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-Vietnam Partnership

The Unlikely, Indispensable U.S.-Vietnam

Partnership

Photo: LUONG THAI LINH/POOL/AFP/Getty Images

Report by Gregory B. Poling, Andreyka Natalegawa, and Simon Tran Hudes

Published July 6, 2021

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The U.S.-Vietnam relationship has been on an upward trajectory defined by

common interests since diplomatic relations between the two countries normalized
a quarter-century ago. Vietnam was one of two Southeast Asian countries
specifically referenced in the Biden administration’s Interim National Security
Strategic Guidance, demonstrating the extent to which it has become an

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increasingly critical part of U.S. defense planning for the region. Bilateral trade has
grown over 200-fold since normalization. People-to-people ties have also grown as
Vietnam’s tourism industry has developed. Since normalization, Vietnam has
welcomed U.S. tourists, former Vietnam War veterans, and even former refugees
and their families. U.S. schools and companies in turn have attracted Vietnamese
students and recent graduates, who are among the best educated in the world
despite the country’s lower level of economic development.

Recent points of friction carried over from the Trump administration regarding the
bilateral trade deficit and allegations of currency manipulation are on the mend,
and Vietnam has so far managed the Covid-19 pandemic well. As a result, it has
emerged in an even stronger economic position compared to many of its
neighbors. But challenges remain. The Vietnamese government’s desire to tightly
control the country’s digital ecosystem remains a drag on investment. The Biden
administration, for its part, is hesitant to engage in regional free trade negotiations,
including entering the Comprehensive and Progressive Agreement for Trans-Pacific
Partnership (CPTPP). The U.S. government has also continued a Trump-era policy
of deporting Vietnamese refugees convicted of crimes, many of whom have lived in
the United States for decades and arrived as children. However, the overall
economic relationship appears to be moving in the same direction as the strategic
relationship: upward.

The current depth and breadth of the U.S.-Vietnam partnership was not a foregone
conclusion. It is the result of decades of hard work and perseverance from both
sides. Positive trends in the relationship today can be traced to collaborative efforts
to resolve legacies of war, as well as shared threat perceptions regarding China.
There are potential roadblocks ahead, including concerns regarding human rights
and the threat of secondary sanctions on Vietnam related to Russian arms
procurement. But the U.S.-Vietnam partnership will remain important to the Biden
administration’s vision for an Indo-Pacific region that is “free, open, resilient, and
inclusive.” And there are steps the United States can take in the months ahead to
invest in this crucial partnership.

Resolving Trade Frictions

Throughout his presidency, Donald Trump expressed frustration with the United
States’ increasing bilateral trade deficits around the world, including with Vietnam.

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By September 2020, the U.S. trade deficit with Vietnam had reached $49.5 billion,
trailing only those with China and Mexico. On October 2, 2020, the Office of the
United States Trade Representative (USTR) launched two Section 301 investigations
into Vietnam, including one on whether Vietnam was undervaluing its currency as
a kind of export subsidy, undermining the competitiveness of U.S. firms.1 This was
the latest in a string of escalatory trade-related actions by the United States,
including an earlier determination by the Treasury Department that Hanoi had
been undervaluing its currency, as well as an investigation into whether to apply
countervailing duties on passenger vehicle and light truck tire imports from
Vietnam.

On President Trump’s last full day in office, USTR announced that Vietnamese
currency practices were “unreasonable,” but that the United States would not take
retaliatory action. Since then, the Biden administration has not made public
statements or announced major policy actions on the matter. Rather, his
administration has worked quietly with Vietnam to reduce the trade deficit and
increase economic integration. Vietnamese imports of U.S. goods increased in
recent months, especially in the services and agricultural sectors. In April,
Treasury removed Vietnam from its list of currency manipulators. But the Section
301 investigation remains open—a potential landmine for bilateral relations—and
USTR is expected to announce further findings in July.

Another recent point of friction sprung from President Trump’s withdrawal from
the Trans-Pacific Partnership, the predecessor of the CPTPP, in 2017. President
Biden’s team is hesitant to pursue free trade initiatives given the difficult politics of
the Democratic caucus. As a result, the new administration has shown no
enthusiasm for joining the CPTPP or pursuing new free trade agreements (FTAs).
But Washington needs to do something to show that it has a regional economic
agenda. One option could be to pursue a multilateral agreement on digital trade in
the Indo-Pacific, which would include Vietnam. This could be based on the rules
for this sector written into the CPTPP, the U.S.-Mexico-Canada Agreement, and the
U.S.-Japan Digital Trade Agreement.

The U.S.-Vietnam partnership will remain important to the Biden

administration’s vision for an Indo-Pacific region that is “free, open, resilient,
and inclusive.”

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Leaders in Vietnam hope that the Biden administration will ultimately choose to
join the CPTPP. The United States’ inclusion in that FTA would confer significant
economic benefits for Vietnam. Barring that, Hanoi is likely open to negotiating a
bilateral FTA, though that could prove at least as difficult politically for the White
House as rejoining CPTPP. But Vietnam recently wrapped up FTA negotiations with
the United Kingdom and the European Union, creating significant incentives for the
United States to follow suit, either bilaterally or multilaterally.

Attracting Investment
Since the two countries normalized relations in 1995, Vietnam has vaulted onto the
shortlist of countries of greatest interest to U.S. investors. U.S. foreign direct
investment into Vietnam has grown from under $1 billion in 2011 to over $2.6 billion
in 2019. The U.S. trade war with China that started in 2017 lured some
manufacturing out of China as U.S. companies sought to diversify supply chains.
Vietnam’s proximity to China, alongside its improving business environment,
young and highly educated workforce, and entrepreneurial mindset helped make it
one of the few beneficiaries of the U.S.-China trade war. However, challenges
remain to U.S. investment, including entrenched corruption, a weak legal system,
unwillingness to enforce intellectual property rights, a shortage of skilled
vocational labor, restrictive labor regulations, obstacles to investment in
infrastructure, and the government’s slow decision-making process.

Vietnam has taken concrete, proactive measures to increase U.S. investment. The
State Department’s 2020 Investment Climate Statement on Vietnam notes,

In particular, the government [of Vietnam] issued Resolution 55, which aims to
attract USD 50 billion of foreign investment by 2030 by amending regulations that
inhibit foreign investments and by codifying quality, efficiency, advanced
technology, and environmental protection criteria. In addition, Vietnam passed the
2019 Securities Law, which states the government’s intention to remove foreign
ownership limits (but does not give specifics) and the 2019 Labor Code, which adds
flexibility for labor contracts.

Vietnam emerged early as a leader in combatting and containing the Covid-19

pandemic—a feat made more impressive by its status as a developing country and
its proximity to China. Vietnam’s strategy was simple: wash hands, wear masks,
stay at home. Leaders framed the pandemic as an enemy and quickly issued
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transparent public health messaging. The government mobilized health

professionals and civil society in the war against Covid-19. Vietnam’s vast network
of communist party officials and informants embedded in neighborhoods aided the
government’s ability to track public compliance and quickly respond to emerging
hotspots. Vietnam’s economy was hit by the pandemic, but it was one of the few
countries in the world to avoid a recession in 2020, achieving 2.9 percent growth.
Vietnam’s strong handling of the pandemic speaks to the economy’s surprising
resiliency and has increased its attractiveness as an investment destination.

A major area of concern for potential U.S. investors has been Vietnam’s intrusive
cybersecurity law passed in 2019, which gives authorities wide latitude to monitor
online activity, demand data localization, and force the removal of objectionable
content. The law has not come fully into effect, as its associated implementing
decrees were drafted and then withdrawn. But if and when it does, the new law
will not only affect tech firms but all companies which rely on unrestricted access
to and full use of the internet. Over two-thirds of the Vietnamese population uses
Facebook. Online collaboration gives rise to innovation and creativity. The law is
likely to come into effect soon—after further tweaking by the government—and
when it does, it will likely be a drag on foreign investment.

Vietnam’s strong handling of the pandemic speaks to the economy’s surprising

resiliency and has increased its attractiveness as an investment destination.

Energy Cooperation
In October 2019, the United States and Vietnam signed a memorandum of
understanding establishing a comprehensive energy cooperation partnership.
Vietnam is projected to increase its already heavy reliance on coal for electricity
generation. But Vietnamese officials have expressed a desire to transition to
cleaner, more renewable forms of energy, including wind and solar, for which
Vietnam is well-positioned. In the interim, Vietnam hopes to rely on the United
States for liquefied natural gas (LNG) imports. Toward that end, Vietnam recently
completed construction of its first LNG import terminal in the Ba Ria-Vung Tau
province and it could begin receiving shipments in 2022. Foreign investors are
laying plans for larger important terminals in a bid to increase Vietnam’s capacity
to import U.S. LNG.

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Resolving Legacies of War

The United States and Vietnam continue to take significant steps toward resolving
war legacies, including accounting for U.S. and Vietnamese soldiers missing in
action and the remediation of unexploded ordnance (UXO) and dioxin/Agent
Orange. Building on earlier successes in dioxin cleanup in Danang, the United
States and Vietnam in December 2019 began remediation work at Bien Hoa air
base. They completed the first phase, covering approximately 5,300 square meters
of contaminated ground, in January 2021. These initiatives have run parallel to
expanded efforts by the U.S. Agency for International Development to enhance the
capacities of Vietnamese counterparts to identify human remains from the war.

Efforts to address war legacies, rooted in strident support from key figures in
Congress like Senator Patrick Leahy and the late Senator John McCain, have played
an invaluable role in shoring up support for the U.S.-Vietnam partnership. These
efforts fostered the mutual trust that undergirds U.S.-Vietnam ties today and
underscores the significant progress made in the relationship since normalization.

Vietnam and the Quad

Relative to its neighbors in Southeast Asia, Vietnam has been supportive of the
emergence of the Quad partnership between the United States, Australia, India,
and Japan. A CSIS survey in late 2019 found that a plurality of Vietnamese
respondents saw the Quad as the region’s most important institutional framework,
far outstripping support for other organizations, including the Association of
Southeast Asian Nations (ASEAN), which Vietnam was chairing that year. Another
survey conducted by the Australian Strategic Policy Institute in 2018 found that 77
percent of Vietnamese respondents expressed support for the Quad, higher than
any other country in the region.

Vietnam’s support for the Quad emanates not only from its increasingly close ties
with the United States but also growing bilateral cooperation with the other
three Quad members. But while Vietnamese strategic thinkers largely approve of
the Quad, those positive sentiments will not necessarily translate into vocal support
or active involvement in all Quad-led initiatives. Indeed, while leaders in Hanoi
might choose to engage in select “Quad-plus” activities, these steps will be carefully
calibrated so as not to upend Vietnam’s delicate relations with its northern
neighbor, China.

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Partners in the South China Sea

The fast-growing nature of the U.S.-Vietnam partnership can be ascribed in part to
shared threat perceptions regarding China, particularly in relation to Chinese
encroachments into contested waters in the South China Sea. As a claimant state in
these disputes, Vietnam issued a defense white paper in 2019 that discussed
“unilateral actions, power-based coercion, violations of international law,
militarisation, change in the status quo, and infringement upon Viet Nam's
sovereignty, sovereign rights, and jurisdiction”—a clear reference to Chinese
conduct in the South China Sea.

China’s maritime militia and coast guard have hampered Vietnam’s efforts to
exploit natural resources within its exclusive economic zone. Under pressure from
Beijing, Vietnam in 2020 canceled planned drilling operations by Russia’s Rosneft
to explore an oil field near Vanguard Bank. This followed harassment of Russian
drilling in the same offshore block the year before. And in early 2021, Rosneft sold
its rights to the block, and all other offshore rights in Vietnam, to Russia’s state-
owned Zarubezhneft. Vietnam also pulled out of exploration agreements with
Repsol and Mubadala in recent years due to similar pressures, incurring costs of up
to $1 billion in compensation to these two companies.

Vietnam has responded to China’s increasing pressure with significant naval and air
modernization and improvements to its military posture in the region. Vietnam has
acquired six advanced Kilo-class submarines along with Gepard-class frigates and
Sukhoi Su-30 fighter jets—all purchased from Russia—to strengthen deterrence
against China. U.S. arms transfers remain modest by comparison. But in June 2021,
Hanoi took delivery of a second decommissioned Hamilton-class coast guard cutter
and received permission to purchase T-6 trainer aircraft from the United States.
Vietnam has also made modest but significant upgrades to the air, naval, artillery,
and sensing capabilities on its own facilities in the Spratly Islands to make them
more defensible and capable of holding Chinese bases at risk. And, most
controversially, Vietnam has funded an expansion of its own maritime militia,
presumably to better compete with Chinese paramilitaries in operations short of
war.

The United States has a key role to play in preserving free and open access to the
South China Sea, and Vietnam by necessity will be an indispensable partner in
those efforts. This is demonstrated in part by port visits to Danang conducted by
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the USS Carl Vinson in 2018 and the USS Theodore Roosevelt in 2020. These were
the first such visits by U.S. carriers since the end of the Vietnam War. Beyond their
symbolic significance in laying to rest the ghosts of that conflict, these visits are
emblematic of the growing centrality of Vietnam to U.S. maritime strategy in the
region.

Political Challenges Ahead

While the U.S.-Vietnam security relationship largely trends positive, a handful of
unresolved issues could spoil further growth. For instance, Vietnam is a
longstanding beneficiary of Russian defense diplomacy, and much of its military
systems remain Soviet- or Russian-built. This reliance is path dependent; the
preponderance of Russian-made defense platforms in Vietnam makes it
cumbersome to incorporate U.S.-made weapons platforms into existing systems.
Moreover, the high cost of U.S.-made arms means that defense planners in Hanoi
tend to favor Russian-made systems that are more affordable in the short term.

President Biden’s tougher stance on Russia could put Hanoi in the crossfire if his
administration chooses to pursue stricter enforcement of sanctions under the
Countering America’s Adversaries Through Sanctions Act (CAATSA). This
legislation imposes penalties on countries that procure Russian military
equipment. But these have been invoked sparingly, and some countries have
sought waivers to avoid sanctions. So long as Vietnam continues to procure arms
from Russia, and in the absence of a CAATSA waiver, the looming threat posed by
sanctions could prove to be a major point of contention between Hanoi and
Washington. Both sides will need to work closely together—in public and private—to
protect Vietnam from secondary sanctions where necessary and provide realistic
and cost-effective alternatives to Russian defense platforms where possible.

Meanwhile, concerns regarding human rights remain a challenge. Human rights

observers have decried Vietnam’s lack of progress on key issues, pointing to the
“[tightening of ] restrictions on freedom of expression, association, peaceful
assembly, movement, and religion” in the past year. While the Trump White House
was content to leave human rights on the back burner, the Biden administration is
expected to place a stronger focus on such issues. Leaders in Hanoi will need to
adjust to the increased scrutiny that may come along with this new reality.
Meanwhile, the Biden administration will need to walk a fine line, rightly calling

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out abuses as the situation demands while diplomatically pursuing discussions on

constructive paths forward with Vietnamese counterparts.

So long as Vietnam continues to procure arms from Russia, and in the absence
of a CAATSA waiver, the looming threat posed by sanctions could prove to be a
major point of contention between Hanoi and Washington.

Strategic Partnership?
Vietnam and the United States elevated their relationship to a comprehensive
partnership in 2013, and enhanced cooperation in the years since has led to
speculation that an upgrade to a strategic partnership may be in the cards. Efforts
to elevate the partnership during the Trump administration were stymied by the
political and economic challenges described above. Notwithstanding these issues,
some Vietnamese officials have described the U.S.-Vietnam relationship as a
strategic partnership in all but name, owing to the depth and breadth of bilateral
cooperation. While this may be the case, formally upgrading ties to a strategic
partnership would serve to boost the relationship, match the aspirations both sides
have for U.S.-Vietnam cooperation, and “signal a higher level of trust and provide a
better framework for alignment in human rights practices.”

Recommendations
For the most part, overcoming the challenges and seizing the opportunities
described above will be matters of long-term strategy over multiple
administrations. But some relatively straightforward steps in the months ahead
would help demonstrate U.S. seriousness and strengthen the foundations of the
bilateral partnership:

Announce an intention to upgrade the U.S.-Vietnam comprehensive

partnership to a strategic partnership. Administration officials should
publicly declare their intention to pursue this effort, which could ideally be
announced by President Biden during a potential trip to Asia in the fall
coinciding with the ASEAN Summit. Setting down this marker could provide
incentives for both sides to make progress on contentious issues—for instance,
through the U.S.-Vietnam Human Rights Dialogue and, on the U.S. side, potential
CAATSA waivers.

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Drop the threat of trade sanctions due to USTR’s 301 investigation. USTR
should complete its investigation and present its findings. But following the
Treasury’s decision in April to remove Vietnam from its list of currency
manipulators, any lingering disagreements should be addressed through
negotiations rather than the threat of sanctions. Most importantly, this will
remove the cloud of uncertainty hanging over the economic relationship for the
last several years.

Deliver on vaccine diplomacy. The announcement earlier this year of a Quad

plan to jointly distribute one billion doses of Covid-19 vaccines in the Indo-Pacific
was welcomed by the region. But India’s struggle with its most recent wave of
infections, which has already caused delays in vaccine disbursement by the
global COVAX initiative, raised anxieties about that plan. President Biden’s
announcement that the United States would ship 80 million doses of vaccines
abroad by the end of June—with a significant portion headed for the Indo-Pacific
—could provide an important stopgap as COVAX and the Quad initiative regain
momentum. Vietnam currently has the lowest rate of vaccination in Southeast
Asia and would benefit enormously from U.S. vaccine donations in the months
ahead. And the goodwill generated by such an effort, proving that the United
States is still a leader in delivering global public goods, would pay enormous
dividends.

Halt the deportation to Vietnam of refugees convicted of crimes who

came to the United States as minors. Sending U.S. green card holders who
came to the United States as children following the Vietnam War to a country
they barely remember is cruel and unnecessary. The U.S. justice system is more
than capable of dealing with crimes committed by Vietnamese refugees without
resorting to the double punishment of deportation after time served.

Launch a multilateral negotiation, including Vietnam, on an Indo-Pacific

digital trade agreement. The United States must show that there is an
economic component to its oft-stated vision of a free and open Indo-Pacific.
Domestic politics will likely make it impossible for the administration to pursue
entry to the CPTPP, or bilateral FTAs in the region, until at least after the 2022
midterms. But a sectoral agreement modeled on the digital trade components of

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the CPTPP, U.S.-Mexico-Canada Agreement, and U.S.-Japan Digital Trade

agreement would be a manageable but important step in the right direction.

Undertake a multilateral effort to monitor and identify Chinese militia

actors. In the wake of the Philippines’ discovery of a large flotilla of more than
200 Chinese maritime militia boats at Whitsun Reef in the South China Sea in
March 2021, both Manila and Hanoi have begun to document and publicize the
locations and even hull numbers of individual Chinese militia vessels. The United
States, along with like-minded partners including Australia, Japan, France, and
the United Kingdom, should propose a multilateral initiative to help Vietnam and
the Philippines collect and disseminate this data throughout the South China Sea
to build a database of known offenders and impose diplomatic cost on Beijing for
their continued use.

Gregory B. Poling is a senior fellow for Southeast Asia and director of the Asia
Maritime Transparency Initiative at the Center for Strategic and International
Studies (CSIS) in Washington, D.C. Simon Tran Hudes is a research associate for the
CSIS Southeast Asia Program. Andreyka Natalegawa is a research assistant for the
CSIS Southeast Asia Program.

This report is made possible with support from Samsung.

This report is produced by the Center for Strategic and International

Studies (CSIS), a private, tax-exempt institution focusing on international
public policy issues. Its research is nonpartisan and nonproprietary. CSIS
does not take specific policy positions. Accordingly, all views, positions, and
conclusions expressed in this publication should be understood to be solely
those of the author(s).

© 2021 by the Center for Strategic and International Studies. All rights
reserved.

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