Vietnam Considers Price and Import Controls to Manage

UNCLAS SECTION 01 OF 02 HANOI 001418

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECIN ECON EINT VM
SUBJECT: Vietnam Considers Price and Import Controls to Manage
Inflation and Trade Deficit

REF: HANOI 1300; HANOI 1394


1. (SBU) Summary and comment: The Government of Vietnam (GVN) is
considering new measures to address increasing inflation and the
worsening trade deficit. The Ministry of Industry and Trade will
try to control imports of non-essential items such as cars and cell
phones by retracting incentives offered during the global economic
crisis. The Ministry of Finance is seeking to manage inflation by
introducing a new price control regime, which we view as a
significant step backward from the market-oriented approach Vietnam
has been pursuing. Embassy, USTR, other embassies, and the local
and international business community have registered their concerns
with the GVN about the price control circular, which has resulted
in a temporary delay of implementation. While we are sympathetic
to the GVN's challenge to control inflation and the trade deficit,
there are better ways to manage inflation than establishing an
extensive set of new government controls over prices. End summary
and comment.




2. (SBU) In late November the Government of Vietnam (GVN) tightened
its monetary policy, devalued the Vietnamese dong against the
dollar, and announced it would end short-term interest rate
subsidies, steps analysts viewed as a sign the GVN's economic focus
was shifting from growth to addressing increasing macroeconomic
imbalances (ref A). Prime Minister Nguyen Tan Dung recently told
donor countries that the GVN is seeking to strike an "effective
balance between combating inflation and encouraging growth" (ref
B). The GVN is now considering additional measures to control
prices and dampen imports to address both inflation and the
worsening trade deficit.



MOIT "does its part" to decrease the trade deficit . . .




3. (SBU) Ministry of Industry and Trade (MOIT) Deputy Director
General for Multilateral Trade Policy Luong Hoang Thai told econoff
that MOIT had been instructed to "do its part" to mitigate the
worsening trade deficit. Vietnam's trade deficit through November
was USD $10.4 billion, down from the same period last year, but
uncomfortably close to the GVN's target of keeping the deficit
under USD $11 billion in 2009. Thai confirmed press reports that
MOIT would try to control imports of non-essential items, including
automobiles, handphones, and cosmetics, by repealing the
"incentives" it had offered in 2009 when it feared the economy
would enter a recession. For example, starting in January 2010,
MOIT would cancel the fifty percent rebate on the VAT tax and car
registration fees currently offered on imported automobile sales.
In addition, MOIT would raise automobile tariffs to the WTO bound
rates of 83% (note: MOIT voluntarily cut automobile tariffs below
WTO bound rates in 2008 and 2009).




4. (SBU) Ford Vietnam's General Director Michael Pease told econoff
that MOIT's announced measures had resulted in a huge jump in
Ford's sales in December, as consumers hurried to purchase before
the new measures took effect in January 2010. Pease said Ford
Vietnam had experienced record sales in 2009, but he expected a
significant decrease in 2010 after the incentives were retracted.
Pease added that Ford had requested that MOIT phase in the return
to higher VAT taxes and registration fees over several months, but
MOIT refused.



. . . while Ministry of Finance tries to control prices




5. (SBU) The Ministry of Finance (MOF) is trying to "do its part"
to control inflation by introducing new price control and
registration measures. In mid-November, U.S. companies informed
Embassy and USTR about a new MOF draft circular that, if
implemented, would regulate and control prices on a set list of
domestic and imported products and services. The circular -
motivated in part by the increasing risk of inflation - is a
significant step in the wrong direction from the market-oriented

HANOI 00001418 002 OF 002


approach Vietnam has been pursuing. In addition to its non-market
approach, the circular would create new administrative burdens on
parties throughout the production and distribution chain. Further,
the draft appears to give MOF authority not only to set minimum and
maximum prices for certain goods and services, but also to control
imports and exports by taking other, unspecified, monetary or
financial measures.




6. (SBU) According to the draft, the products subject to government
control when their "prices fluctuate abnormally" or in an
"unreasonable manner" include oil and gas, cement, steel,
veterinary drugs, plant protection drugs, fertilizers, human
medicine, milk (including infant formula and nutritional powders),
salt, rice, sugar, railway transport, automobiles, and animal feed,
including feed pellets for catfish and prawns. Many of these
products and services are sensitive for Vietnam (i.e., oil, gas,
sugar, rice, public sector services),and therefore are already
tightly controlled; however, other categories capture potential
U.S. exports (i.e., animal feed, infant formula/nutritional
supplements, and automobiles) and could significantly impact U.S.
companies. Although MOF officials claim this circular is one way
to ensure that the poorest Vietnamese citizens are able to purchase
"essential products," the Director General of MOF's Price Control
Department, Nguyen Tien Thoa, told econoff that MOF wanted to
implement the circular before the Vietnamese New Year holiday in
February, when prices typically skyrocket.



USG and others' efforts appear to have delayed implementation for
now




7. (SBU) After a month of the Embassy and USTR repeatedly raising
USG concerns, the MOF appears to have temporarily delayed issuance
of the circular. In addition to USG efforts, other embassies,
local businesses, and the international business community have
asked MOF for more time to review the circular and its potential
impact on their activities and investments in Vietnam. Econoff and
visiting Deputy Assistant USTR first raised USG concerns with MOF's
Department of Price Controls on November 20. Econoff subsequently
followed up in meetings with the Office of the Government on
December 4 and the Ministry of Industry and Trade on December 10.
Econoff and the Trade Counselors for the European Union and the
Embassy of New Zealand met jointly with MOF on December 11 in order
to request again that the Ministry delay issuing the circular until
interested parties had sufficient time to review and provide
comments. (Note: MOF did not provide a final draft of the
circular to Embassy until December 10).




8. (SBU) On December 17, Ambassador, together with the Ambassadors
of the European Union, Australia, and New Zealand, sent a joint
letter to the Minister of Finance registering "serious concern"
over the circular, and requesting that MOF delay further action.
The international business community, including the European
Chamber of Commerce, the American Chamber of Commerce, and the
U.S.-ASEAN Business Council, has also written MOF to register its
concerns. In addition, Vietnam's Chamber of Commerce and Industry
(VCCI) has asked MOF for a copy of the circular and is preparing
comments with its concerns. MOF officials told us December 22 that
they have delayed final issuance and implementation of the circular
to consider the concerns of all relevant parties.




9. (SBU) Comment: We're sympathetic to the GVN's challenge to
manage inflation and the trade deficit; however, we have suggested
there are better ways to manage inflation than implementing a vague
and far-reaching price control regime that gives the government
broad authority to control prices and imports, and could
potentially discriminate against U.S. companies and products. We
have offered to work with the GVN to explore more effective ways to
manage inflation (as has New Zealand).
Michalak