ALLOCATION GUIDELINES

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 000500

SIPDIS

SENSITIVE

STATE FOR EAP/BCLTV AND EB/TPP/ABT/BTT BOYNTON
STATE ALSO PASS USTR BRYAN/SPOONER/MILLER/CLATANOFF
USDOC FOR 6500 AND 4430/MAC/AP/OPB/VLC/HPPHO
USDOC ALSO PASS OTEXA LEONARD/FOOTE/MARTELLO
CUSTOMS FOR RICHARD CRICHTON
LABOR FOR ANA VALDES


E. O. 12958: N/A
TAGS: ECON ETRD KTEX VM
SUBJECT: VIETNAM ISSUES TEXTILE QUOTA ALLOCATION GUIDELINES

REF: HCMC 297


1. (SBU) SUMMARY: The GVN has announced quota allocation
criteria for textile and garment exports to the U.S. Sixty-
five to seventy percent of quota will be allocated based on
past performance over the period of calendar year 2002 and the
first quarter of 2003. The remainder will be issued to new
companies and firms meeting a range of other criteria. AMCHAM
and others had lobbied strongly for quota to go first to past
performance. The allocation of the performance-based quota
should be a relatively transparent process, but criteria for
the remainder has yet to be clarified. Many buyers and
producers worry that this could allow quota to be steered to
politically connected firms. The biggest problem, however, is
that contrary to the circular itself, which calls for 80% of
performance quota to be allocated by the end of May, no such
allocation has yet occurred. Producers and buyers are becoming
increasingly nervous that as all companies, whether eligible
for performance-based quota or not, continue to ship, available
quota shrinks every day. Producers still argue, however, that
quota is still a competitive advantage over China. End
Summary.

Quota Criteria allocates 65-70% to Past Performance
-------------- --------------


2. (U) In a joint circular issued by the Ministries of Trade,
Planning and Investment, and Industry, the GVN spelled out
guidance for quota allocation for export of textile and apparel
to the U.S. market. The circular, dated May 27 and released a
few days later, covers quota allocation for the period from May
1 to December 31, 2003.


3. (U) Depending on quota category, 65-70% of available quota
will be allocated based on past performance, with past
performance defined as shipments to the U.S. market during
calendar year 2002 and the first quarter of 2003. Most of the
remaining quota (from 23-28%, again depending on category) will
be allocated according to a variety of criteria:

--To enterprises with high production and export capacity, but
which just began to export in late 2002 or early this year.

--To enterprises which have no "past performance" record of
export, but which now have export contracts which can be filled
with current capacity. "Priority [will be] given to
enterprises that have invested in modern equipment and
technology to produce textile and apparel products of high
quality for export."

--Three percent in this category will be reserved for companies
that have signed contracts directly with U.S. importers and
distributors.

Ministry of Trade officials explained that they decided to
establish a range on quota distribution to allow them the
flexibility to fine tune the system as they are implementing
it.


4. (U) The remaining 7 percent of quota will be reserved for
enterprises using "significant" amounts of materials and
fabrics made in Vietnam or for enterprises located in
"economically difficult areas" which have production capacity
and export contracts.


Schedule is Already Slipping
--------------


5. (U) The circular directs that the quota be allocated
according to a schedule that has already slipped. Eighty
percent of performance-based quota for companies that had
already properly documented past performance was to have been
issued by the end of May. This has yet to occur. Eighty
percent of performance-based quota for other companies and
quota based on the other criteria is to be issued by the end of
June. According to Ministry of Trade officials, they plan to
allocate the remaining 20% of the quota once the Visa
Certification system is in place.

6. (SBU) The circular prohibits quota from being transferred
or sold between companies and notes that companies that do not
utilize all their quota must surrender the excess quota in
writing by October 1 to qualify for the same quota level next
year. Visas will be required for shipments after July 1. NOTE:
Privately, MOT officials has expressed their concern about the
task of administering the quota system, especially in light of
the minimal prep time they have had to get it up and running.
We're not surprised that they are running behind schedule but
believe that they are making a sincere effort in the face of
intense pressure and outside scrutiny.

The Devil is in the Details
--------------

7. (SBU) Several foreign buyers and producers have told
econoff that they believe the performance-based quota will be
allocated in a relatively fair and transparent manner, but they
are much more pessimistic about the allocation of the quota
based on the other criteria. Rumors have already started to
circulate that one Jaguar-driving son of the key MOT official
responsible for quota is an avenue for obtaining quota.
Although the circular states that allocation shall be "carried
out in a transparent, reasonable manner" the devil is in the
details and evidently buyers and producers here believe in the
devil. For all of the efforts at transparency - the circular
as well as export data for the month of May appears on the
Ministry of Trade website, and the ministries involved
solicited comments from buyers and producers - it is far from
clear how the non-performance quota will be allocated. Although
Ministry of Trade officials verbally explained to us their
intended process and assured us of their intent to be as
transparent and as fair as possible, the published criteria are
vague and could create a situation where decisions are made on
a case-by-case basis, allowing for outside pressure to be
brought to bear on MOT. And even though quota is not to be
sold or transferred, some producers have told econoff that they
are already looking for quota from companies that might have a
surplus.


8. (SBU) For example, 7% of the quota is reserved for
companies using local materials or located in "economically
difficult areas," but the circular did not define "economically
difficult areas," nor did it specify local content criteria.
(Note: We assume that MOT will use the GVN's list of
economically depressed or underdeveloped regions as established
by the Ministry of Planning and Investment under its poverty
alleviation program.) MOT has assured us they are working on
the criteria and procedures to evaluate the applications of new
enterprises seeking quota or those that just began shipping at
the end of last year, but was unable to provide details or a
firm implementation date. One sweater manufacturer which has
invested $5 million in a plant in Ho Chi Minh City told econoff
that although his company had been registered here for about
two years, exports to the U.S. have so far been relatively
small, because of the time it took to get the factory up and
running and to hire and train his staff. The criteria as
issued do not give him any hint of whether or how he will get
quota.

Picking Favorites
--------------


9. (SBU) Buyers, producers and even Vietnamese officials point
out that this lack of clarity will help connected firms get the
quota they need to export. Some of the criteria seem designed
to benefit state-owned enterprises (SOEs) - such as the
criteria which base some allocation on "capacity of production
and export". The guidance measures capacity in part as number
of workers, machinery, etc, which SOEs have in abundance.
AMCHAM, by contrast, had suggested that any additional quota be
based on paid-in capital, which would have favored foreign-
invested firms (Reftel). SOEs are also more likely to locate
in those economically difficult areas which will receive
additional quota.


10. (SBU) All business sector interlocutors stressed, however,
that the lack of clarity in assigning the non-performance quota
would not simply benefit SOEs, but would benefit firms with
strong political connections or those seeking to make them.
Many producers stressed that some large private Vietnamese
firms were very well connected and would have little problem
obtaining the quota that they needed. One Vietnamese private
sector factory owner close to high-level officials told econoff
weeks before this guidance was released he had absolutely no
concerns about obtaining the quota that he needed.


11. (U) Small private firms were likely to do less well
however. Many of these firms have limited "past performance"
and even fewer political connections. One Hong Kong producer
noted that many of these private firms worked as subcontractors
for larger firms when producing for the U.S. market. In such
cases performance quota would accrue to the consignor, not to
the subcontractor.


12. (SBU) According to one Vietnamese official, Korean firms
also influenced the design of the allocation process. A large
group of foreign buyers and producers had been recommending
through a joint AMCHAM committee that companies with past
performance receive quota which at least matched past
performance. Koreans, many of whom recently opened factories
and had little or no past performance argued for limiting quota
based on past performance to allow for quota allocations to new
firms. According to this official, representations were made
by the Korean Ambassador to Trade Minister Tuyen, and the Prime
Minister of Korea made the same appeal in writing to the
highest levels of the GVN. Evidently, it worked. However, we
should note that several U.S. firms expressed exactly the same
concern to us and are very pleased that MOT included provisions
for new firms.

Quota Disappearing by the Day
--------------


13. (U) A larger worry among foreign buyers and producers is
the timing of the actual quota allocations, which have yet to
occur. MOT officials told us in late May that they intended to
allocate quota by the end of May for those firms that had met
the May 15 deadline for applications. The circular in fact
states that 80% of the performance quota will be allocated "by
the end of May." As of June 5, this had yet to occur, although
firm hear that the allocation is coming "any day." Quota
covers the eight-month period from May 1 to the end of the
year. Without quota allocations, product continues to be
shipped madly to the U.S. Producers are worried that when
quota is finally allocated, much of it will have already been
used up - and with good reason. According to the Ministry of
Trade website (www.mot.gov.vn),as of June 3, nine of the 22
categories have already shipped over 25% of the available quota
for the rest of the year. (Note: because the textile agreement
took effect on May 1 this year, only two-thirds of the total
annual quota is available in each category for the period May 1
- December 31, 2003.) In the two largest categories 338/339
22% of the available quota has already been shipped and
category 347/348 has already shipped 30% of the available
quota.


14. (SBU) Comment: Even though the MOT circular instructions
lacked adequate detail (not uncommon),and despite the delay in
quota allocation, buyers and producers are still bullish on
Vietnam. They are pleased the circular calls for a sizable
portion of quota to be allocated based on past performance.
Vietnam's competitive advantage is still quota, one producer
told econoff. He estimated that production costs are still 15%
higher than China and operating costs are 20% higher, but quota
is still cheaper than in China. With most of it free here for
past producers, he would somehow acquire the rest of what he
needed from the allocation process or, although technically
illegal, by buying surplus from other producers. The biggest
problem now is getting quota allocations issued before even
more available quota is used up.

YAMAUCHI