LIMITS ON TRADING AND DISTRIBUTION CONTINUE TO HAMPER

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 000914

SIPDIS

SENSITIVE

STATE FOR EAP/BCLTV AND EB/TPP/BTA/ANA
STATE PASS USTR FOR EBRYAN and GHICKS
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO
TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: ETRD ECON PREL VM WTRO BTA WTO
SUBJECT: LIMITS ON TRADING AND DISTRIBUTION CONTINUE TO HAMPER
U.S. BUSINESS

REF: A) HCMC 366 B) HANOI 1957 C) HCMC 879


1. (SBU) SUMMARY: U.S. businesses in southern Vietnam are
frustrated by limits on trading and distribution rights. Many
company representatives report that relevant BTA provisions are
not being implemented effectively. One business that has been
directly importing and selling its product for 10 years faces a
claim by government authorities that its operating license does
not permit it to import and sell directly. All strongly agree
that broad freedom to directly trade and distribute a wide range
of products must continue to be a key focus of WTO negotiations.
END SUMMARY.

BTA OBLIGATIONS NOT BEING MET ADEQUATELY


2. (SBU) In meetings with EconOff, legal experts and company
representatives have raised recurring concerns about trading
rights and distribution services. When the U.S.-Vietnam
Bilateral Trade Agreement (BTA) entered into force, U.S. companies
could only directly import-export goods in connection with
production or export activities. Most U.S. companies wanting to
import goods for sale in Vietnam had and still have to go through
a Vietnamese trading company. The situation is similar for
distribution services. A U.S. firm must use a Vietnamese company
to distribute its goods within Vietnam. Under phase-ins
negotiated in the BTA, as of December 2004, U.S. companies in
Vietnam engaged in manufacturing or U.S. companies with less than
50 percent equity in a joint venture with a Vietnamese enterprise
should be able to import-export most goods directly. Similarly,
as of December 2004, joint ventures with Vietnamese enterprises in
the distribution services sector may be established, with U.S.
companies holding no more than 49 percent equity. At least two
U.S. companies attempted to avail themselves of these rights early
in 2005, Gannon International (ref A) and American Indochina
Management (AIM). Both were unsuccessful in their petitions to
the GVN on this issue. In the case of AIM, the marketing,
distribution and logistics company was told by MOT in January that
the company would not be allowed to avail itself of these rights
for the time being.

OTIS ELEVATOR CASE


3. (SBU) Another U.S. company, Otis, has been directly importing
and selling its elevators in Vietnam since 1994, but now faces
restrictions. According to a memo prepared by Otis' legal
representatives, law firm Baker & McKenzie, following an attempt
to bring in a shipment of elevators as it has done for the last 10
years, Otis was told in June that it is not allowed to directly
import and sell and that its activities over the last 10 years
have been beyond the scope of its license. This was the view of
the Departments of Trade and Planning and Investment in Hanoi,
where the import information was originally filed; it is unclear
whether Otis will appeal to the Ministry of Planning and
Investment on their case. According to some of Embassy's economic
growth consultants in Hanoi, Otis's problems with its license are
symptomatic of a more general problem for U.S. investors in
Vietnam. Many old investment licenses contain provisions, such as
trade related investment measures (TRIMS),that are not permitted
under WTO rules. However, if old investment licenses must be
rewritten to eliminate onerous TRIMS requirements, firms run the
risk that provisions that are favorable to their business, such as
generous trading rights, might also be eliminated. Many companies
would prefer to "grandfather" their old licenses.

STATUS OF DISTRIBUTION RIGHTS CURRENTLY MURKY IN DRAFT LEGISLATION


4. (SBU) Legal experts in HCMC are divided on how well legislation
being drafted in preparation for Vietnam's accession to the World
Trade Organization (WTO) addresses the issue of trading and
distribution. In the area of trading, Fred Burke, managing
partner of Baker & McKenzie Vietnam, expressed concern to EconOff
regarding a draft Decree on Foreign Traders, which lists 15
categories of foreign companies that can engage in trading
activities, including warehouse, logistics, retail, cosmetics and
catering firms. Burke is concerned that if a company is not
working in one of these 15 areas, then it will not be granted a
license to trade directly, potentially narrowing the ability of
U.S. companies to engage in trading.


5. (SBU) A decree on foreign traders that is being drafted in
connection to the Commercial Law is also troubling to Burke. In
addition to limiting trading activities to only 15 categories of
companies (ref A),the decree will require companies to obtain an
MOT license for each category in which a company wishes to trade.
Burke said that besides being yet another example of a burdensome
documentary requirement, it was unclear how this licensing process
affects companies' obligation to be licensed by the Ministry of
Planning and Investment (MPI). The decree also states that
representative offices in place in Vietnam for more than three
years will be "discouraged" so as to promote the formation of
branches instead. Burke said the intention of this clause is
unclear, and it introduces uncertainty into the system of rep
offices, a system to which foreign companies have become
accustomed. Finally, Burke noted an irony in the GVN drafting a
decree on foreign traders at a time when it seeks to enter the
WTO, where national treatment is a fundamental principle.


6. (SBU) In the area of distribution, Dao Nguyen, partner at
Johnson Stokes & Master law firm in Vietnam, told EconOff in a
separate meeting that, in her view, the new Commercial Law does
not adequately provide for distribution services. It covers sales-
purchase agreements and agents, which include aspects of
distribution, but does not grant broad distribution rights in a
way that would benefit the needs of Nguyen's clients, particularly
foreign companies looking to distribute their goods directly in
Vietnam. However, another HCMC lawyer, Sesto Vecchi, noted he had
seen a draft decree linked to the Commercial Law that included
provisions for distribution services. Dao Nguyen further observed
that distribution is mentioned in the draft Common Investment Law,
but rights under that law require regulations from the Prime
Minister's office, which has not yet begun to draft such
regulations. Due to unclear language in draft decrees on trading
and distribution, there could be a conflict between the Ministry
of Planning and Investment (MPI) and the Ministry of Trade (MOT)
as to whether an investor can acquire distribution rights by
amending its investment license from MPI or should apply to MOT
for a separate distribution license, according to Embassy economic
growth consultants in Hanoi. In their view, the legislation
should be read to give an investor alternative ways to get
distribution rights, but the two Ministries might want investors
to get both licenses.

TRADING AND DISTRIBUTION RIGHTS KEY TO U.S. BUSINESS ACTIVITIES IN
VIETNAM


7. (SBU) U.S. businesses in Vietnam rate the need for broad
trading and distribution rights among their highest concerns in
the run up to Vietnam's WTO accession. Mark Gillen, director of
AIM, met with EconOffs and outlined the kind of expensive and
inefficient mechanisms AIM endures to import and distribute goods
legally in Vietnam for its clients, which include the likes of
Johnson Wax and Sealy. AIM's representative office in Vietnam
must work through a local company that in fact is completely
supported by AIM and is located literally across the hall from
AIM's office. The result is two companies with two management,
accounting and receivables structures to handle the import and
distribution of the same goods. Since the local company must show
a profit and pay taxes, AIM must adjust the price of its goods to
accommodate the financial needs of two companies. This two-
company structure also limits the amount of financing AIM can
obtain to grow its business. The local company can obtain some
financing in Vietnam using inventory as collateral, but AIM, an
American-owned and Hong Kong-registered company, finds it
difficult to obtain more financing outside Vietnam; Hong Kong
financial institutions, for example, demand a large amount of
collateral for loans since AIM's inventory is in Vietnam and
technically held by another company.


8. (SBU) COMMENT: Trading and distribution rights - both the BTA
implementation and the prospects for broader rights under the WTO
- are a continuing concern for U.S. firms in Vietnam. An August
12 USVTC report on the topic noted that Vietnam committed to
extend trading rights at the May WTO working party meeting, except
in areas like petroleum, pharmaceuticals, fertilizers, cultural
products, and some agricultural products, which are already
subject to lengthy phase-ins under the BTA. Representatives of
U.S. companies in HCMC have told us on a number of occasions that
Vietnam's commitments on trading and distribution in the WTO
should be "BTA-plus" and should shorten or eliminate phase-ins for
products like fertilizers, chemicals, pharmaceuticals and cultural
products, all areas in which U.S. business is strongly
competitive.


9. (SBU) Comment continued: These concerns are not new or unique
to southern Vietnam. Firms such as Carrier and General Electric
have been complaining to the Government of Vietnam (GVN) that the
restrictions on their ability to import and distribute are
significant obstacles to the success of their businesses. For
Carrier, it means their air conditioning product line is limited
to what they assemble in Vietnam. For GE, it means they have to
hire a Vietnamese firm as an intermediary to distribute medical
equipment, thus raising costs, reducing profits and making doing
business more complicated. So far these firms continue to operate
in Vietnam, but it is not easy. End comment.
WINNICK