Speech by Minister George Yeo at the Annual Conference of the Council of Americas in Washington DC, 3 May 2005 - Re-Encounter of Latin America and Asia

Re-Encounter of Latin America and Asia

The New China Trade

1. You must have been as surprised as I was that a Singapore Foreign Minister should be addressing the Council of the Americas. But this is perhaps an indication of new stirrings anticipating closer links between Latin America and Asia.

2. When I visited the Mercosur countries after the APEC Trade Ministers' Meeting in Chile last June, I was struck by the explosion of interest in China. In Uruguay, the protocol officer told me that he must be receiving what seemed like a delegation from China every week. With a glint in his eyes, former President Batlle of Uruguay reminded me that Columbus came to America in search of the China trade. A few months earlier, President Lula of Brazil made a successful visit to China with a large delegation of businessmen. That visit was well-reported around the world. President Kirchner of Argentina was soon to follow. In Sao Paulo, Foreign Minister Celso Amorim told me that the South American continent would finally be opened up in this century the way North America was in the 19th century. A Brazilian diplomat had briefed me of Chinese offers to help build ports on the Pacific coast and railroads across the Andes in return for the long-term supply of soya beans, minerals and other commodities. I remarked to Celso that it should not be surprising that the Chinese who played such an important role in building the trans-continental railroads of North America should also be involved in the construction of similar railroads in the South. When I was in Asuncion, President Duarte talked about the construction of a highway from Brazil through Paraguay across the Andes to Antofagasta. Peru, of course, believes that it offers a more direct route to the Pacific coast for Brazil and has asked Singapore to assist in the development of ports and logistics infrastructure. I left South America even more convinced that the rising Chinese tide leaves no shore, however distant, unaffected.

3. Last year was a remarkable year in the growth of the global China trade. China's total trade in 2004 was about US$1.5 trillion, overtaking Japan's. It was a year when China was at the same time the world's biggest steel producer and the world's biggest steel importer. The economies of East Asia are integrating rapidly. Three years ago (in 2002), Singapore's trade with Greater China (meaning the Mainland, HK and Taiwan combined) overtook Singapore's trade with the US. In 2004, China displaced the US as Japan's largest trading partner. Most economies in East Asia have a trade surplus with China which China accumulates into a huge trade surplus with the US. This creates other problems which I will talk about later.

Rise of East Asia

4. The re-emergence of China continues a trend led by Japan after the Second World War. During the Cold War, under an American peace, Japan developed rapidly to become the world's second biggest economy. The four tigers - Korea, Taiwan, Hong Kong and Singapore - followed. When the Plaza Accord in September 1985 forced a sharp upward revaluation of the Japanese Yen, the Korean Won and the New Taiwan Dollar, investments from these countries flowed into Southeast Asia. This led to a decade of rapid growth. In the early 90's, overseas Chinese money from Taiwan, HK and Southeast Asia moved into Southern China sparking the astonishing growth that we see today. However, the Asian financial crisis which hit parts of Southeast Asia and Korea in 1997 was a reminder that rapid economic growth must be accompanied by fiscal and monetary discipline. After a few difficult years, the economies of East Asia are bouncing along again.

5. US trade with East Asia has overtaken US trade with Europe for many years now. The same is now true of Europe. Europe's trade with East Asia has overtaken Europe's trade with the US. These are big flows. US trade with East Asia last year was US$705 billion compared to US$427 billion for the whole of Latin America. If we leave out Mexico, US trade with South and Central America last year was US$160 billion.

6. As Latin America continues with the opening up of its economies, its trade will grow in all directions but the big new opportunity is Asia. A few numbers will make this obvious. The combined GDP of East Asia (meaning Japan, Greater China, Korea and the 10 countries of Southeast Asia) last year was about US$8 trillion. Although this was still less than the US GDP of US$12 trillion and the EU's GDP of $13 trillion, the growth rate of East Asia is much faster. Most economists agree that the combined GDP of East Asia will overtake that of the US and the EU in less than 15 to 20 years. These are broad trends. We can never be sure of course. History never moves in a straight line. But one important reason for the sustainability of East Asian growth is the high savings rate.

7. Much of East Asia's growth is domestically funded by high domestic savings. Japan's saving rate is 27%, China's is 40%, Singapore is 46%. Learning from the last financial crisis, the public sectors in East Asia have become more prudent. Indeed, the economies of East Asia are racking up huge foreign exchange reserves, tripling to more than US$1.5 trillion in the last 6 years. This is about two-third of the world's official foreign exchange reserves. Much of this goes to finance the US trade deficit.

Changes in the Political Landscape

8. The political implications of these economic trends are earth-shaking. Within East Asia itself, the re-emergence of China as Asia's dominant power is causing great discomfort to Japan creating the tension we see today. It is also a complicated problem to the US. Having fought three big wars in Asia in the 20th century (WW2, Korean War, Vietnam War), the US as a Pacific power is an integral part of the strategic political and economic equation of East Asia. That equation is now changing. Keeping the triangular relationship of the US, China and Japan in dynamic balance will test the wisdom of their leaders in the next ten to twenty years. Solving peacefully the problems of North Korea and the Taiwan Straits depends critically on this. If the re-emergence of China on the global stage is mismanaged, the consequences will be immense. In an earlier period, the emergence of Japan after the Meiji Restoration in 1868 led to imperialistic expansion and a war which engulfed more than half the Pacific Ocean. The fierce resistance to Japan on the Chinese Mainland also brought about the eventual victory of the Chinese Communist Party. A China at war with the US will have fateful consequences for the entire world. It is one thing for the US to be unhappy that China is buying oil from Venezuela when the US would not, quite another if the US were to deny China energy supplies the way it did Japan when it invaded China in the 30's.

9. Engaging China and accommodating its legitimate aspirations within a framework of international rules is a key task for all the major powers, not just the US and Japan. The EU has an important role to play as well. China's accession into the WTO was a necessary step. With its low cost of manufacturing, a China operating outside the framework of the WTO would have been much more a competitive challenge than it is today.

10. On its part, China must understand the enormous pressure its growth is generating in the international system and redress the concerns of smaller countries and major powers alike. It must also accept new responsibilities. The Chinese declare that it will never be a hegemonic power and insist that China's emergence will be peaceful. However, China will be judged more by its actions than by its words. China plays a major role in maintaining peace on the Korean Peninsula. China has to win over the hearts and minds of the Taiwanese people so that reunification is not only a matter of legal right but also an act of reconciliation. China can help to make the UN and the WTO work better. How China manages its growing presence on the world stage will be carefully watched by countries big and small. With Southeast Asia, China has been careful not to press too hard its claims including its claims in the South China Sea. To be sure, Chinese society is changing rapidly. As hundreds of millions of Chinese move into the cities, the politics of China must change. It is now the world's biggest cell phone market and second biggest PC market. While the authorities might still be able to control the mass media, they cannot control emails and SMSs.

India

11. Not far behind a re-emerging China is a re-emerging India. In the last ten years, India's growth rate exceeded 6% a year. Last year, despite a bad monsoon, India's growth was close to 7%. Looking ahead, India should be able to achieve an annual growth rate of 6-8% on average for many years to come particularly if it succeeds in attracting more foreign direct investments. India's infrastructure is also improving rapidly. While India is not likely to progress as fast as China, it is another big story to be aware of. With their large populations, China and India have been the world's biggest and second biggest economies for most of human history. This may well happen again in the second half of this century.

ASEAN (Association of Southeast Asian Nations)

12. When the Asian Financial Crisis struck in 1997, many ASEAN countries were severely affected. Indonesia was worst hit. This led to the fall of Suharto. The Indonesian people suffered terribly.

13. Today, after taking some bitter medicine, ASEAN is again one of the most dynamic regions in the world. After a few difficult years, Indonesia is now the world's largest Muslim democracy with directly elected President and Vice-President. As a regional grouping, ASEAN withstood great stresses and emerged stronger. Whether it was SARS or the tsunami, the countries of Southeast Asia displayed an instinct to rally around each other and keep bilateral disputes in check.

14. The emergence of China and India has presented ASEAN with a new set of challenges. On the one hand, there is a danger that we might lose foreign direct investments to them. But on the other hand, there are new opportunities in the region which did not exist before. Provided we make the right choices, the growth of China and India will bring prosperity to the whole of Southeast Asia. This is already beginning to happen. For example, Chinese tourism has become big business. This year, Singapore alone expects a million Chinese tourists.

15. ASEAN will become much more integrated in the coming years, When ASEAN Leaders met in Bali at the end of 2003, they agreed to establish an ASEAN Community along the lines of the European Community's early development. In the next few years, a Charter will be drawn up which will establish institutions integrating us in the economic, security and social fields. ASEAN is steadily strengthening its links to all the major economic powers. We are establishing a Free Trade Area with China by 2010 and with India by 2011. At the end of this year, ASEAN will convene the first East Asia Summit in Kuala Lumpur consisting of the 10 ASEAN countries, China, Japan, Korea, India and, provided they accede to a treaty of amity and friendship, Australia and New Zealand as well.

The Role of the US

16. The role of the US in maintaining the larger peace in the Pacific cannot be overstated. Without continuing active involvement of the US in Asia, including the presence of US military forces on the Western Pacific, the growth of China and India can destabilise large parts of Asia. Japan, for one, will be very insecure and will be forced to go nuclear. Southeast Asia may be balkanized. Old wounds will be reopened in South Asia. The prosperity of the US and Asia are now deeply inter-linked. Without American universities training hundreds of thousands of Asians since the end of the Second World War, the re-emergence of Asia would have taken much longer. American businesses will benefit greatly from this Asian growth.

Latin American Response

17. What should the response of Latin American countries be to the rise of Asia? A few years ago, the diversion of global manufacturing investment to China created alarm in countries like Mexico. Thousands of maquiladora operations were shut down as multi-national corporations shifted their operations to China. When I visited Rio de Janeiro in 2001, a state minister complained that Brazil's shipbuilding industry could never survive without protection.

18. The mood has since changed as China imports more and more from Latin America and as individual countries restructure their economies to take advantage of new opportunities. According to a recent Asian Wall Street Journal report in March this year, the worst days are probably over for Mexican maquiladoras. When President Hu Jintao visited Latin America in November last year, China established strategic economic partnerships with Brazil, Argentina, and Chile.

19. Japan and Korea are also major investors in Latin America. Among Asian countries, Japan's links to Latin America go back the longest. Over a century has passed since the first Japanese immigrants arrived in Latin America. Today, there are over 1.5 million people of Japanese descent residing in Latin America, making this the largest Japanese community outside of Japan. Japan has also been one of Latin America's most active trade and investment partner in Asia. At its peak, Japan's exports to Latin America accounted for nearly 10% of all Japanese sales abroad. In the 1950s and 1960s, a third of Japanese direct foreign investment was in Latin America. Although the economic relationship cooled as a result of the Latin American debt crisis in the 1980s and Japan's economic stagnation in the 1990s, Japan remains a significant player in Latin America. Japan's renewed interest can be seen in Prime Minister Koizumi's visit to Brazil and Mexico last September, the first visit to Latin America by a Japanese PM in eight years. The highlight of the visit was the signing of the Japan-Mexico FTA. This was only the second trade accord for Japan and the FTA would help open doors to other markets in Latin America. In fact, competition among China, Japan and Korea is already heating up in Latin America for markets, public works projects, energy and other resources. These investments are a prime source of economic growth and prosperity, which will exercise a stabilising effect on both regions, to the benefit of their neighbours.

20. For the future, Latin America should move to the offensive and actively seek out opportunities in Asia. The first reaction was fear and a cry for protection. The present reaction is to welcome purchase of commodities and investments. The next phase should be for Latin Americans to move to Asia, understand its complexities and capture your share of the Asian market. A much greater effort by political leaders, diplomats, scholars and businessmen is needed to position Latin America for Asian growth. For reasons of history, Latin Americans know North America and Europe much better than they do Asia. The same can be said of Asians, that they know North America and Europe much more than they know Latin America. Indeed, we tend to see each other through North American and European prisms.

21. Building direct links between Latin America and Asia will reduce misunderstanding and bring great benefits to both sides. Indeed, it can bring benefit to the wider global community. Such links reflect the willingness of Latin American and Asian countries to embrace freer trade and cross-border investment, and our common commitment to the WTO. Some efforts are already being made to increase Latin America's presence in Asia but much more needs to be done. Let me touch on some of them.

FTAs

22. Chile has been a trailblazer. Since 1954, the Chilean Navy sent its midshipmen cruise ship, the Esmeralda, across to East Asia every year. I was in the Singapore Armed Forces before I entered politics. One day in the early 80's, not being a diplomat yet, I asked the Chilean Defence Attache in Singapore pointblank why there was a need for him to be in Singapore. His reply left a deep impression on me: he told me that Pinochet, whom I had formed a certain view of during my student days in the UK, believed that Asia would one day become very important to Chile. When I visited South America for my honeymoon in 1984, I was pleasantly surprised by the hospitality my wife and I received in Chile as Asian tourists.

23. In 2003, Chile concluded an FTA with Korea, the first between a Latin American country and an Asian country. It is now negotiating a quadripartite FTA involving Singapore, Brunei and New Zealand which we hope to conclude this year. Chile will soon be starting free trade negotiations with China and India.

24. Mexico has also been active. Mexico concluded an FTA with Japan last year and has started negotiations with Korea. Mexico had in fact begun negotiations for an FTA with Singapore first but little progress was made because of a lack of Mexican business interest in Southeast Asia.

25. Peru is now getting into the act and has started negotiating an FTA with Singapore. It is exploring others.

26. Singapore's FTA with Panama, which has been substantially concluded, started when then USTR Robert Zoellick asked the Panamanian Trade Minster to study the text of Singapore's FTA with the US before Panama negotiated with the US. At the sidelines of the WTO Meeting in Cancun in September 2002, Minister Jacome asked me to send Singapore officials to Panama to brief his officials. I was then Singapore's Trade Minister. I happily agreed and we started talking about how we could strengthen links between Panama and Singapore. Our FTA will help us strengthen each other as complementary transportation and logistics hubs.

APEC

27. What Singapore is doing on a modest scale to build links to South America, other countries in Asia are also doing or will soon follow. However, these links can only flourish if there is a larger architecture of peace and cooperation in the Pacific.

28. The US is a key link because of its dominant position on both sides of the Pacific. When APEC was formed in 1989, a major objective was ensuring that the Pacific would not be divided down the middle. At that time, there was an alternative proposal to form an exclusive East Asian grouping. That would have kept the US out which would have been bad for countries like Japan and Singapore. It would have also kept out Latin American countries. Keeping both sides of the Pacific together is a fundamental requirement we must never lose sight of. For this reason, the coming East Asian Summit in Kuala Lumpur must be inclusive, externally-oriented and take into account the overarching importance of APEC and trans-Pacific cooperation.

29. APEC has grown in importance since its formation. In 1991, China, Hong Kong and Taiwan were admitted. In 1993, President Clinton convened the first APEC Economic Leaders' Meeting. In 1994, the Bogor Goals, envisaging free trade and investment among developed economies by 2010 and among all APEC economies by 2020, were proclaimed. During the Asian financial crisis, APEC provided a forum for intensive consultation. When relations between the US and China became tense after the Hainan spyplane incident in April 2001, the APEC meetings which were scheduled in China help the two countries maintain high-level contact with each other. After Sep 11, APEC economies worked quickly on security initiatives to safeguard the free flow of trade.

30. US leadership in APEC is critical to its continuing relevance and success. APEC is the most important bridge linking Latin America and Asia together. A stable US-China-Japan triangle is at the heart of this construction. The FTAs and other arrangements we are talking about build upon this basic structure.

FEALAC

31. Many Latin American countries are not in APEC. There is no structured relationship between MERCOSUR and countries in East Asia. Recognising this lack, Singapore initiated the Forum for East Asia-Latin America Cooperation or FEALAC in 1998 to begin a process of regular meetings among politicians, government officials, business leaders and academics to exchange views on issues of mutual concern. To foster greater cooperation, the 15 East Asian and 17 Latin American countries that are members of the forum have undertaken a wide range of projects covering politics, economics, culture, education, science and technology.

MERCOSUR

32. I hope that MERCOSUR will soon develop an Asian policy in the same way as it has a European policy. This will have to be done in stages as Asia is not homogenous. China now has everyone's attention. But there is also Southeast Asia with over 500 million people and India with a billion. Singapore is a natural hub in Asia. To strengthen our links with the MERCOSUR countries, Singapore is opening a trade office in Sao Paulo and facilitating the establishment of a MERCOSUR Business Centre in Singapore. Singapore and MERCOSUR are also working on an agreement to promote two-way trade and investment.

33. Brazil's leadership is essential. Brazil already has a significant trade with Asia amounting to US$27 billion last year. In Singapore, the chicken meat market is now dominated by Brazil which, considering the distance, is quite remarkable. Singapore shipyards build offshore oil platforms in Rio de Janeiro which account for 60% of Brazil's total offshore oil production. However, the political links are less developed than the economic links.

34. When Brazil formed the G20 in 2003 and subsumed some of its own interests to maintain the unity of the grouping, it enabled the WTO to overcome the failure of Cancun and make progress in Geneva last July.

Air Links

35. We need better connectivity between Latin America and East Asia across a broad front. Our direct air links are still very poor compared to our air links to North America and Europe. Negotiating bilateral air agreements will not take us very far. What we need is a bolder move to open up the skies. A start has been made with the Open Skies Agreement signed in the year 2000 involving the US, Chile, New Zealand, Brunei and Singapore. Without faster and cheaper air travel, it is difficult to promote tourism and greater contact between our peoples.

Re-Encounter of Latin America and Asia

36. When Ferdinand Magellan working for the Spanish Crown sailed through the straits named after him into the Pacific Ocean in 1520, he did not see land for four months till he reached the Philippines. So vast was the Ocean. The Treaty of Tordesillas in 1494 had divided not only South America but the whole world between Spain and Portugal, and Spain was claiming its inheritance in Asia. Magellan himself was killed by Lapu-Lapu but, not long after, in 1565, the Spanish conquistador Miguel Lopez de Legazpi captured Manila and established the Philippines (named after Philip II of Spain) as a governor-generalship under the Viceroy of Mexico. The galleon trade between Acapulco and Manila brought great wealth to Mexico. Chinese junks brought silk and porcelain to Manila where they were loaded onto galleons bound for Acapulco. The Chinese goods were paid for in Mexican silver which flooded Asia .

37. The Portuguese entered Asia from the Cape of Good Hope into the Indian Ocean establishing a string of stations from Hormuz to Goa and Malacca all the way to Macao. Then, as now, the main destinations were China and India. Somehow, distances and danger mattered little to these early adventurers from Spain and Portugal in rickety ships. With jet travel and the Internet, distances have shrunk and there is certainly less danger.

38. So to our friends from Latin America, I urge you to discover Asia the way your ancestors once did in search of gold and glory. We live in an exciting new era and we need a new spirit of adventure to match it.

. . . . .