"For a while now, the main contribution made by some of my friends, on the other side of the aisle in the fight against ISIL is, to criticise the administration and me for not using the phrase 'radical Islam'. That's the key, they tell us. We cannot beat ISIL unless we call them radical Islamists," Obama said, referring to the allegations being made by Trump.
"Calling a threat by a different name does not make it go away. This is a political distraction," Obama said.
Obama said the argument of labels has mostly been partisan rhetoric and harming America's fight against terrorism.
"Now, up til this point, this argument of labels has mostly just been partisan rhetoric, and sadly, we have all become accustomed to that kind of partisanship, even when it involves the fight against these extremist groups," he said.
"But we are now seeing how dangerous this kind of mindset and this kind of thinking can be. We are starting to see where this kind of rhetoric and loose talk and sloppiness about who exactly we are fighting, where this can lead us," he added.
"We now have proposals from the presumptive Republican nominee for President of the United States to bar all Muslims from immigrating into America. And you hear language that singles out immigrants and suggests entire religious communities are complacent in violence," he said.
"Since before I was President, I have been clear about how extremist groups have perverted Islam to justify terrorism. As President, I have called on our Muslim friends and allies at home and around the world to work with us to reject this twisted interpretation of one of the world's great religions," he said.
Obama said there has not been a moment in his 7.5 years as President where he has not able to pursue a strategy because they didn't use the label "radical Islam".
"They know who the nature of the enemy is. So, there is no magic to the phrase "radical Islam". It is a political talking point. It is not a strategy," he said.
Obama said groups like the Islamic State and Al-Qaeda want to make this war a war between Islam and America, or between Islam and the West. They want to claim that they are the true leaders of over a billion of Muslims around the world who reject their crazy notions.
"They want us to validate them by implying that they speak for those billion-plus people, that they speak for Islam. That's their propaganda, that's how they recruit. And if we fall into the trap of painting all Muslims with a broad brush, and imply that we are at war with the entire religion, then we are doing the terrorists' work for them," he said.
"Where does this stop? Are we going to start treating all Muslim-Americans differently? Are we going to start subjecting them to special surveillance? Are we going to start discriminating them, because of their faith?" Obama asked.
"Because that's not the America we want. It does not reflect our Democratic ideals. It won't make us more safe, it will make us less safe, fueling ISIL's notion that the West hates Muslims, making Muslims in this country and around the world feel like, no matter what they do, they're going to be under suspicion and under attack," he said.
Obama also said that such treatment makes Muslim-Americans feel their government is betraying them.
"It makes Muslim-Americans feel like their government is betraying them. It betrays the very values America stands for. We have gone through moments in our history before when we acted out of fear, and we came to regret it. We have seen our government mistreat our fellow citizens, and it has been a shameful part of our history," he said.
Obama said this is a country founded on basic freedoms, including freedom of religion.
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