VIETNAM SCENESETTER FOR ASSISTANT TO THE PRESIDENT AND

UNCLAS SECTION 01 OF 05 HANOI 000306

SIPDIS

SENSITIVE
SIPDIS

TOKYO FOR MARC DILLARD
SINGAPORE FOR TREASURY SBAKER
TREASURY FOR SCHUN
USTR FOR BISBEE

E.O. 12958: N/A
TAGS: OTRA ECON ETRD EINV EFIN KIPR PREL PHUM KIRF EAIR
VM
SUBJECT: VIETNAM SCENESETTER FOR ASSISTANT TO THE PRESIDENT AND
DEPUTY NSC ADVISOR PRICE

HANOI 00000306 001.2 OF 005


(U) This cable is Sensitive But Unclassified. For official use
only, not for dissemination outside USG channels or posting on the
internet.


1. (U) Your visit is a good opportunity to encourage Vietnam to
continue the process of opening to the world and reforming
internally. Vietnam's national leadership remains eager to learn
from the United States on economic and governance reform, and will
be attentive to what you have to say. Your visit will also
underscore the high level of attention the USG is paying to the
development of Vietnam as a trading partner, investment destination
and as an export market for U.S. goods and services. The media here
is signaling a warm welcome, and I predict that your visit will
resonate favorably.

VIETNAM'S EAGERNESS TO PROVE ITSELF AS THE NEXT TIGER
-------------- --------------


2. (U) Mission Vietnam very much looks forward to your visit to
Hanoi from March 20 to 22, as your personal engagement will support
directly our important, broad-based efforts to influence
developments in this increasingly important country. After decades
of isolation and failed economic policies, Vietnam is determined to
catch up with the Asian tigers. The government of Vietnam (GVN)
aims to achieve the ranks of middle-income developing countries by
2010 and to be an industrialized country by 2020. In its efforts to
modernize the economy, the GVN has focused on pushing exports and
investment as key drivers in its policy of fast economic growth to
reach its goals.


3. (SBU) When Vietnam started its "doi moi" (renovation) program of
economic reforms in 1986, the economy was in shambles and the vast
majority of the population lived in poverty. Vietnam's economic
reforms have set the country on a successful market economy path
demonstrated by average annual economic growth of 7.5 percent during
the last decade. In 2007, the economy grew at a rate of 8.5
percent. Poverty rates have tumbled from 58 percent in 1993 to
under 15 percent in 2007, according to the GVN's latest figures. A
recent World Bank study described this poverty reduction rate as the
most significant in such a short period of time of any nation in
history. The middle class is growing and retail markets are
booming.

THE U.S. AS A PIVOTAL PLAYER
--------------


4. (U) The United States is Vietnam's third largest trade partner,
after China and Japan, and its largest export market. Total two-way
trade in goods with the United States in 2007 was $12.53 billion, up
29 percent from 2006, according to the U.S. Department of Commerce.
One of the most positive stories of the 2007 trade figures was the
surge in U.S. exports to Vietnam, which increased by 73 percent to
$1.9 billion from $1.1 billion in 2006, as measured by the USG.
U.S. agricultural exports, in particular, showed remarkable growth.
Cotton exports, used as inputs for Vietnam's garment industry, grew
92 percent, soybean exports were up 1,480 percent, and wheat exports
up 1,120 percent. A wide range of U.S. commodities including
hardwood, wheat, hides and skins, soybean meal, tree nuts, fresh
fruit, poultry and red meats, also posted record gains in 2007.


5. (U) The United States is also Vietnam's seventh largest investor,
with $2.6 billion in registered FDI since 1988 (South Korea is the
largest with $11 billion). According to a 2007 study, however,
"U.S.-related investment" would be at least $2 billion more if one
counts investment via overseas U.S. subsidiaries. For example,
normal FDI accounting methods credit Intel's recent $1 billion
investment not to the United States but to Hong Kong because it was
conducted from the chip maker's subsidiary there. The technology
industry, in particular, has increasingly chosen Vietnam as an
investment destination, with U.S. companies like V-CAP and Emerson
recently announcing plans to open facilities here. By any measure,
we are a big player here as both Vietnam's most important export
market and a substantial source of investment.


6. (SBU) The influence of the United States is not restricted to
growth in trade and investment. Over the past decade, the United
States has become a key player and partner in helping Vietnam
implement market reforms and eschew central planning through
innovative technical assistance programs. During your visit, the

HANOI 00000306 002.2 OF 005


Mission and USTR will hold meetings with the GVN on a broad spectrum
of trade and investment issues under the 2007 Trade and Investment
Framework Agreement. A great deal of the discussions will center on
implementation of Vietnam's WTO commitments, which have largely been
proceeding on track. One area USTR will highlight during this visit
is concerns over Vietnam's protection of intellectual property
rights (IPR),including weak enforcement efforts and failure to meet
its WTO commitment to provide for criminal remedies for commercial
scale IPR violations. (Note: Vietnam is currently on USTR's Special
301 Watch List. End note.)

U.S. COMMERCIAL SUCCESSES AND OPPORTUNITIES
--------------


7. (SBU) Aircraft sales and telecoms have presented some of the most
rewarding commercial opportunities to date. In November 2007,
Boeing, Vietnam Airlines (VNA) and the newly formed Vietnam Aircraft
Leasing Company (VALC) inked a $1.88 billion deal for the purchase
of twelve 787 Boeing "Dreamliners." VNA and VALC have now procured
31 Boeing aircraft. Other recent notable commercial successes
include Motorola securing three contracts to build the mobile phone
network of a state-owned mobile phone service provider and U.S. firm
Wilbur Smith Associates' successful bid to provide consultancy
services for the Danang airport expansion. On April 12, Vietnam
will launch Vinasat 1, a $168 million satellite built by
Lockheed-Martin, which also constructed the associated earth
station.


8. (SBU) In addition to the above successes, a number of significant
commercial opportunities loom on the horizon. Boeing hopes to close
a deal for seven additional 787s in 2008, possibly coinciding with a
potential state visit to the United States later this year by Prime
Minister Nguyen Tan Dung. GE Aviation, meanwhile, is engaged in a
sales campaign with Rolls Royce to sell jet engines to VNA for its
787 fleet - a deal valued at around $350 million for GE. AES, a
U.S. power company, is negotiating with state-owned power company
Electricity of Vietnam to build the 1,200-megawatt Mong Duong II
thermal power generation project in Vietnam's northeastern Quang
Ninh province. Chevron is also in negotiations to build an offshore
pipeline and supply gas to a power plant in southern Vietnam.

GROWING RELIANCE ON U.S. ADVICE
--------------


9. (U) Despite our fractious history, Vietnam and the United States
are forging closer ties each day. Vietnam's motivation to seek
stronger ties is clear. As noted above, we are Vietnam's largest
market and one of its closest trading partners. The GVN also sees
the United States as a critical source of financial and technical
assistance. Hanoi also increasingly sees the United States as an
important force in maintaining a stable regional environment and
balancing a rising China. For our part, Vietnam provides an
important opportunity in East Asia for advancing U.S. national
interests in securing a stable and peaceful Asia-Pacific region. We
are also encouraged by the steady liberalization of the government's
role in the life of its citizens. Problems remain, as noted below,
but all agree that basic trends are positive with regard to personal
freedoms, when viewed over time.


10. (U) As noted above, over the past ten years Washington has very
effectively invested limited aid dollars to support Vietnam's
transition to a market economy by strengthening trade
liberalization, particularly the reforms needed to implement
commitments under the 2001 Bilateral Trade Agreement (BTA) and WTO.
Two of our programs, Support for Trade Acceleration ("STAR") and the
Vietnam Competitiveness Initiative, support Vietnam's efforts to
create a modern market economy and the legal framework that supports
it. The STAR team has been involved directly the overhaul of
Vietnam's civil procedure code, new investment laws providing for
equal treatment of state-owned and private companies, a securities
law to help develop Vietnam's capital market, protecting IPR, and
numerous other projects to shore up greater transparency, rule of
law and civil society. As a direct result of these programs,
Vietnam has expanded its reforms to include areas of good
governance, including improving accountability, transparency and
anti-corruption efforts.


11. (U) Eighty five percent of all U.S. Official Development
Assistance to Vietnam focuses on health issues, and our cooperative

HANOI 00000306 003.2 OF 005


efforts to prevent and treat HIV/AIDS and combat Avian Influenza are
the hallmarks of our bilateral health relationship. Vietnam will
receive approximately $88 million in PEPFAR funding in FY07 aimed at
preventing new infections, providing care to 40,000 persons,
including orphans and vulnerable children, and support
anti-Retroviral treatment for 9,000 patients. Our target is to
support treatment for 22,000 HIV-infected persons by September

2009.


12. (U) U.S. Avian Influenza-related assistance has totaled nearly
$23 million over the past three years and has focused on preventing
a pandemic, including strengthening emergency preparedness, building
veterinary laboratory capacity, animal vaccination campaigns, animal
surveillance and response, and public awareness. In FY08 we
anticipate approximately $8 million in USAID funding for Avian
Influenza - a doubling of the FY07 level - to continue vaccination
programs, assist health surveillance, farmer and general population
education and best sanitary practices.


13. (SBU) Last September, pursuant to the U.S. National Nuclear
Security Administration's (NNSA) Global Threat Reduction Initiative
(GTRI),the United States worked in cooperation with the Russian
Federation and the International Atomic Energy Agency (IAEA) to
assist Vietnam to convert its only civilian nuclear reactor from
high to low enriched uranium fuel and return spent high enriched
uranium to Russia. NNSA continues to assist Vietnam to develop the
necessary physical and regulatory safeguards to establish a civilian
nuclear power sector.


14. (U) The current indications from the planning figures in the
FY08 and FY09 budgetary process is that USAID will be in a position
to expand its assistance, especially in the areas of economic growth
and reform and good governance. Given the expansion of the program
and in recognition of the growing development relationship between
the United States and Vietnam, USAID in Hanoi will soon become a
full stand-alone USAID presence mission.

CHALLENGES: INFLATION, OUTDATED ACADEMIC SYSTEM, STATISM
-------------- --------------


15. (SBU) Despite these achievements, Vietnam still faces
substantial challenges. High inflation worries the national
leadership, and fighting inflation now competes with economic growth
as the top economic priority. Prices have increased during the last
several months, measuring 15.7 percent year-on-year in February

2008. The GVN has taken steps to rein in inflation, such as
reducing import tariffs, raising interest rates and widening the
trading band on the Dong, but it is not yet clear if these measures
will be effective.


16. (SBU) Another significant challenge is the large size of
Vietnam's state sector. It accounts for about 37 percent of GDP and
includes state-owned enterprises (SOEs) that dominate
telecommunications, banking, energy, airlines and other key sectors.
While the GVN works to attract more FDI and promote the domestic
private sector, it also intends to maintain a major role for the
state sector in the economy. For now, the government is focusing on
the process known as "equitization" as way to help improve the
competitiveness of the state sector. By allowing private parties to
buy shares of an SOE, even if less than a controlling share, the GVN
hopes that this will force the companies to perform better. There
have been delays in equitizing more SOEs, as well as state owned
commercial banks. Complicating the equitization process has been
Vietnam's troubled stock market, which is currently hovering above
600, down from over 1000 in 2007. The GVN has recently attempted to
rehabilitate the market by loosening foreign ownership laws and
directing the State Capital Investment Corporation to buy shares.


17. (SBU) Other areas of concern include an outdated education
system that is failing to keep up with the demands of a modern
economy. An acute shortage of skilled and semi-skilled labor may
pose a major roadblock to development. The Mission is leading
efforts to deepen U.S. engagement with Vietnam on education issues
by brokering partnerships between Vietnam's academic institutions
and the private sector, including U.S. businesses, and through a
formal "Education Initiative" designed to radically increase the
number of Vietnamese students choosing the United States for
overseas training. Like human resources, infrastructure limitations
also presents a challenge to Vietnam's continued rapid growth. As

HANOI 00000306 004.2 OF 005


you will doubtlessly notice during your visit, roads, rail and port
capacity have failed to keep up with Vietnam's rapid economic
expansion. Corruption also continues to be a significant problem in
Vietnam, and Transparency International's perception index ranks
Vietnam at 123 of 179 countries, a continuous backsliding since

2002.

CHALLENGES ON HUMAN RIGHTS
--------------


18. (SBU) While we share common views with the GVN in many areas,
differences over human rights remain, and lingering fears that the
United States supports the overthrow of the current regime continue
to complicate the relationship. The existence of groups in the
United States and elsewhere that explicitly advocate regime change
helps generate negative charges by conservatives here which stoke a
lingering paranoia that we are indeed still "the enemy." Reassuring
the GVN that the USG does not support separatist groups can assist
in building a better human rights dialogue based on mutual trust.


19. (SBU) Serious deficiencies related to human rights in Vietnam
include lack of freedom of speech, freedom of assembly and freedom
of the press. One of our key objectives is to end the use of
catch-all "national security" provisions such as Article 88 of the
GVN criminal code, which prohibits "conducting propaganda against
the State." The Mission tracks approximately 50 individual cases of
prisoners of conscience and activists under various forms of house
arrest, surveillance, and/or harassment. We continue to call for
the release of all prisoners of conscience and freedom of peaceful
expression of political views, but where we see individuals
expressing their political opinions, many of our government
interlocutors see "lawbreakers" trying to destabilize the regime.


20. (SBU) In other areas, however, perceptible progress is being
made. Key Vietnamese leaders are committed to enhancing governance,
establishing the rule of law and combating corruption -- all
critical in building guarantees of individual freedoms. Vietnam's
leading newspapers are more aggressive in what they publish and in
their willingness to push back against censors. Whereas only a few
years ago, any protest would meet swift and severe police action,
this past year various peaceful protests have taken place involving
issues such as land rights, opposition to Chinese territorial claims
and demands for the return of Catholic Church property, with one
stretching out for a month before it finally ended peacefully. With
regard to religious freedom, Vietnam has made surprising progress,
in large part due to the intensive engagement of Ambassador-at-Large
for International Religious Freedom John Hanford over recent years.
More needs to be done, but the country no longer qualifies as a
particularly severe violator of religious freedom under our legal
definition and we removed the nation from the list of countries of
particular concern in late 2006.

AGENT ORANGE
--------------


21. (SBU) Over the past few years, we have begun to turn a new leaf
on the Agent Orange/dioxin issue with regards to
government-to-government relations and changing Vietnam's tone in
how they approach this issue, which has been used to demonize the
United States. While we do not believe that sound science supports
certain GVN assertions regarding health impacts, certain "hotspots,"
where Agent Orange was stored and loaded during the war, have soil
dioxin concentrations exceeding levels recommended by the U.S.
Environmental Protection Agency (EPA). Beginning in 2006, the State
Department and EPA provided $400,000 in technical assistance to the
GVN for remediation planning and immediate interventions at the
Danang airport. Last year, Congress appropriated an additional $3
million in Economic Support Funds (ESF) for "dioxin mitigation and
health activities," which we are in the process of implementing.
The USG is continuing to work together with the GVN, UNDP, Ford
Foundation and other partners in this increasingly multilateral
effort to address the affects of dioxin.

VIETNAM'S INTERNATIONAL AND REGIONAL PROFILE
--------------


22. (SBU) Vietnam's UNSC membership creates a window of opportunity
to encourage Vietnam to speak out in a constructive way on global
security issues, and to help Hanoi distance today's Vietnam from the

HANOI 00000306 005.2 OF 005


Non-Aligned Movement (NAM) and Communist-Bloc focus driving its
old-style foreign policy. We have been proactive here and in
Washington in educating GVN leaders and officials on Burma, North
Korea and Iran, where in the past it has been unwilling to engage
constructively with us due to "traditional friendships" and
non-interference. Despite repeated demarches so far this year,
Vietnam lined up against our positions in UNSC debates on Burma and
Kosovo.


23. (U) Regionally, Vietnam has become a more prominent player in
ASEAN, and successfully hosted the APEC Summit in 2006. Vietnam is
slated to be chair of ASEAN in 2009, so this visit is an excellent
opportunity to underscore the commitment of the United States to
promote the U.S.-ASEAN Enhanced Partnership, which will provide
expertise and support for ASEAN integration towards becoming the
ASEAN Community by 2015. Your visit also provides a chance to
highlight our support and interest in cooperating on initiatives
such as the ASEAN Single Window Program to support the development
of a customs clearance system.

VIETNAMESE CONCERNS ABOUT CHINA
--------------


24. (SBU) While Vietnam's engagement with the United States will
continue to broaden, China necessarily constitutes Vietnam's most
important strategic preoccupation. This is not to say that Vietnam
is "choosing" China over the United States; the situation is much
more complex than that. For starters, Vietnam's leadership is
sophisticated enough to realize that relations with China and the
United States do not represent a zero sum game; it is possible to
have good relations with both. Each relationship also creates
challenges, however. While China constitutes a vital and necessary
commercial partner and former ally, it is also perceived as a
significant and frustrating constraint to Vietnam's freedom on
action.


25. (SBU) Chinese bullying of foreign companies in an attempt to
compel them to cease oil and gas exploration efforts in the South
China Sea serves to remind Vietnamese officials that while the
Vietnamese may not approve of all U.S. policies, the same is
certainly true of Chinese actions. While progress has been made in
settling the land border, there is no commonality of views on
sovereignty issues regarding the South China Sea, known as the "East
Sea" to the Vietnamese. Hanoi is also "riding the tiger" with
regard to managing the deep negative views toward China of many
Vietnamese. China is widely disliked and distrusted as a former
colonial master, and Beijing's actions in the Spratlys and Paracels
threaten to inflame those passions. Should Hanoi allow
unconstrained protests against the Chinese, however, it would appear
weak in the face of calls to action that it could not satisfy, as
well as risking Beijing's anger.


26. (SBU) On security matters, China looms large. There is an
understandable GVN caution with regard to China's potential reaction
to enhancements in Vietnam's cooperation with the United States.
U.S.-Vietnam cooperation in the security field is also constrained
by an institutional conservatism born of concern over "peaceful
evolution" as a real threat to the regime, as well as by an
ingrained caution on the part of Vietnam's military in the face of
relative power calculations vis-a-vis China.

CONCLUSION
--------------


27. (U) Again, I warmly welcome your visit. It will prove critical
in promoting further economic reforms, signaling our desire to
invest and expand markets, and encourage Vietnam to take a larger
role in regional and global affairs.

MICHALAK