The political economy of the asean free trade area (afta)

1997).  By threatening the political future of incumbent political elites, economic decline, 

or the prospect of it, often compels governments to restore the conditions favouring 

growth, particularly since growth will allow distribution to take place with fewer costs 

than under conditions of generalised economic decline.  The rest of this paper employs the 

analytical framework developed above to account for developments in AFTA.   

 

AFTA: Encompassing Both Open and Developmental Regionalism 

 

AFTA has generally been explained as a project of open regionalism aimed at 

attracting FDI to member economies through the carrot of the single regional market.

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Globalisation had by the early 1990s significantly altered patterns and flows of FDI and 

increased worldwide competition for it.  By 1991-92, the surge of FDI into ASEAN 

particularly from its traditional sources in the OECD countries, Taiwan and Hong Kong 

had moderated, flowing instead to China (Hay, 1996).  This raised considerable concern 

among ASEAN governments as FDI was a crucial source of growth, and had helped these 

countries emerge from the disastrous economic and political consequences of the mid-

1980s recession.  The ASEAN governments attempted through AFTA to offer foreign 

investors who were increasingly practising a regional division of labour an alternative 

regional space of investment/production vis-à-vis China.  China by itself offered investors 

a potentially competing ‘regional’ investment site in the Asia-Pacific region (Baldwin, 

1997: 3), and was regarded by all the core ASEAN countries as their primary competitor 

for FDI.  Specifically, it was the tariff liberalisation component programme of AFTA (the 

CEPT, or Common Effective Preferential Tariff scheme) that members employed to define 

a distinctive space of production for global capital in the wider Asia-Pacific region.  It 

was, thus, the growth imperative that drove the turn to open regionalism in AFTA. 

 

Yet, when the ASEAN Investment Area (AIA) was formally adopted as a 

component programme within AFTA in October 1998, it stipulated that full market access 

and national treatment privileges in the manufacturing sector would be accorded to 

ASEAN investors by 2010 and to all foreign investors only in 2020.  Later, its coverage 

was extended to include agriculture, forestry, fisheries, mining, as well as services 

incidental to all these sectors.  Although the AIA programme was accelerated in 1999, 

                                                 

11

 See, among others Ravenhill (1995) and Bowles and MacLean (1996).   

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only ASEAN investors were to be accorded full market access and national treatment 

privileges at the earlier dates of 2003 in manufacturing and 2010 in the other sectors.  

Foreign (non-ASEAN) investors would receive these benefits only in 2020 as originally 

scheduled.   

 

Some scholars advise against reading too much into the AIA distinction between 

ASEAN and non-ASEAN or foreign investors since they contend that it is irrelevant or 

redundant in the first place due to essentially liberal FDI regimes in ASEAN.

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    This 

argument can be challenged in two ways.  First, if the distinction is indeed irrelevant, the 

question of why policymakers would choose to make it in the first place needs to be 

answered.  It is insufficient to assume that policymakers were acting irrationally or were 

misinformed, since the implications of instituting such a distinction were actively debated 

during the three years of discussions leading up to the formal adoption of the AIA 

Agreement in 1998, and continued to be debated from its adoption until September 2001 

when this particular clause was dropped.  Clearly, there were some quarters for whom the 

distinction was salient.  Moreover, when member governments revised the terms of the 

AIA Agreement in 1999, a year after its initial adoption, they continued to privilege 

ASEAN investors over foreign investors.  Second, the argument that the foreign-ASEAN 

distinction is irrelevant or redundant is easily challenged on empirical grounds.  Foreign 

investors continued to face investment restrictions in many of the original ASEAN 

countries during the 1990s in selected sectors and in particular policy areas despite 

liberalisation of FDI regimes, thus making the AIA distinction between domestic and 

foreign investors significant.  This was especially true for the non-manufacturing sectors 

where fairly restrictive FDI conditions prevailed.  These restrictions ranged from equity 

ownership conditions, market access to certain sectors, land ownership regulations, and 

access to domestic sources of funds.

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Another possible explanation, and one that can be accommodated within the open 

regionalist framework, is that the AIA Agreement constituted an additional tool to 

reinforce AFTA as a means to attract FDI to the region.  The temporary discrimination of 

non-ASEAN/foreign investors was simply a way of offering domestic capital in the 

                                                 

12

 Menon (1998: 18) subscribes to this view. 

13

 Only in Indonesia were the restrictions on FDI minimal, which made the ASEAN/non-ASEAN investor 

distinction in this country somewhat irrelevant.  See Nesadurai (2001: 164-72). 

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