National Agenda : Smugglers Are Stealing Away Vietnam’s Economic Renewal : Legal ventures can’t compete with prices on the black market. Foreign investors shy away, and corruption flourishes in the government.

For the last five years, the Vietnamese state-owned garment company Vinatexco has been struggling to make the transition from a Communist system to a free-market economy. Prices were cut, new products introduced and workers were even sent home on reduced pay to save money.

But just when things were looking up for the company, it was broadsided by a new problem: smuggling. Thanks to fabrics brought into Vietnam illegally from China and Thailand, Vinatexco’s sales have plummeted 30% in the last year.

“The Chinese government subsidizes the cost of fabric production, but Vietnam does not subsidize us,” complained Nguyen Ngoc Tan, Vinatexco’s manager for administration. “More than 3,000 looms in this district alone have gone bankrupt because of the smuggling.”

From the Chinese border in Vietnam’s far north to seaports in the deep south, smuggling has become one of the leading threats to Vietnam’s hopes for an economic renaissance after decades of Communist mismanagement.

“Apart from having a devastating effect upon the nation’s economy, smuggling has become a major threat to Vietnamese industry and a serious deterrent for potential foreign investors,” said Raymond Eaton, chairman of the Export Development Trading Corp., a Bangkok-based company that specializes in Indochina trade.

Government is losing desperately needed revenue from customs duties on imported goods, and fledgling business ventures are finding it impossible to compete.

Further, smuggling often means huge payoffs to poorly paid government officials. That creates a parallel problem of official corruption spilling over into otherwise legitimate enterprises, creating an expensive nightmare for home-grown businessmen and foreign investors alike.

“Corruption has found the soil and conditions for further growth. Smuggling has developed from small to larger scale and the links between corruption and smuggling have become more and more sophisticated,” the Communist Party newspaper Nhan Dan reported in June.

Smuggled goods are everywhere one turns in Vietnam, from Coca-Cola--smuggled in from Singapore despite a U.S. trade embargo--to sugar, textiles and other industrial goods from China, Taiwan and Thailand. In one of those aberrations that testifies to the smugglers’ skill, a bottle of Scotch whiskey smuggled from Singapore costs less in the market in Ho Chi Minh City than in the duty-free shop at Singapore airport.

“The war created the world’s best smugglers down the Ho Chi Minh trail,” said John Brinsden, Vietnam manager for Britain’s Standard Chartered Bank. “If the Americans with all their satellite surveillance methods couldn’t stop smuggling into southern Vietnam, there is no way the Vietnamese with nothing can do it. I think they have to tackle corruption rather than smuggling.”

By the government’s own figures, confiscations of smuggled goods amounted to $15 million in the first three months of 1993, a 44% rise over the previous year. These figures are widely believed to reflect only a minor share of the total amount of smuggling. One newspaper report said that in 1992, police discovered 50,000 instances of illegal trade.

A 1990 government report on smuggling in Vietnam said that 72% of state-run institutions had “diabolically cooperated” with smugglers. “A matter of extreme concern,” Hanoi Radio commented, “is that most of the smuggled goods have been transported by trucks and other types of vehicles with military license plates or public security emblems.”

Particularly bad is the long Cambodian border, where trucks carrying contraband are frequently guarded by former Vietnamese soldiers who served in the army in Cambodia. Trucks come across the border piled with consumer goods ranging from soft drinks to Japanese cars, and customs inspectors appear powerless to stop them.

“Our border controls are very weak. Customs has little experience in this struggle,” said Le Minh Chau, who is in charge of commerce for the Ho Chi Minh City Council. “Smuggling is killing a lot of domestic products.”

As an example of how smuggling undercuts local industry, consider the example of Vinatexco. It can produce textiles for about 70 U.S. cents a yard, while Chinese imports sell at 60 cents. If the Chinese textiles paid the legal import duty of about 18 cents, the Vietnamese fabric would enjoy a substantial advantage in the marketplace instead of stacking up in warehouses.

Another example is Orsan, a joint venture between a French food company and Vietnam to produce the flavor intensifier monosodium glutamate for the local market. After investing $3 million, Orsan is finding the domestic demand, about 40,000 tons a year, swamped by cheap smuggled imports from Thailand and Taiwan.

“When you have 60% of the business (taken by) uncontrolled imports, it’s no longer really illegal,” said Matthieu Oudea, a Frenchman who is general manager of Orsan Vietnam. It’s become the norm, he says, adding: “Having no profit is frustrating everybody.”

The government has intensified a legal crackdown against smuggling and corruption, but the campaign has had only mixed results. Last week, a court sentenced Phan An Tuan, the head of customs in Ho Chi Minh City, to life in prison for helping an overseas Vietnamese smuggle thousands of watches into the country. He was the highest official caught up in the crackdown to date.

Last year, the ruling Communist Party Politburo directed that “leading organs of the party must regard the fight against smuggling and corruption as part of their daily lives.”

The directive called for a number of steps to fight smuggling. One new requirement, for example, holds that owners must produce legal documents showing customs duty was paid when they register their imported cars.

A more Draconian move, which the government resorts to occasionally, is an outright ban on goods that are heavily smuggled. Last year, all Western cigarettes were banned for more than half a year in an effort to protect a domestic company that was set up to produce cigarettes locally.

But Marlboros and Winstons still appeared on street corners, where black market vendors peddled them one at a time.

Eventually the ban was lifted. The peddlers are still there.