VZCZCXRO4420
PP RUEHHM
DE RUEHHI #0291/01 0900118
ZNR UUUUU ZZH
P 310118Z MAR 09
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 9410
INFO RUEHHM/AMCONSUL HO CHI MINH 5731

UNCLAS SECTION 01 OF 04 HANOI 000291 
 
SENSITIVE 
SIPDIS 
 
USTR FOR TRADE REPRESENTATIVE KIRK 
USTR FOR AUSTR WEISEL, DBISBEE AND DBELL 
NSC FOR SR DIR BADER 
STATE FOR EAP/MLS BLAKE, PALMER AND BROWN 
 
E.O. 12958: N/A 
TAGS: ETRD EINV ECON PGOV VM
SUBJECT:  AMBASSADOR'S MESSAGE TO USTR KIRK 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) Hanoi 205 ("Sink-Or-Swim Time for Leading Exporters"); 
E) HCMC 125 ("Investment to Slow"); 
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 USTR KIRK:  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 Commerce, Labor, 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. 
 
SUMMARY: OPPORTUNITIES AND CHALLENGES IN 2009 
--------------------------------------------- 
 
¶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 its shortcomings and welcomes our 
assistance in this area.  Instruments like the TIFA and other 
ongoing negotiations will be key in moving forward U.S.-Vietnam 
economic relations 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 
tightening measures ensued, including interest rate hikes, increased 
 
HANOI 00000291  002 OF 004 
 
 
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 (REF D). Foreign investment, which had registered record 
levels in 2008, slowed, a trend the GVN expects to continue in 2009 
(REF E).  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.  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 under these agreements 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, stressing 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 
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 
 
HANOI 00000291  003 OF 004 
 
 
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 trade and investment liberalization. 
 
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 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 
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 post 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 pangasius 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 
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 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 
 
HANOI 00000291  004 OF 004 
 
 
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.  Mission 
Vietnam's highly-successful Support for Trade Acceleration (STAR) 
and Vietnam Competitiveness Initiative (VNCI) programs will help us 
deepen engagement on trade and investment.  More important will be 
maintaining and encouraging high-level engagement, such as the April 
visit to Washington of Vietnam's Agriculture Minister, ministerial 
TIFA meetings, and visits to Vietnam by the Secretary, USTR, 
Commerce, Agriculture, Labor, Treasury and other economic-minded USG 
principals. 
 
MICHALAK