The move, announced by U.S. President Barack Obama during his visit to Hanoi Monday, would open the way for Vietnam to import a variety of U.S. defense technology, especially maritime capabilities and hardware.
Scholars believe Beijing would react negatively to any situation that improved Vietnam's ability to resist Chinese ambitions in the South China Sea.
"They likely will view this possible move by the U.S. to bolster Vietnam's maritime domain awareness in the South China Sea as an effort to stand up to China's more assertive ambitions in the disputed waters," said Murray Hiebert, a senior advisor and deputy director of the Southeast Asia program for the Center for Strategic and International Studies (CSIS) in Washington D.C, ahead of President Obama's visit.
Tensions have ratcheted up in the region as China has reclaimed land in massive dredging operations, turning sandbars into islands equipped with airfields, ports and lighthouses.
Beijing has also warned U.S. warships and military aircraft to stay away from these islands.
China alienating neighbors?
Orville Schell, Arthur Ross Director at the Asia Society Center for U.S.-China Relations, said a lifting of the arms embargo on Hanoi would present Chinese Premier Xi Jinping with a significant symbol of just how far his aggressive policies in the South China Sea have alienated China's neighbors.
"If he was smart Xi would go on a charm offensive and moderate China's posture," said Schell.
"However, that seems unlikely given his past unwillingness to seek compromise on matters of sovereignty."
When asked about President Obama potentially lifting the ban on lethal weapons sales in the past, China has downplayed the issue.
On Monday, at a press briefing by China's Ministry of Foreign Affairs, ministry spokeswoman Hua Chunying said that it was appropriate for the ban to be lifted.
"(The) arms sales ban was a product of the Cold War and should no longer exist," she told reporters. "We hope the lifting of all such bans will benefit regional peace and development. And we are happy to see the United States and Vietnam develop normal cooperative relations."
China and Vietnam have become the main protagonists in the row over the South China Sea, which China claims almost in its entirety through its nine-dash line.
Those claims are disputed by Vietnam, the Philippines, Taiwan and Malaysia.
Military trade increases, old suspicions remain
Even without the lifting of the U.S. ban on lethal arms, Vietnam is seeking to bolster its naval forces.
It has a $3.2 billion deal in place with Russia to procure six Kilo-class diesel-electric submarines, which should be complete by the end of the year.
Hanoi has also purchased from the U.S. six Metal Shark Defiant 75 fast response boats for its Coast Guard in a deal worth $18 million and supported by U.S. aid.
"Our analysis suggests that Vietnam's requirements include maritime-security capabilities such as maritime patrol aircraft, coastal radars, and naval craft, including coastal patrol vessels," said IHS Jane's analyst Jon Grevatt.
"All of these items could feasibly be supplied by the U.S. under existing U.S. export rules."
Even so, while bilateral U.S.-Vietnam ties are clearly warming, there is still an air of mutual suspicion in military circles, as highlighted by Hiebert and his colleague Phuong Nguyen in a commentary published by the CSIS.
"Many in Hanoi still question whether the United States intends to work with Vietnam in a serious and constructive manner in the coming years," Hiebert and Nguyen said.
"This feeling of suspicion is not new -- it can be traced back to the period after the Vietnam War when Hanoi and Washington were estranged and struggled to establish rules of engagement before normalizing diplomatic relations in 1995."
Hiebert and Nguyen added that scepticism remained on Capitol Hill as to whether the Vietnamese would remain committed to improved human rights, a condition of the Trans-Pacific Partnership agreement, which Vietnam is a member of, and a likely key component of future arms sales.
Grevatt at IHS Jane's deemed it unlikely that a U.S.-Vietnam deal would automatically lead to a regional arms race, saying it was most likely that Vietnamese purchases from the U.S. would be supported by U.S. aid.
"This will restrict the size of the purchase (in terms of value) and will mean that any purchase of aircraft, for instance, is likely to feature a small number ex-U.S. military platforms," he said.
However, Hiebert said most maritime countries in Southeast Asia have stepped up arms spending over the past five to seven years amid China's growing assertiveness in the South China Sea.
"These countries know they can't stand up to China, but are trying to achieve a slightly more credible deterrent," Hiebert said.
China has reiterated that its moves in the South China Sea are purely defensive, dismissing U.S. State Department assertions that Beijing's actions are becoming a cause for concern.
"China's position on the East and South China Seas is consistent and clear," said Hong Lei, a spokesman for the Chinese Foreign Ministry on May 16.
"We stay firmly committed to safeguarding our territorial sovereignty and maritime rights, and to peacefully resolving relevant disputes.
"The U.S., who has long been intensifying military presence in the South China Sea and the neighborhood and dispatching military ships and aircraft for the show of strength, is the major cause of tensions in the region."