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

different ASEAN countries sufficient time to prepare for full investment liberalisation in 

2020.  This argument appears to have some merit if we consider the way the AIA 

Agreement was framed.  The original Agreement, in fact, specified that full market access 

and national treatment privileges were to be accorded to all investors immediately where 

possible, but allowed governments to maintain temporary exemptions in a variety of 

sectors and policy areas as they saw fit (ASEAN, 1998). 

 

Yet, this does not explain why ASEAN investors were allowed full market access 

and national treatment privileges ten years earlier than foreign investors.  The exemptions, 

which were fairly extensive, were to be removed by 2003 and 2010 for ASEAN investors 

and only in 2020 for all other foreign investors (ASEAN Secretariat, 1999).  Such a move 

would not have protected domestic investors from all external investors, since other 

ASEAN investors were to be treated as domestic investors from 2003/2010.  This suggests 

that there were other dynamics apart from the FDI dynamic that shaped the development 

of AFTA.  As the following discussion reveals, domestic political priorities centred on the 

need to preserve emerging domestic-owned capital that was politically salient in the face 

of a different set of globalisation pressures also influenced the design of AFTA. 

 

Anticipated changes in multilateral investment rules 

Attempts by advanced country governments and their TNCs during the 1990s to 

develop global rules to lower and remove ‘beyond the border’ barriers to free trade 

(Smythe, 2000: 72) constituted a second set of globalisation pressures and incentives that 

confronted the ASEAN governments.  In particular, it was the move through forums like 

APEC, the WTO and the OECD to develop a multilateral regime for investment that 

would maximise freedom of operation for foreign investors in as many countries as 

possible that was especially salient.  Even though these attempts through the OECD and 

APEC were unsuccessful, many developing country governments including in ASEAN 

expected guarantees to foreign investors to be written into the WTO framework eventually 

(Khor, 2001: 86).   

 

Although a group of developing countries including Malaysia and Indonesia 

successfully kept investment off the negotiating agenda for the First WTO Ministerial 

Meeting in 1996, many governments regarded this reprieve to be only temporary.  These 

expectations were not misplaced.  A working group on investment was established at the 

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1996 Ministerial to study the feasibility of incorporating investment into the WTO in the 

future.  In 1998, the WTO General Council decided that the working group should 

continue its work until the Seattle ministerial meeting in 1999 when members would 

decide on whether to incorporate investment within the WTO (WTO, 1998).  The 

European Commission was particularly interested in ensuring that the national treatment 

principle formed a key part of any future WTO regime on investment (Khor, 2001: 87).  

Expectations of an impending global investment regime reinforced perceptions in ASEAN 

of further intensification of market competition for domestic firms and of the potential 

dominance of foreign corporations.  They led at least two of the five original ASEAN 

national governments to contemplate providing preferential investment treatment for 

ASEAN firms in the AFTA regional market as a means to build up domestic firms.   

 

The ASEAN response  

The concerns about a global free investment regime were strongest in Indonesia 

and especially Malaysia and were centred on the future of domestic firms.  Although the 

Malaysian government had instituted extensive neoliberal economic reforms from the 

mid-1980s, the government and the private sector both saw foreign interest in negotiating 

global investment rules as posing the biggest threat to domestic companies.

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    The 

expectation was that global rules would eventually allow foreign corporations unrestricted 

access to the domestic market.  Malaysian policymakers had, by the early 1990s, begun to 

voice their reservations about the country’s overwhelming dependence on FDI and 

articulated the importance of nurturing Malaysian multinationals.

15

  In response to moves 

to include investment into the inaugural WTO agenda, Malaysian trade minister Rafidah 

Aziz argued against the idea of full market access and national treatment privileges for 

foreign investors.  She pointed out that such a move would prevent national governments 

from implementing “national level investment policies …  to enable [domestic firms] to 

grow and be able to compete with large established foreign firms”.

16

  Indonesia expressed 

similar concerns, and formally objected to the inclusion of investment in the WTO agenda 

together with Malaysia and six other developing countries.

17

  Singapore, the most open of 

                                                 

14

 Interview with Ong Hong Cheong, former coordinator of Malaysian participation in OECD workshops, 

May 2001. 

15

 See Ali (1992) and Abdullah Tahir, quoted in Felker (1998: 247). 

16

 Business Times, ‘Malaysia against restrictive investment rules: Rafidah’, 10 July 1996. 

17

 Business Times, ‘Malaysia, seven others jointly oppose new WTO rules’, 5 November 1996. 

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