Speech By Mr Lee Hsien Loong,Prime Minister, at the Lloyd's City Dinner, 7 September 2006, 9.30 pm at the Merchant Taylors Hall, London

Lord Peter Levene, Chairman of Lloyd's,

Distinguished Guests,

Ladies and Gentlemen,

Introduction

May I thank Lord Levene for his generous introduction and warm remarks. It is good to be back in London again, and to join you tonight for dinner. I am also glad that Lloyd's sees its future growth in Asia, and is taking steps to seize the many opportunities opening up in the region.

Lord Levene asked me to talk about Asia. I am sure all of you are familiar with the rise of China and India, and so I will not dwell on their stories tonight. Instead, I will try to describe how these two giants are altering the rest of Asia, how Southeast Asia fits into the picture, and what role Europe can play in this evolving Asian landscape.

Asia Transformed

The emergence of China and India is rapidly transforming the economy of the whole of Asia. In the past, the Asian countries were not closely interlinked. They had stronger links with partners outside the region, like the US and Europe, than they did with one another. These external links continue to be important today, but new patterns of trade and investments have emerged, networking Asian countries with one another.

China has become the largest trading partner of many Asian countries including Japan, South Korea and several ASEAN countries, overtaking the US and Europe. India lags behind China in its liberalisation, and its foreign trade is much smaller than China's, but it is growing rapidly too. India's trade with Southeast Asia has multiplied five times in the last decade - a reflection of India's "Look East" policy to participate in Asia's prosperity.

Besides trade, China and India have attracted many investments from the rest of Asia, from companies eager to seize the opportunities opening up there. And now an outward flow is starting. Chinese and Indian companies are investing abroad, going international. Singapore alone is home to around 2,000 companies from China and another 2,000 from India.

Between China and India too, relations are warming up. The two countries are taking steps to settle old disputes and strengthen economic ties. Neither side wants a collision, and both see the world as big enough to contain their aspirations. China has become India's second largest trading partner. China exports a wide range of goods, from motorcycles to statues of Ganesha, the Hindu elephant god. Indian software companies like Infosys and Wipro have set up operations in China, hiring talented Chinese programmers.

However, not every link in this new Asian economy starts or ends with the two giants. Other Asian countries are developing more cross-linkages with one another. For example Japan, which led the first wave of growth in Southeast Asia, continues to offer the region investments, know-how and jobs. Overall, the supply chains and networks in Asia are becoming more complex. Movement of goods, data, services and people is taking place in all directions.

An Open Region

Asian countries are eager to partner China and India, and ride upon their growth. The impact has been broader than economic. China has been skilful in deploying its soft power, and winning friends throughout Asia. However, Asian countries do not want this to be an exclusive relationship. In particular we want to maintain and grow our ties with the developed countries, for they remain key markets, and vital sources of investments and new technologies. Dynamic and vibrant as it is, Asia will continue to depend critically on its links to other parts of the world. We do not see a future for ourselves in a closed Asian bloc. Instead, we seek to build an open framework of cooperation with many partners.

The most important of these partnerships for Asia is the one across the Pacific, with the United States. The US is the ultimate destination of many Asian exports, even when the intermediate goods are first exported to another Asian country. The US will be the world's most advanced and powerful economy for many decades to come. And beyond its economic role, the US continues to make a vital contribution to the security of Asia, through its military presence and its strategic interests in the region.

Asia's ties with Europe are also very important. A European stake in Asia's growth will reduce the chances of friction and protectionism between these two continents. Without such a stake at the very least Europe will miss out on Asia's opportunities, or worse it may see Asia as an economic threat, take countermeasures to protect itself, and so weaken the global trading system.

Challenges of Change

The emergence of China and India presents Asia with challenges as well as opportunities. It has intensified competition, and forced other countries to adapt to a radically changed situation. Countries with low wages and surplus labour, like Vietnam and Indonesia, feel the heat directly because they occupy the same niches in the international economy as China and India. Hence, Vietnam is accelerating its economic reforms, preparing to join the WTO, and pushing hard for growth and investments. Indonesia is setting up Special Economic Zones (SEZs) to create a more conducive investment environment, especially in the Riau islands near Singa­pore, where Singa­pore is able to work with Indonesia and help to promote the SEZs to investors.

Even more developed countries like Singapore feel similar pressures. In these countries, at the high end of the workforce, entrepreneurs and skilled professionals are benefiting from the many opportunities opening up all over Asia. But at the lower end, less skilled workers are seeing their wages stagnate, like less-skilled workers elsewhere. But the pressure extends well beyond the least skilled workers. China and India are moving up the value ladder, and growing their scientific and technological prowess. Chinese universities now lodge as many patents in China as American universities lodge in the US. India's outsourcing industry not only processes credit cards and airline reservations, but also interprets medical scans and researches legal precedents. The end result is an accelerating pace of change and a widening of income disparities. The countries are being forced to restructure and upgrade, or else be overtaken and hollowed out.

ASEAN's Response

In Southeast Asia, the ten ASEAN countries are actively anticipating and adapting to the changes around us. Southeast Asia forms an important part of Asia. It is a strategic region with rich mineral and energy resources, and vital sea lines of communications. It has a population of half a billion - half the size of India, and more than one third the size of China. Its combined GDP is the third largest in Asia. For companies who want to diversify their Asian exposure beyond China and India, Southeast Asia is an attractive option. But to realise its full potential, the ASEAN countries need to integrate their economies more rapidly. ASEAN's strategy is to take off using the China and India as its two wings. But to do this ASEAN needs a strong body.

It is not easy bringing together the ASEAN member states. I think you can understand this from your own experience - Europe took decades to integrate, and even now the issue of whether to join the Euro is still passionately debated in Britain. Far more than the European countries, Southeast Asia is characterised by political, economic and cultural diversity rather than natural coherence. Nevertheless ASEAN has made encouraging progress in recent years. The countries recognise that integration is essential and that time is not on our side. China and India are forging ahead, and if ASEAN falters, we will be left behind. Thus ASEAN is developing a Charter document, to strengthen its institutions and define its long term goals. It is aiming to achieve an ASEAN Economic Community by 2015, five years sooner than the original target.

With growing interest in regional integration, moves to define an Asian-wide Community have gathered momentum. ASEAN aims to shape a framework of cooperation which is open and friendly to all the major powers. ASEAN's initiative to establish an East Asian Summit (or EAS) which includes all the countries of East Asia, India, Australia and New Zealand, with ASEAN at the core, is precisely to achieve such an objective.

As a member of ASEAN, Singapore is fostering ties both with our Southeast Asian neighbours, and with the wider Asian and global economy. Our role is to be a hub for the region, an intermediary in trade, logistics and finance for China, India and ASEAN, as well as many other countries around the world. Our cultural affinity with these Asian societies gives us a unique competitive advantage. We ourselves are an Asian society, with Asian heritage and roots, but an ethos that is open, cosmopolitan and pragmatic. Our multiracial population is English speaking but bilingual in Mandarin, Malay/Indonesian, Tamil and other languages. We work actively to preserve and strengthen this multiculturalism. We want to keep ourselves open to people of all cultures, and welcome talents from all over the world, while understanding and working with our rapidly growing region.

We are re-establishing our historical links with the Middle East. With huge surpluses, and finding the West not completely welcoming, their political and business leaders are increasingly looking eastwards. The first official overseas visit by the new King of Saudi Arabia was to India, China and Malaysia. In a way we did not expect, some of them hold up Singapore as a development model for themselves.

Financial services are one example of how Singapore brings the world to Asia, and links Asia to the world. Over 600 financial institutions are based in Singapore, providing a wide range of financial services for the region and beyond. For example, 20 of the top 25 reinsurers in the world use Singapore to serve the growing insurance needs in Asia. More than half of the assets managed by fund managers in Singapore are invested in Asia. At the same time as a key global financial centre, linked to London, New York and Tokyo, we offer Chinese and Indian companies access to global equity and debt capital markets to finance their expansion.

Thus Singapore strives to make ourselves useful to our neighbours, service their needs, and so foster a more integrated ASEAN and a more prosperous Asia.

Regional Issues

What I have sketched so far is the economic landscape in Asia. However, economic prospects depend on the broader political and security environment. Fortunately, this is also positive. Relations among countries in Asia are generally stable, although there are potential problems.

One problem is Sino-Japanese relations. These have been difficult in recent years. But with growing economic linkages, both sides have a strong incentive to manage their differences and cooperate with each other. The Liberal Democratic Party in Japan will be choosing a successor to Mr Koizumi as Prime Minister soon. Both in China and Japan, many are hoping that a new Japanese leader will make a fresh start, and improve bilateral relations.

Another hotspot is the Korean Peninsula. North Korea's continuing brinksmanship creates alarm throughout the region, and makes negotiations extremely difficult. North Korea has refused to yield to international pressure over its nuclear programme. But the regime is unlikely to provoke or start a war that would threaten its own existence. The longer-term danger is nuclear proliferation, but that is a broader, global problem which will require continued effort by the international community to resolve.

A third potential crisis point is the cross-strait situation between China and Taiwan. In 2004, there seemed a real risk of Taiwan stepping over the line and triggering an armed conflict with China, which would drag in the US and Japan. Since then the tension has eased. All the key players - America, China and Japan - have taken clear positions on Taiwan. The Taiwanese public as well as Taiwan's leaders now know that independence is out of the question. We must expect Taiwanese politicians still to make provocative statements from time to time. These can raise the temperature, but are no longer likely to fundamentally destabilise the situation.

Global Risks

Beyond Asia, the global economic outlook is benign, but there are some major political and security risks. One is the continued violence and tension in the Middle East. If there is a blow-up which disrupts world oil supplies, energy prices will shoot up even higher, and trigger a global recession.

Another concern is Islamist terrorism. This is undoubtedly fuelled by events in the Middle East, especially the Israel-Palestine conflict and the civil war in Iraq. Al-jazeera, satellite TV and the internet have turned these once faraway happenings into immediate and urgent problems all over the world. Asia is also affected, especially Southeast Asia which has a large Muslim population. Thus the Jemaah Islamiyah, a Southeast Asian terrorist group which perpetrated the Bali bombings, had direct links to Al Qaeda. Governments in the region have disrupted the Jemaah Islamiyah, but other splinter groups and dangerous fanatics are still on the loose. Terrorism has become indigenised, in Southeast Asia as in Europe. Home-grown terrorists were responsible for the 7/7 bombings in London, and also the recent plot to mount suicide bombings on US-bound passenger flights.
The terrorist threat is not confined to attacks on land. Maritime security is also a serious concern. A spectacular terrorist attack on a tanker or an LNG carrier in the Straits of Malacca would be a major setback for the whole region. To improve security in the Straits of Malacca, the three littoral states - Singapore, Malaysia and Indonesia - have started joint patrols using maritime surveillance aircraft. These have had a salutary deterrent effect, and helped to reduce the incidence of sea robberies and piracies. The littoral countries will continue working together and with international stakeholders to keep this critical sea line of communication safe and open. I am therefore glad that Lloyds has recognised these efforts, and recently decided to declassify the Malacca straits as a war-risk zone.

Protectionism is another major risk. Asia's transformation is based fundamentally on globalisation, free markets, and the free flow of goods and services worldwide. The global division of labour has benefited not just Asia but also many other countries around the world. But protectionist pressures are never far away, especially in a time of rapid economic change. In Europe, manufacturers of shoes and textiles have prevailed over the interests of consumers, to impose restrictions on imports of these low-tech goods from China. Globally, the WTO Doha Round of negotiations is on the verge of collapse. As Indian Commerce Minister Kamal Nath put it, the "round is not dead...but it is definitely between intensive care and the crematorium."

These trends are worrying. Without the forward momentum of a new trade round, we risk slipping backwards to beggar-thy-neighbour protectionism. Developed countries which close their markets or impose "voluntary" trade restrictions set undesirable examples of how to bend the rules, and the emerging economies, which are being exhorted to open up their own markets and abide by multilateral disciplines, will be very fast learners. This would leave us all worse off. For now, the stars do not seem aligned to get the Doha Round back on track, because of the political timetables in the key countries. But failure would leave us all worse off. It is therefore crucial for all participants, including the EU, to do their utmost to revive the round and secure a positive outcome.

Conclusion - Seizing the Opportunities in Asia

Despite these risks, the transformation in Asia will continue, and many opportunities will open up. Europe has many urgent priorities, but it must strive to deepen its relationship with Asia. If Europe is left out of Asia at a time when the region is growing and linking up with partners all over the world, it will pay a heavy price not just in economic growth and vitality, but also in its international influence. This is why Asian and European countries launched the Asia Europe Summit Meeting (ASEM) in 1996. We will be holding the tenth anniversary meeting of this summit in Helsinki in a few days' time, with more participants joining from both sides.

Europe's engagement with Asia must go beyond China, or China and India. Europe needs to broaden its links with other significant parts of Asia, including ASEAN and Japan. This way Europe can participate fully in the transformation of Asia, build up its stake in the region, and play a full role in an important part of the world.

With ASEAN, Europe has historical links that go back centuries. Europe can build on this strong foundation to broaden and deepen its engagement with ASEAN. For its part, ASEAN is keen to work with Europe. We are already significant trading partners. ASEAN wants to negotiate an FTA with the EU to bring our cooperation to a higher level. ASEAN is already negotiating similar FTAs with China, India and Japan, and several ASEAN members are negotiating FTAs with the US. Europe should not be left out.

In the City of London, as in Singapore, I do not need to argue that vitality and growth comes from embracing globalisation, linking up to the outside world, and competing in the global marketplace. Asia's rise is the result of this same process, on a gigantic scale. Many of you like Lord Levene know Asia, and know the momentous changes that are taking place there. I hope you will help to nurture and grow the relationship between Asia and Europe, and contribute to the prosperity and progress of both continents.

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