at the 11th International Conference on

“The Future of Asia”

25 May 2005, Tokyo, Japan

Mr Ryoki Sugita, President & CEO Nikkei,

His Excellency Mr Abdullah Badawi,

Ladies and Gentlemen,

A New East Asia

In the 1980’s, the East Asian story was about Japan and the Newly Industrialising Economies, what was called the “flying geese formation”. Today, the nature of East Asian cooperation has changed. The whole of East Asia is taking off. China is rapidly emerging. Japan is growing again. After the Asian Financial Crisis, Korea is remaking and reforming itself. In Southeast Asia, ASEAN countries have undergone political transitions, restored confidence and resumed growth. Beyond East Asia, countries such as India, Australia and New Zealand are also growing and adding to the vibrancy of the whole region.

The question is: how can we strengthen co-operation in East Asia, so as to sustain growth and prosperity for countries all across the region? I believe that we need to do four things to achieve this goal.

First, we need to integrate China into the regional economy in an orderly, win-win manner. Second, we need to strengthen co-operation among the other economies in East Asia. Third, East Asia must stay outward looking, and strengthen its cooperation without becoming closed or protectionist. Fourth, economic integration must be underpinned by a stable security environment.

Integrating China into Regional Economy

First we need to manage China’s integration into the region. China’s growth into a heavyweight economic player is the central reality in Asia. It brings tremendous opportunities to all, but also causes major changes to the status quo. Countries must make difficult adjustments to adapt to the changes and benefit from the rise of China.

China is already the major economic partner of many countries in East Asia. Trade is growing both ways – imports as well as exports. Greater China (Mainland China, Hong Kong and Taiwan) is amongst the top five trading partners for almost every Asian country, including Japan, South Korea and Singapore. China is the fastest growing source of tourists, with growing purchasing power and the desire to travel further. And China is starting to generate outward investments itself. In Singapore alone there are 1,500 Chinese companies. There are 77 Chinese companies listed on the Singapore Exchange.

Overall, the Asian countries see China’s emergence as a major plus. They are striving to strengthen their economic ties with China, and to benefit from the great opportunities opening up. China’s growth is fostering regional economic integration, and producing a new division of labour among the countries. A digital camera from Akihabara that says ‘Made in Japan’ actually has its casing made in China, the CCD image sensor developed in Singapore and the optical lens manufactured in Japan.

However, China is also a formidable competitor. It is developing a broad range of capabilities. It competes with developed countries in R&D and high end manufacturing, and with developing countries in low cost, labour intensive operations. So whether it is the hard disk drive industry in Singapore, textiles and garments in the US or Europe, or automobiles in Japan and Thailand, industries all round the world will come under strong pressure.

Countries have to restructure and upgrade their economies, develop new competencies, adapt to the new reality, and prepare their peoples in order to benefit from China’s growth. Those which stand still and resist inevitable changes will ultimately lose their export markets, or see their existing activities hollowed out.

For its part, China has strongly affirmed its intention to emerge peacefully and to cooperate with other countries on a win-win basis. For example, in the free trade agreement which China is negotiating with ASEAN, it has given ASEAN countries favourable access to its market through an ‘Early Harvest’ package. The chapter on trade in goods has now been completed. This will foster even closer linkages between China and ASEAN, and also help China to integrate smoothly into the global economy.

Stronger Regional Co-operation

Second we must strengthen co-operation amongst other Asian countries, so that even as China’s economic weight grows, it does not become the only growth engine in East Asia. Cooperation amongst other Asian countries will produce a multi-focal, multi-connected pattern of growth, broader and more robust than a ‘hub and spokes’ configuration where every link either starts from or ends in China.

One sub-regional group which needs to strengthen economic cooperation among itself is ASEAN. With a population of 500 million, ASEAN is a sizeable economy. The ten countries contain a wide range of natural and human resources, and possess complementary strengths which allow MNCs to spread their operations across different countries to reap their respective advantages. Nissan, for example, has set up manufacturing operations in Thailand and Indonesia, uses Singapore as its regional headquarters, and makes significant sales all over Southeast Asia.

Taken together, ASEAN is a strong global competitor and an attractive investment destination. But to draw the MNCs, ASEAN needs to integrate into one economy. The group is working towards an ASEAN Economic Community by 2020. 2020 is still 15 years away, but I believe that ASEAN countries understand the seriousness of the competitive challenge, and will want to set more ambitious and less distant targets. Later this year in Kuala Lumpur, the Leaders of ASEAN will make a declaration to draw up an ASEAN Charter establishing the constitutional framework of what we want to become. This will give ASEAN integration a much needed push.

Another important cross-linkage is between ASEAN and Japan. Japan is the second largest economy in the world, three times the size of China’s economy. It possesses advanced technology and deep capabilities unmatched by any other country in the region. Japanese MNCs can offer ASEAN countries investments, know how, jobs and access to developed countries’ markets. It will be a long time before Chinese MNCs can do the same. During the Tsunami disaster last year, the biggest contribution of disaster relief from Asia, and a sizeable contingent of relief personnel, came from Japan. Your generosity and sincerity in helping affected countries at a time of great need were deeply appreciated.

ASEAN countries will for a long while look towards Japan to help them develop, industrialise and create jobs. Unfortunately, after the Bubble Economy burst in 1990, Japan stagnated for more than a decade. But it is now emerging from these problems. Under Prime Minister Koizumi, Japan has made great progress in reforming and recapitalising the banking system, Companies have cleaned up their balance sheets, and the government is now pushing hard to privatise Japan Post which will have far reaching consequences.

To such a revitalised Japan, ASEAN is of special significance. It offers a competitive production base, supplies Japan with many natural resources, especially energy, and contains some of the busiest and most efficient seap

orts and airports through which Japan can reach out to the world. ASEAN also occupies a strategic location midway between the growing markets of India and China.

Indonesia is the largest country in ASEAN and straddles some of the most critical sea lanes of the world. It is crucial to peace and stability in Southeast Asia. Indonesia underwent many unsettling political changes after President Suharto resigned in 1998. But now with President Susilo Bambang Yudhoyono, Indonesia once again has a stable, effective government which is putting its house in order, developing the economy and attracting investments, and playing an active and constructive role in the region.

Japan should see its relationship with ASEAN as a strategic one. Trade and investments are important in themselves, but also part of this larger relationship. Japan has an Economic Partnership Agreement with Singapore, and has just concluded another one with Malaysia. But bilateral deals should not be our end objective. They are catalysts and building blocks for economic co-operation at the regional or multilateral level. Through the momentum generated by the bilateral deals, we should accelerate the progress of the Japan-ASEAN Closer Economic Partnership (CEP). So far, negotiations for this CEP have progressed less quickly than the FTA negotiations between China and ASEAN. The two sides should muster the political resolve to take bold decisions and conclude a worthwhile agreement that will signal clearly Japan’s stake in ASEAN.

Establishing External Linkages

Third, East Asia must stay outward looking, and not become closed or protectionist. Dynamic and vibrant as it is, East Asia depends critically on its links to other parts of the world.

Within Asia, India is a key player which is opening up to the world, and which can potentially play as large a role as China. The momentum for reform is building in India, and there is a growing sense that the changes taking place are irreversible. In information technology and business process outsourcing India is already a global player. India is not yet attracting large amounts of FDI because many legal and regulatory impediments, including restrictive labour laws, have still not yet been removed, but already it is highly competitive in some industries such as automotive parts and pharmaceuticals.

For ASEAN, India is an additional engine of growth. Economic links are intensifying. Singapore companies are pursuing opportunities in India, while Indian companies are developing overseas markets in ASEAN. Negotiations for an FTA between India and ASEAN are progressing well, and another FTA between India and Singapore is nearly complete.

India is also developing direct economic links with China. Bilateral trade has grown rapidly. China is exporting a wide range of goods to India, from motorcycles to figures of Ganesha – the Indian Elephant God. Leading Indian companies like Infosys have set up operations in China. Both countries are now considering the possibility of an FTA, which will have huge implications for the whole of Asia.

The links between Japan and India are not fully developed. Psychologically, many Japanese companies think of India as a far away and unfamiliar country. But India presents opportunities that are not to be missed. ASEAN can serve as the bridge between Japan and India. Geographically, ASEAN and India are close regional neighbours. Culturally, our peoples are comfortable with each other and our links are growing.

Therefore, in developing a new framework for East Asian Cooperation, ASEAN is taking an open, inclusive approach. ASEAN is launching a new regional grouping – the East Asian Summit – this year. We have decided on a broader grouping, going beyond ASEAN’s three Dialogue Partners in Northeast Asia – China, Japan and South Korea, to include any country which fulfils certain criteria. This will include India and potentially also Australia and New Zealand. This better reflects the present reality, which is that trade, investment, and people linkages are transcending conventional physical geographical boundaries, and India, Australia and New Zealand are already becoming an integral part of the region.

Beyond Asia, the key external linkage is with the US. Strategically, the US presence in the region has been a bulwark of peace and stability for 60 years since the Second World War. As the sole military and economic superpower of the world, the US will continue to play a key leadership role on global issues for many years to come. No major international issue can be resolved without US participation, or at least acquiescence. The US is also the biggest and technologically most advanced economy in the world, and the largest non-Asian foreign investor in the region. Its trade with Asia (US$685 billion a year) across the Pacific has for more than a decade exceeded its trade with Europe (US$577 billion a year) across the Atlantic.

American strategic and economic interests in East Asia reinforce each other. It is critical that that while we foster cooperation among Asian countries, we do not split the Pacific down the middle. In this regard, APEC is an important institution that helps draw both sides of the Pacific closer together.

Asia-Europe relations are another important linkage. Europe has a long history of engagement in the region, and European companies too are actively looking towards East Asia to tap opportunities in the region. It is in Asia’s interest to engage the EU. In areas such as agricultural products, banking, aviation and pharmaceuticals, what the EU offers is as attractive the US, and gives us more options as consumers.

A Stable Security Environment

Finally, underpinning growth and prosperity in East Asia is a stable security environment. The key players shaping this environment are the US, China and Japan.

The dynamic balance between these three players provides a tripod of stability for the region. With major changes underway, friction and contention will sometimes occur. There are also hotspots which must be managed carefully. We need a framework to resolve or at least to manage differences, so that they do not spiral out of control.

The US and Japan are steady allies. The Security Alliance assures Japan of the security it needs, without Japan having to build up its own military forces and particularly a nuclear capability, which would cause other countries to react, and destabilise the region.

Japan and China share a long and intertwined history. The two countries have not reconciled and come to terms with the history of the Second World War, the way Germany and France have done in Europe. So some friction is inevitable as both enlarge their influence regionally and internationally. But a collision is not inevitable, because both governments see the benefits of cooperation and neither wants a conflict. But both sides need to moderate nationalist sentiments, manage territorial and other disputes which arise, and find wise ways to gradually defuse the issue and work toward reconciliation. This will also help Japan to make a fuller contribution internationally and take its rightful role amongst the community of nations.

Between the US and China, although rivalry will never be entirely absent between them, there is no fundamental clash in ideology unlike during the Cold War. China too depends on the market economy, and pushes for economic growth and prosperity for its people. The US and China have already developed a substantial
economic relationship, which will make conflict very costly. This gives both sides a strong incentive to manage differences and cooperate with each other.

One issue that could sour US-China relations is Taiwan. Not long ago there appeared to be a real danger that Taiwan would make moves towards independence, triggering military action from China, which might drag in the US and Japan. Now, the temperature has cooled down. President Bush has made his position clear that he does not support Taiwanese independence, and that there is only One China. China has passed the Anti-Secession Law, stating formally that it will act if Taiwan moves to secede. Japan has indicated for the first time that it will cooperate with the US should there be conflict in the Taiwan Straits. The lines have been drawn. The Taiwanese public now understand that independence is out of the question. Their mood has shifted and there is growing desire to work with China to secure advantages for Taiwan. Both sides of the straits need to show flexibility and creativity in order to build on this progress, strengthen their interdependence, and stabilise the situation.

Another hotspot is the Korean Peninsula. A nuclearised Korean Peninsula aggravates the problem of nuclear proliferation and technology falling into wrong hands, and can trigger a dangerous arms race in Northeast Asia. The Six Party Talks provide a framework to manage the situation, but the talks are being held hostage by North Korea’s brinksmanship, which raises anxiety levels and increases the risk of miscalculation. China has the biggest influence in North Korea. It will have to be convinced of the gravity of the problem, recognize China’s own interest in this issue, and lend its weight to bringing North Korea back to the Six Party Talks.

Another problem we must worry about is the continuing threat of extremist terrorism, and particularly the issue of maritime security. Some 50,000 ships sail through the Straits of Malacca and Straits of Singapore every year, carrying much of the oil from the Middle East to Japan, China and Korea. Although the littoral states have primary responsibility for ensuring maritime security in the Straits, we need the assistance of the US, Japan and China, and indeed of all major interested parties. Japan has taken the lead in focussing global attention on the problem of maritime security. It has indicated its intention to help ASEAN, in particular Indonesia, build capacity and capability to ensure the security of major sea lanes in the archipelago. This is an important contribution to regional security.

Finally, a stable East Asia also depends on the wider international order, and thus on a credible and effective United Nations (UN). Singapore supports the UN reforms, because an expanded UNSC will better reflect the reality of the diverse interests of the global community today. In line with this, Singapore supports Japan having a permanent seat in the UN Security Council (UNSC). Japan is a natural candidate, given its international influence and its significant contributions to the region and the world.

However, it would be unrealistic to expect any new permanent members in the UN Security Council to be accorded veto powers. This would complicate and slow down decision making in the UN, increase the likelihood of gridlock, and ultimately undermine the UN’s credibility and effectiveness. This would not be in the interest of any country, and small countries like Singapore would feel this loss most acutely.

Conclusion

We live in an unprecedented era, when almost everywhere in Asia we see growth, progress and hope. But to realise the promise of stable and prosperous East Asia, we need to continue to strengthen cooperation, resolve differences, and put in place a regional architecture which enables all countries to grow in peace. The solutions will be dynamic, evolving as Asia progresses. But however the future unfolds, Japan should continue to play a significant role, contributing to the region and prospering with it.