US expects to upgrade Vietnam ties, risks China anger

By Francesco Guarascio

HANOI (Reuters) -The United States expects to elevate its diplomatic relations with former foe Vietnam to the top level as President Joe Biden travels to Hanoi in a week, in a move that may irk China and with unclear business implications.

Fearful of the potential reaction from its much larger neighbour, Vietnam had initially expressed caution about the upgrade. That led the Biden administration to multiply efforts to persuade the southeast Asian nation, including through multiple visits of high-ranking members of the U.S. government in recent months.

The unprecedented push has led Washington to expect to be elevated to the top tier of Vietnam’s diplomatic ranking, together with China and Russia, from two notches below now.

Biden said it publicly in July and officials in both countries have since informally expressed optimism about the two-step upgrade, although no official statements have been released from either government.

Perhaps seeking to assuage Beijing, Vietnam is discussing top-level visits to Hanoi after or even shortly before Biden’s arrival on Sept 10, with officials saying China’s President Xi Jinping and Prime Minister Li Qiang could meet Vietnamese leaders in coming days or weeks.

Risks that a double upgrade with Washington may not go down well in Beijing remain high, but Vietnam’s communist leaders may have calculated the best timing for the move is now as relations with China are “likely to get worse in the future,” said Le Hong Hiep, a senior fellow at Singapore’s Iseas–Yusof Ishak Institute.

Yet it is unclear what Vietnam, which is at odds with China over boundaries in the South China Sea (NYSE:), stands to gain in the short term from the upgrade.

A boost of U.S. military supplies to Hanoi has long been discussed but no immediate deal is expected as these talks take time, Hiep said.

Meanwhile, Vietnam is talking with several other countries to upgrade and expand its mostly Russian-made arsenal, and has recently engaged in multiple high-level defence meetings with top Russian officials.

Supporting Vietnam’s ambitions to become a hub for the semiconductor industry is also part of Washington’s inducements, but public funds so far available under the CHIPS Act are very limited.

The U.S. may offer more, said Vu Tu Thanh, head of the Vietnam office of the US-ASEAN Business Council.

Energy is another sector where cooperation could increase as Vietnam prepares to become a player in Liquefied Natural Gas (OTC:) (LNG) and offshore wind although administrative and funding delays are dampening the mood.

The upgrade of relations is expected to boost U.S. firms’ plans in Vietnam. Planemaker Boeing (NYSE:) and energy firm AES (NYSE:) may make announcements during Biden’s visit, people familiar with the plans said. The companies had no immediate comment.

The U.S. is already Vietnam’s largest market for its exports and U.S. customs procedures could be eased to boost trade, Thanh from the US-ASEAN Business Council.