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Welcome to Singapore and the 6th Shangri-La Dialogue. Since we met last year, East Asia has continued on its upward trajectory. As a huge wave of optimism sweeps over Asia from China to India, it is not surprising that some people are talking about an Asian Century. I would not be so presumptuous. Not all problems have been resolved, and many uncertainties lie ahead. Nevertheless, the region is on the move. Provided countries do not become complacent and make big mistakes, Asia should maintain stability and continue progressing for many more years. Tonight, I will explain the basis for this optimistic view, and discuss some ways things can go wrong. The strategic environment in Asia remains favourable. Relations between major powers continue to be constructive. Regional concerns are being managed, including in North Korea where some progress is being made on the nuclear issue. These conditions provide the essential stable backdrop for the region to grow and develop. America continues to play a vital role in Asia's stability and prosperity, despite its many priorities elsewhere in the world. It is not only a major economic partner, but also remains the predominant military power, exerting a decisive benign influence in the region. Within the region, China, Japan and India also play leadership roles. They set the parameters for long-term cooperation and competition among the regional countries. China's strategic weight and rapid transformation continues to be felt all over the world. It is opening up and becoming more integrated with the world. Its economy is growing rapidly, and its trade is increasing even faster. China continues to emphasise peaceful emergence and integration into the community of nations. It has pursued broad-based cooperation with the rest of the world, improved relations with Japan, and participated constructively in the Six Party Talks. What the Chinese are saying to their own people gives some insight to their thinking. Recently China Central Television (CCTV) broadcast a highly popular documentary series on the "Rise of Great Nations". This was an objective account of the rise and fall of major powers over the last 500 years. It described how Germany and Japan destroyed themselves after becoming powerful because they went for armed expansion, leading to the two World Wars; and how America prospered and became a pre eminent power by tapping on the creativity, innovation and enterprise of its people and companies. The lessons that Chinese leaders wanted to convey to their own people were explicit and clear. Within the region, China is skilfully deploying its soft power, and cultivating its neighbours in a coordinated, strategic way. China participates actively in regional forums, provides technical assistance, and promotes trade and people-to-people linkages. All Asian countries welcome these warm ties with China, even as they develop their relationships with other powers. With ASEAN, China is concluding an FTA, on generous terms. China's motive is not just the direct trade benefits, but also a strategic consideration: to reassure countries which feel threatened by China's growth, and anchor good long-term relations with them. Two chapters of this FTA on Goods and on Services are already in effect. In contrast, similar FTAs between ASEAN and India, and between ASEAN and Japan, are still under protracted negotiation. America and Japan have expressed concerns over China's military build-up, and seek more information on China's defence spending and intentions. China's successful test of an anti-satellite weapon last year attracted widespread attention. But most Asian countries assess the challenge from China to be more economic than military. They see China's actions not as a threat to regional security, but as a specific response to the cross straits situation. They are also confident that the prevailing strategic balance, which owes much to the US presence, will not be upset anytime soon. Of course, China would eventually want its armed forces to be equal in technology and capabilities to other world powers. But for the time being it is content to develop deterrent capability that is asymmetrical. Japan, under a new Prime Minister, has been active in its foreign policy. Mr Shinzo Abe has focused on repairing frayed ties with China, and made China the destination of his first overseas visit. Premier Wen Jiabao reciprocated with a successful ice-melting visit to Japan. In his address to the Japanese Diet, the first ever by a Chinese premier, Premier Wen emphasised the importance of drawing lessons from history, not to "perpetuate hatred", but to "secure a better future for (bilateral) relations." This has had a positive and stabilising impact, though while the ice has melted, the water is still cold. Mr Abe wants Japan to be a "normal" country and play a bigger role in the world. Japan is taking steps to amend the Constitution, participating in UN peacekeeping operations and seeking a permanent seat in the UN Security Council. It has also signed a joint declaration on security cooperation with Australia to cooperate on terrorism, disaster relief, peacekeeping and other areas. This is Japan's first bilateral security arrangement with a country other than the US. Shortly after the signing, both Japan and Australia were quick to emphasise that the deal was not directed at China. One thorny issue holding back Japan from becoming a normal country is the unresolved legacy of the Second World War. On this, there has been no basic change of mindset on the part of Japan's leaders. But there are some positive developments, including the recently launched China Japan joint history study group, and the year-long study by the Japanese newspaper Yomiuri Shimbun to examine objectively the culpability of those responsible for the war. Mr Abe came to office with a reputation of being a nationalist, but his actions have shown that he wants to improve Japan's relations with its neighbours. Instead of visiting the Yasukuni shrine, he sent a potted plant as an offering, and went to pay respects at the tomb for unknown soldiers. Beijing has accepted this "don't ask, don't tell" approach, and for now the problem of the shrine visits has been set aside. This illustrates the pragmatic approach both sides are taking to move forward and work together, despite their unreconciled views of history. India's weight in regional and international affairs is growing. As its vibrant economy progressively opens up, its security outlook is also becoming more outward oriented. From a traditional focus on its Northern land borders, India is now more engaged in maritime security, extending beyond the Indian Ocean to the Straits of Malacca through which more than half of its maritime trade passes, and beyond. Recently, the Indian Navy concluded an unprecedented string of bilateral and multilateral exercises in the South China Sea, Yellow Sea, Sea of Japan and off the western coast of Japan with several navies from the Asia Pacific region. India is also stepping up its economic engagements with East and Southeast Asia. Trade between India and ASEAN has increased five-fold in the last decade, though formal cooperation between India and ASEAN is not progressing as fast as we would like. More broadly, India continues to engage in the East Asia Summit. It plans to revive the ancient Nalanda University as a centre for learning and inter faith dialogue for scholars from all over Asia, and to promote other areas of cooperation, including in science and technology, and arts and culture. Beyond the region, India's partnership with the US has created a new dynamic. The US Administration views India as a country "poised to shoulder global obligations in cooperation with the US in a way befitting a major power". Last year, both sides agreed to cooperate on civilian nuclear energy, a de facto recognition by the US that India is a nuclear power. However, it is clear from the debate in India on this issue that it will not be a deputy sheriff to the United States, but fully intends to maintain its own strategic priorities. Indeed, India does not see its partnership with the US as a means to counter-balance China. Instead, India and China are growing their economic links, and holding joint military exercises. The re-opening of the Nathula Pass, once part of the Silk Road linking the two ancient civilizations, is another sign of their warming relations. Some problems remain, such as the old border dispute, but these are being managed and are unlikely to affect the broader relationship. All countries in Asia are relieved, as none wants to see two nuclear powers and the two most populous countries in the world at odds with each other. With this dynamic backdrop, the ten countries of ASEAN know that they need to strengthen and integrate their diverse economies. The ASEAN countries are not without their own internal issues and preÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Âoccupations. But most realize that if ASEAN is disunited or passive in a rapidly changing world, it will become marginalised and irrelevant. This is why ASEAN is drafting a Charter document, to strengthen its institutions and define its long-term goals. We plan to complete this in time for the Leaders' Summit in November, which will mark the 40th anniversary of ASEAN. We are also striving for an ASEAN Community by 2015, to create a single economic entity and realise the full potential of our combined market of 550 million people. One challenge for Asia is to develop the right framework for regional cooperation, within which countries can deepen cooperation, discuss sensitive issues, and contain and manage frictions so as to ensure a stable environment in Asia for the benefit of all. Many overlapping forums and groupings exist in the region. ASEAN is the core of many of them. The ASEAN Regional Forum (ARF) for example has established itself as a platform for the major external and regional powers to discuss and manage security issues. Within East Asia, two groups now exist to foster intra-regional cooperation, and provide concrete steps towards an East Asian community. One is the ASEAN+3 group, comprising ASEAN plus China, Japan and South Korea. The other is the East Asia Summit (EAS), which is ASEAN+3 plus three more members India, Australia and New Zealand. These two groupings reflect different views of the most appropriate configuration for regional cooperation. For now, both the ASEAN+3 and EAS groups are evolving in parallel, as countries are still experimenting and feeling our way forward. ASEAN+3 is the more established forum, which is working on constructive projects such as an ASEAN +3 FTA and a possible regional financing arrangement. As the newer grouping, the EAS will take some time to crystallise major areas of cooperation. The members are gradually putting substance into the strategic intent, beginning with issues such as energy security, environment, and financial cooperation. Over time, we hope that a robust regional architecture will emerge, which will enable Asian countries to work together on not just economic but also security issues. This is a prerequisite for prosperity and growth in the region, and indeed in the world. While the overall outlook is positive, there are as always security and political risks. Looking forward, we can never be sure how events will unfold. Despite the many positive signs, things can go wrong. What can derail the optimistic forecast? Let me suggest three possible scenarios. One scenario is the souring of US-China relations. Trade frictions are a potential catalyst. The trade imbalance between America and China is the consequence of different savings and consumption rates in the two countries, and not just a misaligned exchange rate between the renminbi and the US dollar. Unfortunately, the exchange rate has become a politicised and emotional issue in the US. As former US Deputy Secretary of State Robert Zoellick noted, "[it] has become a symbol today of whether the relationship is fair or not". This sense of unfairness is fuelling protectionist pressures and adding to the unease and insecurity amongst the American people over stagnant wages, job losses and inadequate safety nets. The mood in Congress is hostile to China, and the Administration is under pressure to take tougher action. On its side, China has its own domestic considerations and priorities. Its leaders see an overriding imperative to maintain internal stability and growth, and are unwilling to risk drastic policy changes which may dislocate the economy and unscramble the present successful formula. The stresses are therefore building up. If the US takes punitive measures against China on trade, and China retaliates, it will lead not just to more protectionism, but also friction and recrimination that will sour the broader relationship between the two countries, and increase the risks of a cold war. Protectionism will not be confined to US-China trade, but will surely spill over into the global trading system. This will constrict the main arteries of trade and investment flows. It will undermine the basis of globalisation which fuels both the transformation of Asia and the improved living standards in the developed countries. We will all be worse off. Besides trade tensions, another potential flashpoint in US-China relations is Taiwan. The cross straits situation has stabilised after the US made its position clear and emphasised its opposition to Taiwanese independence. But with the legislative and Presidential elections due in Taiwan over the next year, events bear close watching. President Chen Shui-bian has vowed to persist in Taiwan's bid to join the UN, which he has dubbed "mission impossible", and predicted that Taiwan will achieve full sovereignty within his lifetime. There is talk in Taiwan of amending the constitution, and holding a referendum on the amendments. These actions will raise the temperature, and could lead to unintended and dangerous escalation of tensions between China and the US. Asian countries will be forced to choose sides, which none want to do. A second scenario is upheaval in the Middle East. The Israel-Palestine conflict stirs up strong passions in Muslim communities worldwide. This complex issue will not be resolved anytime soon, but continued deadlock and lack of progress will fuel growing frustration and extremism. Southeast Asia has experienced first hand jihadist terrorist groups linked to Al-Qaeda. These groups have been disrupted, but the problem is far from over. Saudi Arabia's revival of the 2002 Arab Peace Plan recognising Israel in return for its return to the 1967 borders is a good basis for negotiations. It deserves the support of all parties. In Iraq, if America switches course, and quits in a way that is seen as a defeat, its enemies will claim victory and jihadists everywhere will be emboldened. Former US National Security Advisor Brent Scowcroft was an outspoken critic of the US campaign in Iraq in 2003. Yet Scowcroft recently wrote: "the costs of staying are visible; the costs of getting out are almost never discussed. If (the US) gets out before Iraq is stable, the entire Middle East region might start to resemble Iraq today. Getting out is not a solution". No solution in Iraq is possible without taking into account both the interests of Iraqi Shiites, Sunnis and Kurds and the security interests of all of Iraq's neighbours especially Turkey, Saudi Arabia and Iran. One critical uncertainty in the Middle East is Iran. Iran is a factor in all the major security problems in the region. Its nuclear programme progresses unhindered despite continuing objection from the international community. If there is no resolution of the nuclear issue, and Tehran acquires sufficient fissile material to become a nuclear power or even a threshold power, the balance of power and deterrence in the Middle East will be fundamentally changed. On the other hand, if steps taken to resolve the Iran nuclear issue end up in military conflict, that too will have incalculable consequences for the whole world. World oil supplies will be disrupted, pushing up energy prices and triggering a global recession. There will be widespread anxiety and uncertainty, due to fears of a likely terrorist response. The whole basis for a predictable and secure future for Asia will be called into question. Like it or not, Iran has to be engaged. If it is not part of the solution, it will be part of the problem. But Iran must also recognise that if it presses its claims too hard, there will be a ferocious response from the Sunni countries. A third and longer term concern is global climate change. This is traditionally viewed as an environmental or economic issue, but it has serious security implications. There are no longer any serious doubts that climate change is real, and will have major effects which will grow in the coming decades. Greenhouse gas concentrations are at record levels and rising, and average global temperatures are steadily going up. We can already see changes in the world around us: extreme weather events, more frequent and severe natural disasters such as major floods and droughts, rising sea levels, retreating glaciers, longer and hotter summers. Taken together, these signs give us good reason to expect widespread changes in human habitats and eco-systems that will disrupt our present way of life. Scientists do not know how quickly this will happen, or how severe the effects will be, but we can imagine plausible scenarios of drastic changes over the next 50 to 100 years. At the simplest level, climate change has the potential to create natural disasters and humanitarian crises. Other problems will arise if food production declines, new diseases spread, low lying coastal areas become vulnerable to flooding, and millions move in search of food and safe refuge. In countries where the economic and political environment is already fragile, the stresses from climate change can cause social upheavals and civil strife. Between countries, competition for scarce resources and displacement of populations across borders can deepen tensions, and provoke conflict and wars. How well mankind adapts to climate change depends on how we respond collectively, because this is a global challenge. Governments around the world are beginning to take climate change seriously, and to explore effective frameworks for countries to cooperate and reduce greenhouse gas emissions. In East Asia, climate change has become a major item on the regional agenda. Technological breakthroughs will offer new ways to tackle this problem, but nobody expects to discover a silver bullet. Dealing with climate change will be neither cost free nor problem free. There is broad consensus that something needs to be done, but not yet a viable overall strategy, much less an international agreement, on how this will be implemented and who will bear the cost. Action on the environment will benefit everyone, but it is not free for anyone. One unavoidable price is slower growth, and the economic and political consequences of that. More than in other regions, political legitimacy in most East Asian countries has been premised on continued high growth. Slower growth will challenge this premise, and make it harder for countries to work on win-win relationships. The emerging economies of Asia will be among the world's largest emitters of greenhouse gases. Any viable solution on climate change must have their support. They must be convinced that their own interests are at stake, and be full participants and stakeholders in setting the global direction forward. But they are underÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Âstandably reluctant to constrain their growth and energy usage, when the current greenhouse gas problem is the result of past emissions by the developed countries, and their per capita emissions remain much lower than the developed countries. Clean and renewable energy sources are possible alternatives to fossil fuel. But there are still trade-offs and risks to manage. Biofuels, if produced in an unsustainable way, can lead to deforestation, environÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Â mental degradation and the destruction of carbon sinks. Nuclear energy comes with the risks of safety hazards, proliferation of fissile material or nuclear technology, and the danger of all this landing up in terrorists' hands. Serious discussions on climate change must confront these difficult issues head on. We have to begin talks on a post-Kyoto regime which involves both developed and developing countries. President Bush has for the first time proposed that countries agree on "a long-term global goal" for cutting greenhouse gas emissions by the end of next year. Japan has long been one of the most energy efficient states in the world. And in a sign of a new Chinese priority, Premier Wen devoted a considerable part of his recent report to the National People's Congress to the environment. These are positive signs. Climate change can underÃƒÆ’Ã¢â‚¬Å¡Ãƒâ€šÃ‚Âmine the stable and predictable environment that underpins the growth and prosperity of all countries. This makes it a serious long term threat to the security of the region, and the world. The scenarios I have described may or may not materialise. But countries have to take them seriously to minimise the chances of bad outcomes. Some of the problems raised can be solved by the countries within the region, working together. But others like climate change are global problems that require global solutions. This means that every country will have to do its part, work with others to develop a consensus on the way forward, uphold their international commitments, and abide by the multilateral rules of global bodies such as the United Nations, the IMF, World Bank and the World Trade Organisation. Regionally, Asian countries must continue to work together and strengthen our framework of cooperation, so that we can build mutual confidence and deal with critical issues that affect more than one country. Forums such as this Shangri-La Dialogue which gather leaders and policy makers to address the security challenges facing our region play an important role in this process. Despite the risks, I am confident the transformation in Asia will continue. Virtually all Asian countries recognise that it would be counter-productive to resist change altogether, or try to maintain the status quo. They are modernising rapidly, absorbing new ideas, adapting them to their own situations, and influencing one another. Survey after survey shows that young Asians feel hopeful about their future. Our response to the challenges ahead must be creative and far-sighted. Then we can continue to achieve sustainable development and growth, raise living standards for all, and bring about an Asian renaissance.