Speech by Minister George Yeo at the Boao Forum, 22 April 2006 - New Opportunity of Asia, Driving Growth to the Next Level

New Opportunity of Asia, Driving Growth to the Next Level

Century of Asia?

1. History has a way of disappointing the optimist. As a huge wave of optimism sweeps over large parts of Asia from China to India, it is not surprising that some Asians should now be talking about the 21st century being an Asian century. This is hubris. With so many problems confronting us, we have to be modest in our self-estimation and avoid over-reaching ourselves.

2. For my address today, I would like to talk about two major challenges to overcome before we can move up to the next level of development. These two challenges concern the global trade agenda and a new political architecture of cooperation in Asia.

Global Trade Agenda

3. Top of the global trade agenda is the Doha Round which is in danger of floundering. The Hongkong Ministerial at the end of last year was rescued at the eleventh hour by a small group of ministers who knew that the consequences of failure were too horrendous to contemplate. We were fortunate to have in Pascal Lamy, a Director-General of exceptional ability and stamina. But success is still by no means assured. There is not much time left. In the US, the existing TPA or Trade Promotional Authority will lapse in July 2007. With Presidential Elections around the corner, most commentators agree that it is not likely that TPA will be renewed. Although the US is only one country, it is the most important country in the global trading system and, without TPA, it would not be possible to conclude the Doha Round. Protectionist sentiments in the US are growing and US Congressmen are expressing this new mood. Recently, the Chairman of the Ways and Means Committee of the US House of Representives, Bill Thomas, was reported in the press as expressing doubt about the importance of the Doha Round. I know Chairman Thomas. He has been a strong supporter of the global trading system. He has since issued a clarification but his portrayal of the mood in Congress is worth noting. The visceral reaction against the acquisition of American ports by the Dubai Port World reminds us how perception can become reality and how mass emotion can suddenly become a factor in decision-making.

4. Enjoying a ballooning trade surplus of over US$200 billion with the US last year, China has become the main target of Congressional criticism. Despite the efforts of the Central Government, the protection of Intellectual Property remains a serious problem. As for the value of the RMB, China took the major step of de-linking it from the US Dollar on 21 July 2005. Since then the RMB has appreciated by about 3.3%. The challenge is to let the RMB value rise gradually over a period of time in a way which does not open it to speculative attack or disrupt the Chinese economy.

5. The just-concluded visit of President Hu Jintao to the US went as well as could be expected. On the key issue of Taiwan, President Bush's One China policy is clear. All other issues were negotiable and President Hu played the role of a good guest who did not want to cause inconvenience to his host who has enough problems on his hands. The Chinese Government is fully aware of the issues of concern to the US and would try to ameliorate them. Vice-Premier Wu Yi's advance shopping trip to the US was predictably well-received.

6. However, the longer term problem of growing protectionist sentiments in the US and the EU remains. Since the end of the Cold War, three billion human beings have joined the global marketplace. They are hungry and eager to climb the ladder. This new wave of globalisation is creating stresses in many countries. The recent demonstrations in France against labour policy reform are only one example of a wrenching adjustment process that will continue for years to come.

7. If domestic and international politics are mismanaged, the health of the global economy would be affected. Today, it is the developed countries which provide a large part of global demand. US consumer confidence, for example, has a decisive impact on the well-being of many countries in Asia. With a trade deficit of almost US$800 billion, a loss of confidence in the US Dollar or a downturn in the housing market could weaken US consumption with far-reaching effects on the global economy and the global free trade agenda. A significant part of the growing US trade deficit is financed by Asian savings including savings from the Middle East. The present situation is one of Asians lending more and more money to the US at low interest rates so that American consumers can continue to buy from Asia. How long this game can be kept going ought to be a matter of great concern to everyone.

Asia Also Playing A Leadership Role

8. For the long-term health of the global economy, it is important for the major Asian economies to play a greater leadership role. While demand from developing Asia has grown signficantly in the last 10 years, it is still relatively small compared to the demand of the developed countries. For example, the Japanese economy today is still more than twice the size of the Chinese economy. In the next 10 years, it is important for Asian countries to stimulate stronger consumption in the region. Otherwise, some time in the next 10 years, the global economy could go into a major tailspin as global supply capacity runs ahead of global demand. In such a scenario, no one will be talking about a new round of trade liberalisation.

9. Japan, China and India will have to play leadership roles. Japan has been doing this, off and on, for years now partly to protect its investments and markets in Asia and partly because of US prodding. However, in the last 15 years since the crash of the Japanese markets in 1990, Japan has not been a strong leader. Nevertheless, Japan remains the only Asian country in the G8 and the second largest economy in the world. With the recent resurgence of the Japanese economy, Japan can play a leadership role in the region again.
10. The Asian Financial Crisis was an important test for China. Fighting off pressure to devalue the RMB, the Chinese Government decided to pump-prime the domestic economy instead and poured money into infrastructure. By doing this, China helped to stabilise the Asian economy during the Crisis years and raised its own economy to a higher level. While the ASEAN economies were struggling, the Chinese economy shot ahead. In the coming years, China will have to play an even stronger leadership role.

11. Following Japan, China has been accumulating US financial assets, helping to keep US interest rates low. Like Japan's, the health of the Chinese economy is now closely connected to that of the US and European economies. Within 10 years, the same is likely to happen for India. For this reason, it is important to bring first China, then India, into the G8 so that better coordination is achieved. Both China and India will have to play bigger roles in the WTO and help keep the global trading system open and in good repair.

12. The steady adjustment of exchange rates is a necessary part of global coordination. In an earlier period, the signing of the 1985 Plaza Accord by the G5 countries resulted in a sharp revaluation of the Japanese Yen from about 240 Yen to a Dollar to 130 yen to a Dollar within 3 years. This led to the bubble economy and the subsequent crash. Although China's path of development has been different from Japan's, international pressure on China to revalue the RMB will persist. What we must avoid is a sudden, destabilising revaluation which will also harm the interest of foreign investors in China.

13. Exchange rate adjustment is only one of a number of measures that have to be taken. What is more crucial for the global economy is increasing Asian demand by a significant amount in the coming years. This is already happening as Asian middle classes expand. But the role of governments in building infrastructure and providing better urban amenities is even more important. We are now witnessing in China, Southeast Asia and India, urbanisation on a speed and scale never seen before in human history. Huge investments are needed if the cities are to be more liveable. Trillions of dollars more will be needed to build highways, railroads, ports, airports, telecommunication facilities, houses, schools, power stations, waterworks, sewers and other facilities. Much more effort must also be put into protecting the environment. With better infrastructure, property prices will go up. The wealth effect will spur consumption further.

14. Asian economic integration can give another big boost to the global economy. Intra-Asian trade flows have been increasing dramatically. China has become the biggest trading partner for many Asian countries including Japan and Korea. China will become India's biggest trading partner within the next year or two, surpassing the US. China's trade with ASEAN is expected to reach US$200b by 2010. A web of concentric and overlapping FTAs is binding the region closer together.

15. We are talking about a region which is likely to become a major driver of the global economy some time in the first half of this century. The countries which participate in the East Asia Summit (EAS) - the ASEAN-10, China, Japan, Korea, India, Australia, New Zealand - account for half the world's population and have a combined GDP of some US$9 trillion today compared to the US GDP of $12.4 trillion and the EU GDP of $13.3 trillion [IMF - World Economic Outlook]. In twenty to thirty years' time, the combined GDP of the EAS countries will be signficantly greater than that of the US or the EU.

16. The recent proposal for an EAS FTA by Japanese METI Minister Toshihiro Nikai is interesting and forward looking. Although it is not an achievable goal in the short term, an EAS FTA by the year 2020 can be envisaged. 2020 is also the target date set by the APEC Leaders for the Bogor Goals of free trade and investment in the Asia-Pacific to be achieved. By that time, it will be the Asia-Pacific region which will set the pace for the world. We need both the EAS and APEC. APEC is very important because it brings both sides of the Pacific together. We want the US in particular to be a major stakeholder in Asia's growth. The US has been a key player in Asia since the Second World War.

Political Challenges

17. However, all this is only possible if we have peace in Asia for at least another generation. The political challenges are considerable because the re-emergence of China and India as major global players is unsettling for some of the major powers today.

18. The key relationship is that between China and the US. Recently, the Quadrennial Defense Review of the US Pentagon identified China as the only country which can challenge the US strategically. The US says it wants China to play the role of a responsible stakeholder in the global system. President Bush wants good relations with China and recognises that the relationship is "positive" though "complex". China has said repeatedly that its emergence will be a peaceful one which will benefit, not harm others. But in both countries, there are groups which worry about what can go wrong and want precautions to be taken. Objectively speaking, the interdependence between the two countries has now become so great, conflict between them would be a global tragedy. Since the Hainan spyplane incident which took place not far from here in April 2001, both countries have developed a closer understanding of each other and worked towards greater cooperation. President Hu's recent visit to the US is part of this effort to forge stronger links across the Pacific. Although there will be up's and down's, on the whole, we can expect that rational players on both sides will ensure that whatever problems that may arise from time to time are kept within bounds.

19. China's relationships with Japan and India are also important. With Japan, the disagreement over visits to the Yasukuni Shrine has been an unfortunate obstacle to progress. Both sides must find a way forward on the basis of mutual respect. Without China and Japan working together, we will not be able to build the institutions needed to promote Asian integration. As for Sino-Indian relations, they are at their best since the 1962 war. For the first time, both countries are negotiating seriously the delineation of their common border. Despite warmer links with the US, India will have its own position on China. As PM Manmohan Singh said last year, the world is big enough for both countries and each is too big to be contained by the other.

20. The annual East Asia Summit will help us construct an architecture for the peaceful development of Asia in this century. It brings together the major players - China, Japan and India. By including Australia and New Zealand, we demonstrate that this is not a grouping which is exclusively for Asians. With an integrated ASEAN in the middle and in the driver's seat, we have an opportunity to address critical issues like improving economic connectivity, ensuring maritime security, coordinating anti-terrorism efforts, fighting pandemics and securing energy markets. However, the East Asia Summit must stay open and inclusive and work in cooperation with the US and EU.

China's Cultural Diplomacy

21. It is important for all of us to work for the peaceful re-emergence of China and India on the global stage. Done well, this will usher in a new era of peaceful development in Asia which will change the course of world history. Mismanaged, there will be big problems. China is particularly seized by this challenge and has made strenuous efforts to assure everyone of its good intentions. To be sure, China faces so many internal difficulties today, it would surely not want to be distracted by adventures abroad. The 2008 Olympic Games in Beijing will be a watershed. It will be an inspiring demonstration of China's achievement since 1978, of how far it has travelled on the road of reform and opening up since Deng Xiaoping's fateful change of direction. But there is also a danger that too strident a display of Chinese nationalism during the Olympics will cause alarm bells to ring around the world. Billions of people will be watching. If Chinese spectators reserve their loudest applause for Chinese athletes and are disdainful of others, in particular, those from the US and Japan, this will provoke a negative reaction around the world. I was cheered by the recent announcement that Steven Spielberg had been invited to join the team designing the opening and closing ceremonies. It sends a welcome signal.

22. It is good that China is now embarking on cultural diplomacy in a big way. For hundreds of years, China has made enormous contributions to human civilization and China will again do this in the coming decades. In the field of philosophy, for example, Confucianism, Taoism and Mahayana Buddhism are Chinese humanistic belief systems which can enrich the world and promote greater inter-faith harmony. In Chinese history, the relationship between Muslims and non-Muslims was never as antagonistic as it was in the West and other parts of the world. Just as modern China has learnt much from the rest of the world, the whole world will benefit from China's development.

23. Provided we do not become arrogant and make big mistakes, the tide of optimism in Asia can flow for many more years. Survey after survey shows that the majority of young Asians feel hopeful about their future. However, there is a troubling counter current flowing in the developed countries which views the rise of Asia as a threat. These opposing movements can cause dangerous swirls in global politics and economics. We must anticipate the problems and act early to reduce their force. Forums such as the one which gather us here in Boao can play a helpful role in promoting greater mutual understanding. We must make a special effort to involve young people because it is their sense of history and of what is right and wrong which will decide the future of Asia and the world.