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The full lifting of the U.S. embargo on sales of lethal arms to Vietnam is the front end of a wider initiative with geopolitical, military and economic goals. U.S. President Barack Obama made the announcement on Monday, the first of his three-day visit to Vietnam and a longer, weeklong Asia trip with his next stop in Japan. The lifting of the arms embargo will give Vietnam the opportunity to buy defense equipment from the U.S. instead of its current near-complete reliance on Russia. Vietnam needs to bolster its defenses while its northern neighbor China flexes its territorial claims and military muscle in the South China Sea, according to experts at Wharton and the Peterson Institute for International Economics.
Obama aims to also build support for the U.S.-led Trans-Pacific Partnership (TPP) that a dozen countries, including Vietnam and Japan, signed in February 2016 and must ratify over the next two years, the experts said. As the TPP promises to lower trade and tariff barriers, it could also increase opportunities for U.S. businesses to sell their wares in Vietnam, they added. Additionally, Obama will leave a legacy of change with his overtures in Vietnam, extending the normalization of ties that began two decades ago, and a partial lifting of the arms embargo two years ago. It also marks the turnaround of a relationship scarred by the 20-year Vietnam War that ended in 1975.
Obama’s efforts to strengthen ties with Vietnam is “the penultimate move” in a 20-year relationship between the two countries “that has been evolving into gradual liberalization,” said Regina Abrami, senior lecturer in political science and a senior fellow in the management department at Wharton, and director of the global program at the school’s Lauder Institute of Management and International Studies. Concerns over alleged human rights abuses in Vietnam prove the last hurdle for a full normalization of ties between the two countries.
According to Abrami, the chief advantages of the TPP for Vietnam include access to the U.S. market and more beneficial tariff rates. The U.S. would also benefit, she said, and pointed to U.S. Department of Agriculture analysis that identified business opportunities that the TPP would unlock in the Asia-Pacific markets. “Most of these emerging economies tend to have very high tariff rates, which makes it very hard for American companies to do business there,” she said.
Obama’s goal in Vietnam “is to build momentum for economic support and get this [TPP] pact ratified in the partner countries,” said Cathleen Cimino-Isaacs, a research associate at Peterson Institute for International Economics in Washington, D.C. The TPP is significant against the backdrop of the geopolitical activity in the region — not just Chinese military activity but from many other countries including the Philippines, Malaysia and Taiwan, she added. An estimated $5 trillion worth of trade passes through the South China Sea.
“Concerns abound over the potential disruption of trade in areas including fisheries, energy trading with oil imports, etc.,” said Cimino-Isaacs. “Everyone depends on each other and there is a huge amount of economic integration in the region. There is mutual benefit to try and resolve these concerns.”
Abrami and Cimino-Isaacs discussed the economic and political issues surrounding Obama’s Vietnam visit on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
Gains Unfold, Slowly
Obama’s visit has already produced results in terms of commerce. On Monday, Boeing and Vietnamese discount air carrier VietJet announced an $11.3 billion deal. VietJet agreed to buy 100 737 jets. “This is a major commercial opportunity for companies like Lockheed Martin and United Technologies that are major players in defense,” said Cimino-Isaacs.
According to Abrami, the Boeing-VietJet deal “is a very powerful market signal for people who may be wary of the investment climate in Vietnam and for people looking to that country as a new and emerging market.” She described VietJet as “one of the brightest lights in the Vietnamese economy today. The symbolism here is directed more at the American audience instead of the Vietnamese, which is that doing business with Vietnam and normalizing relationships with Vietnam is good for U.S. businesses.”
“This is a major commercial opportunity for companies like Lockheed Martin and United Technologies that are major players in defense.” –Cathleen Cimino-Isaacs
The lifting of the embargo on sales of lethal arms gives Vietnam room for “capacity-building,” said Abrami. She noted that in recent years, Vietnam had been working with the Oregon National Guard and the U.S. Coast Guard for such capacity-building to be able to efficiently patrol its long coastline.
According to Cimino-Isaacs, the two-way exchange between the two countries will help tourism and trade. Trade between the two countries has expanded significantly in the past two decades, and the U.S. is Vietnam’s third most important trading partner, she noted. The TPP also helps in rules-based governance and in encouraging the building of strong institutions within its partner countries, she added.
“Over the past two decades, our trade has surged nearly a hundredfold, supporting jobs and opportunities in both countries,” Obama said at a joint press conference with Vietnam’s president Tran Dai Quang in Hanoi on Monday. He noted that since he took office, U.S. exports to Vietnam grew by more than 150%, and that the U.S. is the single largest market for Vietnam’s exports.
Added Abrami: “Today, Ho Chi Minh City has Kentucky Fried Chicken, McDonalds and many other U.S. brands including U.S. cars on the roads.” Many American brands are also being manufactured in Vietnam, she added. Also, Obama noted in his press meeting that American companies are among the top investors in the country.
The lifting of the arms embargo and the emphasis on the TPP are not expected to lead to a rush of investors or a surge in business deals. Arms deals, in particular, will need approval on a case-by-case basis, and will be subject to U.S. expectations of Vietnam improving its record in human rights and civil liberties, said Abrami. “Realistically, it will be a slow process,” she added. However, the sale of U.S. military equipment to Vietnam and other countries in the region will provide for “greater interoperability between American-made equipment and American forces,” she noted.
“The entrepreneurial energy in Vietnam, much of which is with young people, is beyond belief.” –Regina Abrami
Education will be one of the first areas where the new normal between the U.S. and Vietnam will see results. Vietnam has granted a license for the setting up of Fulbright University Vietnam – the country’s first nonprofit, independent university – and it will accept its first class this fall, said Obama. He also noted that Harvard Medical School, Johnson & Johnson and GE, among others, will work jointly with Vietnamese universities to improve medical education.
More Attractive Than China?
For U.S. businesses, Vietnam appears more attractive as a market than China in some senses, said Abrami. China, with its rising wages, has become a more expensive place to do business. Also, the technology sector is uncomfortable with China’s restrictive policies, she added. “Businesses have a China +1 strategy where they have one foot in China” and the second in another country, “so from a business perspective, [Vietnam] is inherently attractive.”
“The entrepreneurial energy in Vietnam, much of which is with young people, is beyond belief,” said Abrami. “These young people want to be on Facebook, they want to use Dropbox [and] YouTube. The fact that you can have access to all of those things, which you cannot have in China, only serves to further differentiate why Vietnam should not be looked at as a miniature version of China.”
Civil rights in Vietnam will be a sticking point before the U.S. Congress approves any deals. However, according to Abrami, “there is greater transparency in Vietnam and televised questioning of public officials.” Independent candidates stand for elections, although not many make it through, she noted. Unlike in China, people in Vietnam often take to the streets to protest against issues such as corruption, environmental issues or over Chinese actions in the South China Sea. Cimino-Isaacs agreed that in the context of the TPP, Vietnam is “moving towards improved labor rights [and] civil liberties — and these are binding legal agreements.”