Obama announced the full removal of the embargo at a news conference where he vowed to leave behind the troubled history between the former war enemies and embrace a new era with a young, increasingly prosperous nation.
Obama steered clear of harsh condemnation of what critics see as Vietnam's abysmal treatment of dissidents, describing instead modest progress on rights in the one-party state.
"At this stage, both sides have established a level of trust and cooperation, including between our militaries, that is reflective of common interests and mutual respect," Obama said. "This change will ensure that Vietnam has access to the equipment it needs to defend itself and removes a lingering vestige of the Cold War."
Obama also has more current motivations. His move was the latest step in a yearslong and uneven effort to counter China's influence in Asia.
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Obama's push to deepen defense ties with a neighbour was certain to be eyed with suspicion in Beijing, which has bristled at US engagement in the region and warned officials not to take sides in the heated territorial disputes in the South China Sea.
The United States and Vietnam have mutual concerns about maritime issues and the importance of maintaining freedom of navigation in the South China Sea, he said. While Washington doesn't take sides, he said, it does support a diplomatic resolution based on "international norms" and "not based on who's the bigger party and can throw around their weight a little bit more," a reference to China.
China outwardly lauded the lifting of a US arms embargo, saying it hoped "normal and friendly" relations between the US and Vietnam are conducive to regional stability. A spokeswoman for the Chinese Foreign Ministry said bans are a product of the Cold War and shouldn't have existed.
For Vietnam, lifting the arms embargo was a psychological boost for its leaders. The United States partially lifted the ban in 2014, but Vietnam has pushed for full access as it tries to deal with China's land reclamation and military construction in nearby seas.