STATE TRADING IN VIETNAM -- LIMITS ON TRADING AND

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000366

SIPDIS

SENSITIVE

DEPARTMENT PLEASE PASS USTR, ELENA BRYAN
STATE FOR EAP/BCLTV AND EB/TPP/ABT/BTT
USDOC FOR 4430/MAC/ASIA/OPB/VLC/HPPHO
TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: ETRD ECON EINV BEXP PREL VM BTA
SUBJECT: STATE TRADING IN VIETNAM -- LIMITS ON TRADING AND
DISTRIBUTION

REF: A) HCMC 104 B) HCMC 178 C) HCMC 213 D) HCMC 294


1. (U) This is the fifth in a series of cables on industry
perspectives in southern Vietnam on the role of the state in the
economy.


2. (SBU) SUMMARY: U.S. companies based in Ho Chi Minh City chafe
at GVN restrictions that prohibit them from directly importing and
distributing their goods. They report that phase-ins of trading
rights and distribution services provided in the U.S.-Vietnam
Bilateral Trade Agreement are not being implemented in a timely
fashion. In addition, there are too many products that U.S.
businesses are forbidden to import and distribute directly. These
limitations hinder U.S. exports to and investment in Vietnam and
make products that do get in more expensive. END SUMMARY.


3. (SBU) U.S. invested enterprises may only import and export
products used in, or in connection with, their production or
export activities. They are currently prohibited from importing
and distributing goods for sale in Vietnam, with some exceptions.
Only Vietnamese companies, which are frequently state-owned, are
authorized to import and distribute products from U.S. and other
foreign suppliers. This has the effect of leaving U.S. companies
virtually powerless to control how their goods reach the
Vietnamese market, according to attorneys at the Ho Chi Minh City
branch of Baker and McKenzie.


4. (SBU) The U.S.-Vietnam Bilateral Trade Agreement (BTA) provides
phase-ins through 2008 and beyond that gradually allow U.S. firms
more control over the import and distribution of their goods in
Vietnam. As of December 2004, U.S. companies engaged in
manufacturing in Vietnam should be able to import most goods,
though they must continue to rely on a Vietnamese distributor.
However, at least one U.S. company, Gannon International, has
reported problems in availing itself of trading rights under the
BTA. A full service asset management company, Gannon
International provides warehousing, logistic, and beverage
production services for a variety of chemical, raw material, and
consumer product companies in Vietnam. An official at the
Ministry of Trade acknowledged to Hanoi Econoff that the GVN has
not issued the regulations necessary to implement the BTA's
trading rights and distribution services obligations. He said
that MOT is in the process of drafting the necessary regulations,
but the process is likely to take at least several more months.
MOT still needs to circulate the draft regulations for inter-
ministerial clearance and then seek approval from the Prime
Minister.


5. (SBU) There are currently a large number of goods listed in the
BTA that the GVN bans from direct import and distribution and that
will not benefit from any of the BTA phase-ins. U.S. companies
like Merck, Dow, Dupont, Diageo, Gannon and others are frustrated
that there are currently no provisions for them to import and
distribute their goods, including pharmaceuticals, chemicals,
fertilizers, pesticides, wine and spirits, and audio-visual
materials. Merck and other U.S. pharmaceutical companies with
representative offices in Ho Chi Minh City report difficulties in
effectively marketing their products because they cannot control
distribution. Diageo and the Distilled Spirits Council of the
United States note U.S. companies' inability to control import and
distribution of spirits means there is a greater danger of
counterfeiting, which endangers public health and brand
reputations. Monsanto, as well as Dow and Dupont in the United
States, would like to expand their product lines to include more
fertilizer and pesticide because of growing Vietnamese demand, but
they are barred by restrictions on fertilizer and pesticide.
Baker and McKenzie report many U.S. companies that are interested
in selling their products - from audio-visual products to computer
hardware - in Vietnam are unwilling to do so in the current
environment.


6. (SBU) Having to import and distribute through Vietnamese
intermediaries raises the cost of U.S. goods and reduces the
service benefits that traditionally help to make a U.S. product
desirable. Gannon estimates the bottlenecks created by having to
go through a Vietnamese importer and distributor add about seven
percent to the cost of imported goods. The situation also opens
up U.S. business to risks of fraud, unpaid receivables and
cumbersome business practices that add further costs to goods sold
in Vietnam. Oregon-based OIASCM Supply Chain Management estimates
the cost of having to work with a local partner at several
thousand dollars a month. OIASCM says having fewer intermediaries
involved in their logistics business would mean lower cost,
greater efficiency and better service. OIASCM also observes that
it is limited by the capabilities of its local partners; the
company would like to grow its business in ways that it currently
cannot because of local partner limitations. Johnson, Stokes and
Master, another law firm, reports that all their clients involved
in selling goods in Vietnam - regardless of the sector - have
voiced frustration at the costs involved in working through local
importers and distributors, who often cheat on duties and demand
significant percentages of profit margins. Baker and McKenzie
notes that U.S. products are often in demand because of their high
quality and a U.S. company's ability to provide good customer
service and technical assistance. Many of these advantages are
lost when the U.S. company does not have control over import and
distribution.


7. (SBU) Under the BTA, full distribution rights for 100 percent
U.S. owned companies are not phased in until 2008. U.S.
enterprises doing business in Vietnam have expressed a strong
interest in speeding up this timetable as part of Vietnam's WTO
accession. Carrier Corporation operates a 100 percent foreign
invested subsidiary, which manufactures, sells, and services air
conditioning equipment in Vietnam. Carrier is interested in
expanding its business in Vietnam, but views current limitations
on distribution rights as a significant obstacle. Carrier can
currently only control the distribution of its products that are
manufactured and assembled in Vietnam. For distribution of
Carrier products manufactured elsewhere, the company has to use a
cumbersome and convoluted process that involves a third-country
middleman. Carrier representatives also note that limitations on
distribution limit Vietnam's ability to attract foreign investment
in infrastructure and logistical operations.


8. (SBU) COMMENT: The issue of trading and distribution rights is
a critical one to a broad cross-section of U.S. business, not to
mention other foreign companies. In Baker and McKenzie's view,
the limits and prohibitions on import and distribution are
creating a structural trade imbalance between the United States
and Vietnam. Many U.S. companies, particularly small and medium
enterprises, are discouraged from doing business in Vietnam
because they cannot control trading and distribution.
WINNICK