[Vnbiz] Stink over Vietnamese food exports

[Tai Phan]

    *Dec 12, 2007 *
         *Stink over Vietnamese food exports*
By Long S Le

Vietnam's accession earlier this year to the World Trade Organization (WTO)
was widely expected to open new and lucrative market opportunities to the
country's many ambitious exporters. But since joining the global trade club,
many Vietnamese businesses now find that they are actually losing rather
than gaining access to certain markets due to growing safety concerns about
their products.

That's been particularly true for Vietnam's food businesses, which
contribute 55% of exports and around 50% of total national income. In less
than two decades, Vietnam has transformed its

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once centrally planned and backward agriculture sector into a major engine
of export growth, in recent years surging at annual growth rates of over
20%. Vietnam is currently the world's biggest pepper and cashew nut
exporter, the second largest exporter of coffee, rice and seafood and among
the world's leading exporters of tea, fish sauce, soy sauce, and instant
noodles.

The agricultural sector still employs the majority of Vietnam's labor force,
with around 11 million Vietnamese small-scale farm owners and businesses,
most of whom have land holdings of less than one hectare and who operate as
their own farmers and managers. As a small latecomer to several global food
markets - including Japan, China, the United States, the European Union and
even countries in the 10-country Association of Southeast Asian Nations
(ASEAN) - Vietnamese producers are being saddled by new trade and non-tariff
barriers, which are blocking the market opportunities many had banked on for
their future profits and growth.

To be sure, that was frequently the case even before Vietnam joined the WTO,
particularly for seafood producers. In January 2005, the US Department of
Commerce determined that Vietnamese shrimp exporters were guilty of dumping,
or selling at prices below production cost which resulted in material injury
to US shrimp producers. The department imposed an average 25% punitive
tariff rate against a number of Vietnamese shrimp producers.

Several of those sanctioned producers rebounded from the US's market-closing
measures, as they were able to find new global outlets for their products,
primarily in Japan and the EU. Yet Vietnam's lack of investment in quality
assurance and marketing is stymieing Vietnam's drive capitalize on its WTO
membership to open more lucrative, developed country marketplaces.

Vietnamese seafood exports to Japan and Europe began to spiral downward this
year due to producers' inability to meet their more stringent controls on
antibiotic residues and banned chemicals. That includes the Vietnamese
seafood industry's continued use of chloramphenicol as a preliminary
treatment for fish products to keep the products fresh. The substance has
been banned worldwide because it can cause severe health effects, but is
still often used in some developing countries, including Vietnam, because of
its availability and low cost.

Japan, which had previously been Vietnam's biggest global seafood customer,
started as of late last year to test all Vietnamese shrimp and cuttlefish
products. Banned antibiotics were still detected after Vietnam joined the
WTO in January this year. As a result Japan's ambassador to Vietnam warned
in June that if the situation did not improve, his country would consider a
total ban on Vietnamese seafood products. Similarly, the EU, which in 2006
purchased about 22% of Vietnam's total fishery shipments, has also recently
detected banned antibiotics in Vietnamese catfish and has in turn restricted
trade.

Those sanctions are arguably starting to have a spillover effect to other
food sectors. China's expected slide in food exports due to recent global
concern over its chemically-tainted seafood and juice drinks could have
created a competitive opportunity for Vietnam's food exporters. At the
moment it doesn't appear that will be realized, as Vietnam is increasingly
confronted with similar accusations of poor food quality - although the
problems have been played down by state-run media and government officials.

Vietnam's mounting failure to meet food safety standards will likely result
in the country missing its $3.6 billion seafood export target for this year,
some industry analysts say. And the situation could get worse before it gets
better, as American shrimp and catfish producers aggressively lobby their
state health agencies to more vigorously test Vietnamese seafood imports.
The discovery of antibiotics in imported fish and frozen shrimps by US
states Alabama, Louisiana and Mississippi, where local seafood producers
compete for US markets, recently prompted the Food and Drug Administration
to take tough action.

In the first six months of 2007, a total of 240 batches of Vietnamese food
goods, mainly seafood, were refused entry into the US because they failed to
meet basic hygienic standards, according to the FDA. Banned substances
detected included salmonella, chloramphenicol, and Aflatoxin, as well as
other hazardous additives which were not named on some food's labels.

The rejected shipments included those processed by some of Vietnam's top
food exporters, including Seaspime, Mekophar, Cau Tre Enterprise, Frozen
Food Company No 4, and Acecook Vietnam Co Ltd. Because these companies are
now assumedly on the US FDA's watch list, it could cause Vietnamese seafood
exports to the US to fall precipitously since many supermarkets, restaurants
and distributors to fast food eateries rely on FDA findings. Meanwhile,
local US seafood producers are calling for tougher inspections of competing
Vietnamese products, of which they complain less than 1% are currently
tested.

*Out of quality control *
Whether Vietnam can quickly improve its quality controls and keep these
lucrative markets open to its exporters is an increasingly crucial economic
question. Vietnamese authorities have responded by claiming they have taken
more measures to control the quality of exports, but without any clear signs
of success. Moreover, there is a lack of public information to accurately
evaluate what steps the Vietnamese authorities have or have not taken in
response to recent rejected food shipments.

And it's still unclear to many industry analysts what capacity and resources
for testing and enforcement of safety regulations are available at Vietnam's
National Fisheries Quality Assurance and Veterinary Directorate and the
other local inspection agencies. Even if quality control could be made more
effective and efficient, it may only underscore that most food-processing
practices in Vietnam do not meet international standards, and that there are
no real cost-effective alternatives without fully transforming the
food-producing sector through the procurement of expensive technologies
which would effectively erode the industry's current low-cost advantage.

Bui Chi Buu, head of the Southern Science and Technical Institute in
Vietnam, argues that the country's food producers need to invest heavily in
post-harvest technology if they want to upgrade the quality of their rice
and other food products. Such investment would also significantly reduce the
loss of agriculture products after harvest, of which 7% of gross national
agricultural products are lost due to pilferage and rot, according to
industry experts.

Another major need is to invest in the country's rural transportation
infrastructure, cold-chain infrastructure and the privatization of
agricultural research that could be refocused to further develop the food
export industry. These investments, or government subsidies, are necessary
on the theory that there are existing technologies that, in the long run,
would be profitable to procure and implement to ensure food quality and
safety.

For several Vietnamese food sectors, production methods clearly have to
change - and fast. This past summer, a soy sauce scandal - in which a number
of soy sauce brands sold in the Vietnamese domestic market were found to
have high levels of 3-MCPD, a known cancer-causing substance - represented
yet another case in point. The substance is sometimes added by manufacturers
to increase protein and cut down production time.

According to state-run media reports, the health inspectors had known about
the high levels of the substance beginning in 2001. Since 2004, it was also
known that the Czech Republic and Belgium had rejected Vietnamese soy sauce
precisely for their excessive 3-MCPD levels, but that no action was taken
locally against the violating soy sauce producers, whose products were still
being consumed domestically.

In state-run Vietnamese newspapers, it was recently reported that a 2006
state-conducted preventive healthcare study found that 32 out of 33 soy
sauce producers were using processes that produced high levels of the
cancer-causing substance, but most violators were not financially fit enough
to upgrade their processes and stay solvent. The report, however, was never
publicly released and while the violating producers were fined, they were
not required by the authorities to change their processing practices.

Unless new incentives are put in place for Vietnamese enterprises to adopt
best practices and deploy more modern food processing technologies, the
emerging market questions about Vietnam's food safety for both domestic and
foreign consumption will inevitably grow. Given the government's emphasis on
boosting production and seeking out new export markets, Vietnamese food
producers have failed to move aggressively to improve their quality and meet
international standards because alternatives have been frequently available
to them.

A recent EU report found that contaminated Vietnamese seafood exports
shipped first to Western markets are not necessarily destroyed but rather
shipped to "easier-to-please" Asian markets. Though not necessarily for the
same reason, Vietnamese government officials are reportedly now working fast
to acquire export licenses to ship seafood exports to the Australian and
Russian markets to compensate for expected losses in Japan and the EU.

For many Vietnamese food producers, boosting production is what's primarily
associated with generating higher income. This is even more so when
Vietnamese producers are faced with lower export commodity prices, of which
they are likely to compensate for by employing more intensive farming
practices to boost output and oversupplying the market.

That's what happened in the late 1990s when Vietnamese coffee growers,
facing historic low prices, oversupplied the market with cheap, robusta
coffee which is believed to have contributed to the total collapse of global
coffee prices. It has already been alleged that Vietnam, as a new member of
the WTO, has resorted to such practices. As of November 2007, at least 30
Vietnamese firms faced various anti-dumping lawsuits, of which four are now
under formal investigation. By one count, Vietnam has lost 23 out of 28
dumping cases filed against its exporters and the country has never moved to
file its own anti-dumping suit.

Vietnam's world-beating food exports are mostly processed in commodity form
and hence are limited in economic value. Meanwhile value-added food goods
are often exempt from anti-dumping tariffs and command higher market prices.
By many accounts, the uneven quality of Vietnamese rice - the majority is
exported unprocessed or poorly processed - makes it inferior to Thailand's
technologically scanned and sorted products. Similarly, around 90% of
Vietnamese coffee is of the cheap, lower quality robusta variety, which
often does not meet the International Coffee Organization's minimum
standards.

This, in part, may explain why the prices for both Vietnamese rice and
robusta coffee are always at least 15% to 20% lower in world markets than
that of their nearest rivals, respectively Thailand and Brazil. This is also
true for aqua products, vegetables, and a range of other agricultural
commodities that have limited competitiveness in world markets, according to
the United Nations' recently released Global Competitiveness Report.

In today's increasingly cut-throat global food economy, buying improved
seeds, having access to updated technical information, and being first to
innovate a new type of crop are no longer sufficient to generate higher
incomes. The current knowledge, technology and financing systems behind
Vietnamese farmers need to be significantly improved if the country is going
to meet global production requirements and stay abreast changing market
demands.

In the immediate term, Vietnamese food exporters may be able to offset the
potential losses from failing to meet developed countries' more stringent
standards by ramping up production and selling inferior products to poor
countries' at lower prices. At the same time, that approach will sooner or
later constrain food exporters' profits and if not well-managed will
accentuate an already growing negative reputation about Vietnam as a
producer that dumps cheap and often unsafe food products onto the global
market.

*Long S Le is the director of international initiatives for the Global
Studies Program and also a lecturer of Vietnamese studies at the University
of Houston in the United States.*
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