AMBASSADOR'S MESSAGE TO LABOR SECRETARY SOLIS ON THE

UNCLAS SECTION 01 OF 04 HANOI 000293

SENSITIVE
SIPDIS

LABOR FOR SECRETARY SOLIS
LABOR FOR ACTING DEPUTY U/S EUGENIO
LABOR FOR SENIOR EAP ADV LI
STATE FOR EAP/MLS BLAKE, PALMER AND BROWN
STATE FOR DRL/IL MITTELHAUSER
NSC FOR SR DIR BADER
USTR FOR KARESH

E.O. 12958: N/A
TAGS: ETRD EINV ECON PGOV VM
SUBJECT: AMBASSADOR'S MESSAGE TO LABOR SECRETARY SOLIS ON THE
ECONOMIC CRISIS AND OUR ECONOMIC AGENDA WITH VIETNAM

REF: A) 07 Hanoi 1729 (Vietnam's Inflationary Conundrum");
B) 08 Hanoi 530 ("Anti-Deficit and Inflation Measures");
C) 08 Hanoi 377 ("PM Declares War on Inflation");
D) HCMC 125 ("Investment to Slow");
E) Hanoi 205 ("Sink-Or-Swim Time for Leading Exporters");
F) Hanoi 241 ("Financial Crisis Causing Increased Unemployment);
G) Hanoi 138 (GVN Rolls Out Stimulus Package");
H) 08 Hanoi 871 ("Vietnam Not Rushing Trade Deals")
I) 08 Hanoi 1072 ("TIFA Agenda");
J) 08 Hanoi 1329 ("Private Sector Tells Vietnam");
K) Hanoi 50 (Bilateral Assistance: Our Window Of Opportunity");
L) 08 Hanoi 1265 ("Distribution Sector Readies For Foreigners")
M) J) Hanoi 137 ("A Half-Hearted Deficit-Busting Scheme");
N) 08 Hanoi 1401 ("Senator Baucus Urges Vietnam");
O) 08 Hanoi 1382 ("Vietnam GSP and Labor Reform");
P) 08 Hanoi 1403 ("Progress Toward Market Economy Status")

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


1. (SBU) INTRODUCTION FOR SECRETARY SOLIS: I strongly believe that
we have an unprecedented window of opportunity today to influence
the outcome of Vietnam's fast transformation through our economic
engagement. Few will dispute that our work here over the last 20
years has had a profound effect in Vietnam, and mostly for the
better. Politically and socially, Vietnam lags behind, but I am
convinced that change is inevitable. The engine behind it is, for
the most part, economic. Vietnam aspires to improve its business
climate and economic competitiveness, and it is our role to continue
to link these goals with better governance, labor freedoms, public
accountability and the rule of law. In order to shape that change,
we need to stay engaged. This is not the time to step back, but to
push even further. The global economic slowdown will present us
with as many opportunities as challenges to further our strategic
goals in Vietnam: to ensure that a prosperous and better governed
society and a better partner for the United States emerges from this
process.


2. (SBU) I encourage you to consider including a visit to Vietnam in
your schedule. Your presence here will advance our ability to
influence the pace and outcome of Vietnam's transformation at this
critical time. We have asked Secretary Clinton, and your
counterparts at USTR, Commerce, Agriculture and Treasury to visit as
well. Mission Vietnam and I sincerely welcome and encourage your
visit, and hope to see you here over the course of this year. END
INTRODUCTION.


3. (SBU) SUMMARY. The global economic crisis hit Vietnam as it was
emerging from serious inflation and balance of payments problems
largely generated by excessive credit and money supply growth.
Given its dependence on foreign trade and investment, the worldwide
downturn compelled the GVN to reverse tight monetary and fiscal
policies, dramatically lower interest rates, and adopt fiscal
measures to stimulate growth. This message contains post's views on
the GVN's trade and investment policy reaction to the global
economic downturn, and how the USG should respond.


4. (SBU) Vietnam has continued to maintain a commendable record on
opening its market and undertaking other economic-related reforms --
two trends that we want to encourage. At the same time, potential
challenges lie ahead, including a range of important bilateral
issues in coming months. Maintaining and improving access to the
U.S. market remains a top priority of the GVN. Chief among these
goals is eligibility for the GSP program, expanding regulatory
approval for Vietnamese fruits, and avoiding trade friction over
catfish. Labor reform is essential to maintaining Vietnam's
competitiveness and deepening trade relations with the U.S.; Vietnam
seems committed to address shortcomings and welcomes our assistance
in this area. Instruments like the TIFA and other ongoing
negotiations will be key to moving U.S.-Vietnam economic relations
forward during the challenging times ahead. END SUMMARY

VIETNAM HAD A HEAD START IN ECONOMIC HEADACHES
--------------


5. (SBU) Vietnam had economic problems of its own making that
predated the global crisis: double-digit inflation, a record trade
deficit, serious downward pressure on the Vietnamese dong, and
slumping real estate and stock markets (REFS A, B). By April 2008,
with prices rising 19% YOY, the Government of Vietnam (GVN) made
inflation-reduction its foremost priority (REF B). A series of

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tightening measures ensued, including interest rate hikes, increased
bank supervision, and cuts in government investment spending (REF
C).


6. (SBU) These measures were beginning to have an impact on
stabilizing the situation when the global economic situation started
to unravel. Exports, which had been rising strongly until mid-year
(and still closed 2008 with an almost 30% increase from 2007),began
to sag. Foreign investment, which had registered record levels in
2008, slowed, a trend the GVN expects to continue in 2009 (REF D).
GDP growth of 6.2% in 2008 was the lowest since 2000, and is
expected to be even lower in 2009, with most projections in the 5%
or lower range. Orders for Vietnam's leading exports are down
across the board (REF E). The GVN predicts that if current trends
continue, up to a tenth of the workforce could be left unemployed
(REF F). "Preventing further economic slowdown" is now the GVN's
number one policy priority, Deputy Prime Minister Nguyen Sinh Hung
underscored in March 17 remarks at an Economist Intelligence Unit
roundtable with foreign investors.

KEEPING A COOL HEAD, MINDING STABILITY
--------------


7. (SBU) The GVN is keenly aware that the current situation could
disrupt the stability and consensus engendered by economic
prosperity. Its much-lauded poverty reduction program will be
tested (Septel). The GVN has responded aggressively to worsening
economic conditions by reducing policy interest rates, starting last
October, from a high of 14.5% to 7%, which cut the maximum lending
rate from 22% to 10.5%. It has loosened other elements of monetary
policy and has implemented a stimulus package which combines
interest rates for commercial loans at four percentage points below
the market rate, corporate and personal income tax cuts or
deferrals, and one-time payments to poor families (REF G). Some
investment spending on infrastructure projects may also be moved up
to help create jobs. The ultimate effect of the economic crisis on
Vietnam is still uncertain and will depend on the depth and length
of the global downturn.

VIETNAM STAYS THE COURSE IN TRADE POLICY
--------------


8. (SBU) Despite its burgeoning trade deficit in 2008 and in the
face of the current economic downturn, Vietnam for the most part has
stuck to its free-market stance. Post expects this to continue in

2009. Vietnam finished free trade deals in the second half of 2008
with Japan, and with Australia and New Zealand at the ASEAN Summit
in Thailand in February 2009 (REF H). Some important export
industries, such as textile and electronics, point to expanded
market access to Japan as one of the few bright spots of 2009. The
EU is seriously thinking about breaking off its EU-ASEAN FTA and
starting bilateral FTA talks with Vietnam.


9. (SBU) Vietnam is also pursuing an equally ambitious agenda with
the United States. The two sides held the first round of Bilateral
Investment Treaty negotiations in December 2008 and are readying the
next round this spring. On February 3, Vietnam announced that it
was joining the Trans Pacific Partnership negotiations with
Australia, New Zealand, Singapore, Peru, Chile, Brunei, Singapore
and the United States. Vietnam also continued its comprehensive
engagement in 2008 on a range of trade issues under the Trade and
Investment Framework Agreement (TIFA) meetings with the United
States (REF I),and will be sending a team to Washington in April
2009 for broad expert-level TIFA discussions.

FOCUS ON COMPETITIVENESS AND TRANSPARENCY
--------------


10. (SBU) U.S. investors and businesses in Vietnam have urged the
GVN to focus on becoming more competitive during the economic
downturn, with particular emphasis on improving the business climate
and addressing obstacles to greater investment (REF J). Mission
Vietnam has pressed the same message, focusing on administrative
reforms and the need for increased transparency. Post has also
urged Vietnam to move ahead with education reform, which has become
a serious drag on economic development.


11. (SBU) Vietnam's response has been encouraging. The GVN has
embraced education reform and is seeking increased investment in
this sector. A bilateral Education Task Force is finalizing and
will soon submit recommendations to senior leaders on both sides for
improvements in Vietnam's system of higher education. The GVN is

HANOI 00000293 003 OF 004


also discussing with Post a new approach to improve and reform
governance, and we expect some of these changes to roll out in 2009
(REF K).


12. (SBU) The GVN puts a high premium on its ability to deliver on
the commitments it makes. Post believes the GVN's determination to
remain engaged in multilateral and bilateral economic negotiations,
to maintain the pace of reforms and openly discuss how to improve
its business climate and competitiveness despite the difficult
times, are strong indicators of the GVN's commitments to open
markets and greater foreign trade and investment.

POTENTIAL HURDLES AHEAD FOR 2009
--------------


13. (SBU) Vietnam's resolve to uphold these commitments will be
tested in 2009. Facing an unprecedented level of FDI and foreign
competition in 2008, local businesses in certain service sectors
tried in vain to slow down the opening of Vietnam's markets to
foreign penetration (REF L). A historic high trade deficit in 2008
also put pressure on the GVN to stem the flow of imports (REF M).
The GVN for the large part resisted this pressure, keeping its
markets open and a positive competition policy, and continuing to
implement its trade commitments. Domestic pressure to slow down
foreign encroachment into hitherto protected areas is unlikely to go
away, especially as the economic situation puts pressure on local
businesses. Moreover, Vietnam's resistance to domestic
protectionism may weaken if it finds barriers to its exports being
erected overseas.

CATFISH AND PANGASIUS
--------------


14. (SBU) Vietnamese seafood exporters, the GVN, and U.S. importers
of Vietnamese seafood have raised concerns with Mission Vietnam and
Washington about the fate of trade in pangasius (tra and basa) fish
(REF N). The 2008 Farm Bill shifted regulatory jurisdiction over
"catfish" to USDA but left open the definition of catfish. A
previous Farm Bill mandated that Vietnamese basa and tra fish could
not be called catfish in the United States, which has created
ambiguity as to what species of fish the 2008 Farm Bill will
eventually cover. The Vietnamese industry is in limbo pending
resolution by USDA of the catfish definition. Foreign sales of
these fish were a bright spot for Vietnam in 2008, with both export
value and volume up worldwide, and exports to the United States
totaling $70 million. In turn, Vietnamese seafood exporters are
large consumers of U.S. feed (exports of U.S. grains and feed to
Vietnam commonly used in the seafood industry reached $192.6 million
in 2008, a 44% increase from 2007).

LABOR REFORMS AND INTERNATIONAL STANDARDS
--------------


15. (SBU) Vietnam is now undertaking a major effort to reform its
labor laws, a result in part of our discussions regarding Vietnam's
application for the Generalized System of Preferences (GSP) (REF O).
The ongoing Labor Code reform is a continuation of a process that
began earlier this decade, supported by our bilateral Labor Dialogue
and technical assistance from the Department of Labor. It is
significant to note that the GVN is now discussing with us for the
first time revisions planned for the Trade Union Law. Labor will
also figure prominently at the next TIFA, in TPP negotiations and in
the U.S.-Vietnam Market Economy Status discussions (REF P).
Moreover, Vietnam understands that it needs to move forward with
labor reforms in order to advance its immediate GSP objectives and
longer-term plans to intensify its trade relationship with the
United States. The USG should continue to engage with the GVN on
the full range of important labor issues, including providing
technical assistance, to ensure that Vietnam maintains its progress
toward internationally recognized worker rights standards.

BILATERAL AGRICULTURE TRADE
--------------


16. (SBU) U.S. agricultural exports to Vietnam were a bright spot in
bilateral trade in 2008, increasing by triple digits in at least 32
categories of commodities and exceeding one billion dollars for the
first time. In 2009, both the United States and Vietnam will
continue to press for greater access for each other's agricultural
exports. At the present time, one of the most important issues for
the United States is improving access for beef. Currently, Vietnam
accepts all cuts of beef from cattle under 30 months of age. The

HANOI 00000293 004 OF 004


United States has pushed Vietnam to permit importation of beef from
cattle of all ages. Despite promises to make a decision on this
issue by the end of 2008, the GVN has yet to implement the change
and the mission will continue to press hard at all levels of the
GVN. The planned April visit to Washington by Vietnam's Agriculture
Minister also presents another ideal opportunity to lobby for
greater access.


17. (SBU) While the GVN wants additional access for its tropical
fruits, less-than-expected demand for Vietnamese dragon fruit, which
gained access to the United States in mid-2008, may dent Vietnam's
sense of urgency on this issue. Nevertheless, the GVN has a long
list of fruits on its request list for USDA/APHIS approval. The
incentive of increased access to the U.S. market for these fruits
serves to strengthen our ongoing cooperation on a range of
agriculture issues.

COMMENT: KEEPING VIETNAM ENGAGED IS THE BEST MEDICINE
-------------- --------------


18. (SBU) Like the rest of Asia, Vietnam ushered in 2009 with an
economic downturn that has affected two of its engines of growth:
exports and investment. Vietnam has been a reliable trading
partner, a good investment host and an enthusiastic free marketer.
There is no reason why this should not continue. The best way to
maintain this positive trend is to keep Vietnam focused on its
ongoing process of economic reform and integration. We can do this
by maintaining and encouraging high-level engagements, such as the
April visit to Washington of Vietnam's Agriculture Minister,
ministerial TIFA meetings, and visits to Vietnam by the Secretary,
USTR, or other economic Cabinet Secretaries. Mission Vietnam's
highly-successful Support for Trade Acceleration (STAR) and Vietnam
Competitiveness Initiative (VNCI) programs will also enable us to
maintain our deepening engagement on trade and investment.

MICHALAK