Lee explained:

1) The war in Ukraine 

After more than a year, the war is deadlocked, with no good outcome in sight. Neither side can win, nor can either afford to lose. In fact, things have been at a stalemate since last November. The Ukrainians are understandably reluctant to stop fighting before they reclaim all of their territory, but this will be very difficult. 

The Russians are most unlikely to be defeated entirely despite heavy losses. They have a large population and can still conscript more troops and mobilize more resources. There is always a danger of the conflict escalating. 

The US and NATO countries are supplying Ukraine with more and more sophisticated military equipment like longer-range artillery, the Patriot air defense system, and main battle tanks.

Impact is bad

If the Ukrainians, using these Western-supplied weapons, make a breakthrough on the battlefield, we cannot predict how Russia may react. What does this mean for the rest of the world? 

Even short of worst-case scenarios, the impact is bad. The war continues to disrupt global energy, food and fertilizer supplies. 

We are all feeling it, at higher prices. There are also significant implications for international relations. Relations between Russia and the NATO countries (the US and Europe) have completely broken down, and will not return to normal anytime soon. 

Two months ago, Russia suspended its participation in the New Start Treaty, it’s only remaining nuclear arms control treaty with the US. For China, Russia’s invasion of Ukraine has presented a difficult problem.

The US and Europeans want China to use its influence to get Russia to stop the invasion. China would prefer not to aggravate Europe and the US, by providing military support for Russia’s war in Ukraine.

But China is hard-pressed to condemn Russia’s invasion or pressure Russia to stop fighting. It shares a very long land border with Russia, and it has to consider its own substantial relations with Russia. So the war has made it difficult for China to improve relations with Europe, even though I think both sides would like to do. It has also complicated China’s already very troubled ties with the US.

2) US-China relations 

Between the US and China, there is deep mutual suspicion and fundamental mistrust.

In America, the Democrats and Republicans disagree with each other on almost everything. But they are united on one issue: China. The prevailing view in America is that their efforts to work out a cooperative relationship with China have failed, and China’s growing strength and assertiveness are becoming a grave threat to US interests and values. 

And therefore the US must go for “extreme competition” and maintain “as large a lead as possible”, in their words, over China in foundational technologies, such as semiconductor chips, quantum technology, artificial intelligence, biotechnology, and green technologies —  all the things that count. 

It is not just the US government. Negative perceptions are prevalent among the population too. 

The latest Pew survey found that over 80% of adults in the US have an unfavorable view of China, and nearly 40%, 4 in 10, would describe China as an enemy of the US rather than as a competitor or partner.

Surveys in China similarly show that the Chinese public perception of the US has deteriorated. More consequentially, China’s leaders have become convinced that the US is seeking to “contain, encircle and suppress” China, in the words of President Xi Jinping. They believe that Washington wants to hold back China’s growth and weaken the Communist Party of China’s hold on power.

They say the East is rising and the West is declining, and they think the time has come for China to take its rightful place in the world. They consider issues like Hong Kong, Xinjiang and Tibet to be China’s domestic matters, vitally affecting its security and integrity, on which they see no room for discussion or compromise.

But the most dangerous flashpoint of all is Taiwan. Singapore is good friends with China and we are also old friends of Taiwan. Singapore rigorously upholds our “One China” policy and continues to support the peaceful development of cross-strait relations.

Reddest of China’s red lines

China considers Taiwan as the most important issue, and the “One China” principle to be the reddest of its red lines. But in the West, an alternative narrative is gaining currency: that the problem in cross-strait relations is a broader ideological issue of democracy versus autocracy. 

This is even though most countries, including most Western countries, have officially adopted “One China” policies. This difference of views is very worrying.

Tensions over Taiwan are high. All sides continue to make moves, responding to one another. After Dr. Tsai Ing-Wen met US House Speaker Kevin McCarthy during her stopover in the US, China launched three days of extensive military exercises all around Taiwan. 

A CCTV report described them as “comprehensive and precise simulated attacks on the key targets in the island and surrounding waters”. The risks of a miscalculation or mishap are growing.

Relations will not improve

US-China relations will not improve anytime soon. Even if the two powers avoid a direct conflict, which thankfully I believe neither side wishes to see, enduring enmity and bad relations between them will be very costly for both, and will mean big trouble for the rest of the world. 

It is a very worrying outlook, but we still hope that relations between US and China do not get worse and that both sides can keep lines of communication open, and with time, gradually repair their relationship on the basis of mutual respect and trust.

3) Multilateral trading system under siege

The third big issue is that the global multilateral trading system is under siege. This has very serious implications, especially for small, open economies. 

For Singapore, a stable, well-functioning international trading system is vitally important. We cannot survive other than as an open economy. We rely on the free flow of trade and investments across the world, and a common set of rules that applies to all countries, no matter their size.

This has helped us greatly to compete against bigger countries, attract investments from around the world, and to grow. 

For the last few decades, there was a broad international consensus supporting globalization. Countries were lowering tariff and non-tariff barriers, harmonizing rules, seeking win-win economic cooperation. APEC economies talked about their vision of an FTAAP, a Free Trade Area of the Asia Pacific. 

Even when countries clashed on political or security issues, they still continued to do business with each other. From time to time, countries might violate the rules set by the World Trade Organization (WTO), but even then, the exceptions had to be justified and defended. Now things have changed.

All over the world, countries are prioritizing domestic and national security considerations.

No more trade win-win talk

Countries no longer talk about trade is win-win. Too often, when countries quarrel, their bilateral trade becomes embroiled in these disputes. They impose restrictions on imports or exports. It depends – if you need my imports more than me, I restrict my exports. If it is the opposite, we will restrict your imports. 

Sometimes it is high-tech items like semiconductor chips or sophisticated machinery; sometimes it is agricultural products like bananas, barley or wine. They seek to inflict maximum political pain while blandly denying any hostile intent. It is a vicious cycle. 

Countries trust others less and less to play by the rules. Therefore they are increasingly going their own way, and “on-shoring” or “friend-shoring” supply chains. This then triggers a tit-for-tat response from the other side.

Protection

We are once again heading towards a world where protectionism is the default and trade rules are secondary, like what happened in the period between the First and Second World Wars. The economic cost to the world will be very high. 

The IMF recently estimated that fragmentation of the global economy could in the long run reduce global GDP by 7% cumulatively. 

Seven percent  is a very high figure – but I think it is a conservative estimate because the reality is probably worse. 7% is the effect on goods and services not traded, but deglobalization will also impact the exchange of ideas and innovation, technology development and diffusion, as well as capital flows and cross-border financing. 

All of which add to growth, prosperity, and human well-being. And these are all vital for economic growth, especially for an open economy like ours. A deep decoupling of the world economy will undo what has taken countries decades to collectively achieve.