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RESTRICTED
WORLD TRADE
WT/TPR/S/156
12 December 2005
ORGANIZATION
(05-5812)
Trade Policy Review Body
TRADE POLICY REVIEW
MALAYSIA
Report by the Secretariat
This report, prepared for the fourth Trade Policy Review of Malaysia, has been
drawn up by the WTO Secretariat on its own responsibility. The Secretariat has,
as required by the Agreement establishing the Trade Policy Review Mechanism
(Annex 3 of the Marrakesh Agreement Establishing the World Trade
Organization), sought clarification from the Government of Malaysia on its trade
policies and practices.
Any technical questions arising from this report may be addressed to
Mr. Mario Kakabadse (tel: 022 739 5172).
Document WT/TPR/G/156 contains the policy statement submitted by the
Government of Malaysia.
Note:
This report is subject to restricted circulation and press embargo until the end of the first
session of the meeting of the Trade Policy Review Body on Malaysia.
Malaysia
WT/TPR/S/156
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS
I.
II.
III.
vii
(1)
ECONOMIC ENVIRONMENT
vii
(2)
TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
vii
(3)
TRADE POLICIES AND PRACTICES BY MEASURE
viii
(4)
TRADE POLICIES BY SECTOR
x
(5)
OUTLOOK
xi
ECONOMIC ENVIRONMENT
1
(1)
OVERVIEW
1
(2)
RECENT ECONOMIC DEVELOPMENTS
(i)
Macroeconomic policies
(ii)
Structural policies
3
3
7
(3)
DEVELOPMENTS IN TRADE AND FOREIGN INVESTMENT
(i)
Composition of trade
(ii)
Direction of trade
(iii)
Trade in services
(iv)
Trends in foreign direct investment
11
11
11
14
14
(4)
OUTLOOK
15
TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
16
(1)
INTRODUCTION
16
(2)
GENERAL CONSTITUTIONAL AND LEGAL FRAMEWORK
16
(3)
DEVELOPMENT AND ADMINISTRATION OF TRADE AND INVESTMENT POLICY
(i)
Advisory and review process
(ii)
Transparency
17
20
20
(4)
TRADE POLICY OBJECTIVES
21
(5)
TRADE AGREEMENTS AND ARRANGEMENTS
(i)
World Trade Organization
(ii)
Regional agreements
(iii)
Bilateral agreements
(iv)
Trade preferences
21
22
24
27
28
(6)
DISPUTE SETTLEMENT
29
(7)
FOREIGN INVESTMENT REGIME
(i)
Recent developments
(ii)
Legislative framework and procedures
(iii)
Incentives
(iv)
Investment guarantee and double taxation agreements
29
29
30
31
31
TRADE POLICIES AND PRACTICES BY MEASURE
33
(1)
INTRODUCTION
33
(2)
MEASURES DIRECTLY AFFECTING IMPORTS
(i)
Customs issues, trade facilitation, customs valuation and rules of origin
34
34
WT/TPR/S/156
Page iv
Trade Policy Review
Page
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
IV.
Tariffs
Prohibitions, quantitative restrictions, and import licensing
Contingency measures
Government procurement
State trading
Trade-related investment measures and local-content requirements
Other measures
36
44
46
47
48
49
49
(3)
MEASURES AFFECTING EXPORTS
(i)
Export taxes, charges, and levies
(ii)
Export prohibitions, restrictions, and licensing
(iii)
Duty and tax concessions
(iv)
Free-trade zones and other measures
(v)
Export subsidies
(vi)
Export finance, insurance, and guarantees
(vii)
Export promotion
49
49
50
51
51
51
51
52
(4)
MEASURES AFFECTING PRODUCTION AND TRADE
(i)
Standards and other technical requirements
(ii)
Sanitary and phytosanitary regulations
(iii)
Taxation and tax incentives
(iv)
Legal framework for business
(v)
Government-linked companies (GLCs)
(vi)
Corporate governance
(vii)
Competition policy
(viii)
Intellectual property
52
52
56
57
63
63
64
65
67
TRADE POLICIES BY SECTOR
74
(1)
INTRODUCTION
74
(2)
AGRICULTURE
(i)
Main features
(ii)
Trade regime
(iii)
Key subsectors
(iv)
Policy objectives for the sector
76
76
77
79
82
(3)
MINING AND QUARRYING
(i)
Regulatory framework
(ii)
Trade and Investment regime
(iii)
Foreign participation in the oil and gas sector
82
83
83
84
(4)
MANUFACTURING
(i)
Features
(ii)
Objectives for the sector
(iii)
Trade policy instruments
(iv)
Key subsectors
84
84
85
85
86
(5)
SERVICES
(i)
Features
(ii)
Policy objectives
(iii)
Key subsectors
92
92
94
94
REFERENCES
107
APPENDIX TABLES
111
Malaysia
WT/TPR/S/156
Page v
CHARTS
Page
I.
ECONOMIC ENVIRONMENT
I.1
I.2
Product composition of merchandise trade, 2001 and 2004
Direction of merchandise trade, 2001 and 2004
III.
TRADE POLICIES AND PRACTICES BY MEASURE
III.1
III.2
III.3
III.4
III.5
Simple average applied MFN tariff rates, by HS section, 2001 and 2005
Distribution of MFN tariff rates, 2001 and 2005
Tariff escalation by 2-digit ISIC industry, 2001 and 2005
Applied AFTA tariff rates, by HS section, 2001 and 2005
Import licensing, by HS section, 2001 and 2005
12
13
39
40
41
42
45
TABLES
I.
ECONOMIC ENVIRONMENT
I.1
I.2
I.3
I.4
Selected macroeconomic indicators, 2001-04
Basic economic and social indicators, 2001-04
Eighth Malaysia Plan, 2001-05
Malaysia's trade in commercial services
II.
TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
II.1
II.2
II.3
II.4
Main trade-related laws and regulations
Comparative governance indicators: selected countries and the OECD, 2002
Status of selected notifications to the WTO, 2001 to October 2005
Malaysia's involvement in bilateral and regional trading initiatives with non-ASEAN partners,
June 2005
III.
TRADE POLICIES AND PRACTICES BY MEASURE
III.1
III.2
III.3
III.4
III.5
III.6
III.7
III.8
III.9
III.10
III.11
III.12
III.13
Structure of MFN tariff in Malaysia
Applied MFN tariff averages by stage of processing, 2001 and 2005
Summary of anti-dumping actions, 2001-05 (June)
Government procurement, 2001-04
Malaysian standards aligned to international standards, 2001 and 2005
Import restrictions on agricultural products, 2001-04
Structure of direct and indirect tax revenue, 2001-04
Summary of Malaysian tax measures, 2005
Direct and indirect tax incentives in Malaysia by sector and activity
Main direct tax incentives for investment and recent changes
Estimated trade losses due to copyright piracy, 2000-04
Actions taken under the Copyright Act 1987, January 2001 to December 2004
Seizure of counterfeit goods under Trade Descriptions Act 1972, January 2001
to December 2004
IV.
TRADE POLICIES BY SECTOR
IV.1
IV.2
IV.3
Structure of production and employment, 2001-05
Growth of labour productivity, 2001-05
Tariffs affecting imports of selected agriculture products into Malaysia
1
5
10
14
17
21
22
24
36
43
46
47
54
57
58
59
60
61
71
72
73
74
76
77
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Trade Policy Review
Page
IV.4
IV.5
IV.6
IV.7
IV.8
IV.9
IV.10
IV.11
IV.12
IV.13
IV.14
IV.15
IV.16
IV.17
IV.18
Overview of domestic support measures, 1998 and 2004
79
Production of major agricultural products, 2001-03
81
Manufacturing production index, 1995 and 2000-04
85
Export, employment, total output, and value added for selected manufacturing subsectors, 2003 87
Exports and imports of selected electrical and electronic products, 2004
87
Tariff reductions on selected ITA products by Malaysia
89
Tariff and excise rates on imported passenger vehicles, 2004-05
92
Overview of market access requirements in selected services sectors in Malaysia
93
Assets of the financial system, 2004
95
Top ten domestic banking groups, by total assets, end-June 2004
96
Top ten foreign banks, by assets, June 2003
97
Top ten insurance companies, 2001 and 2002
98
Telecoms: trends and forecast, 2000-07
101
Major foreign exchange earnings, 2004
103
Tourist arrivals and receipts, 2000-05
103
APPENDIX TABLES
I.
ECONOMIC ENVIRONMENT
AI.1
AI.2
AI.3
AI.4
Merchandise exports by group of products, 2001-04
Merchandise imports by group of products, 2001-04
Merchandise exports by destination, 2001-04
Merchandise imports by origin, 2001-04
III.
TRADE POLICIES AND PRACTICES BY MEASURE
AIII.1
AIII.2
AIII.3
Summary analysis of the Malaysian's MFN tariff, 2001 and 2005
Import licensing approval, 2005
Khazanah investment holdings by sector and company
113
115
117
118
119
120
123
Malaysia
SUMMARY OBSERVATIONS
(1)
ECONOMIC ENVIRONMENT
1.
Trade and trade-related policies
remain integral parts of Malaysia's broad
economic development strategy, whose key
objectives are economic growth sufficient for
the attainment of developed country status by
2020 and an equitable distribution of the
resulting wealth. Hence, during the period
under review (2001-05), Malaysia has
continued to liberalize its policies on
international trade and foreign investment.
Indeed, imports and exports of goods,
respectively, were on average equivalent to
86% and 110% of GDP during that period.
Inflows of foreign direct investment (FDI),
although down from the high level of 7% of
GDP between 1990-97, were still around 3%
of GDP during the period 1999-04, a level
more in line with the world average.
2.
As a consequence of its openness to
trade together with prudent macroeconomic
and structural reforms in key areas, it looks as
if the Malaysians economy has now fully
recovered from the Asian financial crises in
1997-98. Growth in real GDP, after slowing
to 0.3% in 2001, owing to a contraction in
exports, rebounded to 4.4% in 2002, 5.4% in
2003, and 7.1% in 2004. At the same time,
both unemployment and inflation have
remained low during the period under review,
with unemployment at around 3.5% and
inflation within the 1-2% range. Real GDP
growth for 2005 is expected to consolidate at
5%, due to slower world growth and trade
activities, the downward trend in the global
semiconductor cycle, higher imported inflation
arising from relatively higher world oil prices,
and lower prices of commodities, particularly
palm oil, Malaysia's main agricultural export.
3.
Malaysia's current account surplus
widened from 8.3% of GDP in 2001 to 12.6%
of GDP in 2004. The current account position
is due to merchandise trade; Malaysia has a
persistent deficit on invisibles trade.
WT/TPR/S/156
Page vii
4.
With the exchange rate pegged to the
U.S. dollar (until July 2005), thereby limiting
the scope for independent monetary policy,
compensatory
fiscal
policy
sustained
Malaysia's growth momentum between 2001
and 2003 in the face of softening global
demand and uncertainties created by the
11 September attacks, the war in Iraq, and
SARS. In the process, federal government debt
rose appreciably, albeit from relatively low
levels. Post-crisis reforms to restructure the
financial sector and clean up balance sheets
have been almost completed and the financial
and corporate sectors have been strengthened.
Restrictions on foreign exchange transactions
were lifted gradually and the liberalization of
the trade and investment regime has
continued. In July 2005, Malaysia abandoned
its currency peg against the U.S. dollar and
replaced it with a "managed float" system
based on a basket of currencies. This marked
the end of almost all of the capital controls
that had been established in September 1998
in the wake of the Asian financial crisis.
5.
Malaysia's
economic
slowdown
earlier in the period under review highlighted
the problems associated with over-reliance on
an export-led growth strategy, particularly in
electrical and electronic products and the
consequent
vulnerability
to
industrial
countries' business cycle. To address this
issue, measures have been taken to develop
new sources of growth, whereby agriculture,
resource-based industries, high-technology
manufacturing and services have been given
higher prominence in order to improve the
economy's competitiveness and resilience to
shocks.
(2)
TRADE
POLICY
REGIME:
FRAMEWORK AND OBJECTIVES
6.
There has been little change in
Malaysia's
trade-related
institutional
framework since its last Review. Malaysia has
continued efforts to liberalize its relatively
open trade and investment regime. In the
WTO, Malaysia has implemented its Uruguay
Round commitments, has unilaterally lowered
tariffs in its annual budget exercises, and is
WT/TPR/S/156
Page viii
participating
actively
Development Round.
Trade Policy Review
in
the
Doha
7.
One notable feature of the review
period is that Malaysia has joined the trend in
the south-east Asian region of seeking closer
economic relations at both the regional and
bilateral levels. Thus, in addition to moving
with its ASEAN partners towards achieving a
single market by 2020 and full participation in
the APEC forum under its 2004 Individual
Action Plan, Malaysia, since the WTO's Fifth
Ministerial talks in 2003, has been actively
seeking bilateral free-trade agreements, with
an important investment component, with
Australia, India, Japan, Korea, New Zealand,
and Pakistan.
Through ASEAN, it is
participating in regional free-trade and
investment negotiations with Australia/New
Zealand, China, India, Japan, and Korea. It
has also signed a trade and investment
framework agreement with the United States.
The Malaysian authorities maintain that
existing as well as planned bilateral and
regional free-trade agreements are consistent
with, and complement, the multilateral
framework for trade negotiations. Although,
negotiation of a number of ASEAN-wide as
well as bilateral agreements could increase
competition in Malaysia, such agreements also
raise issues of uniformity and consistency as
well as trade diversion. These FTAs could
erode the competitive position of suppliers
with MFN access to the Malaysian market.
8.
In terms of investment liberalization,
equity holdings in all new manufacturing
projects have been fully liberalized; foreign
investors can now hold 100% equity in all
investments in new projects as well as
expansion/diversification projects. Malaysia
has also relaxed its guidelines to provide
greater flexibility for foreign equity
participation in local firms; for acquisitions
by Malaysian and foreign interests, the only
equity condition is to maintain at least 30%
bumiputera equity. Sectors deemed strategic,
such as broadcasting, water and energy
supply, banks, and health, however, are still
limited to 30% foreign equity participation.
(3)
TRADE POLICIES AND PRACTICES BY
MEASURE
9.
During the period under review
(2001-05), Malaysia's economy has remained
relatively open to trade and foreign
investment. The tariff continues to be the main
border measure affecting imported goods and
accounted for 5.4% of overall tax revenue in
2004. Over one third of tariff lines remain
unbound and the considerable gap between
bound and applied tariffs creates a degree of
unpredictability for traders in the sense that
there is significant scope for the authorities to
raise tariffs. However, applied tariffs have
come down in successive annual budget
exercises to an MFN average applied rate of
8.1% in 2005, compared to 9.2% in 2001.
Patterns of MFN tariff dispersion and
escalation have changed little since 2001.
10.
Imports are generally treated in the
same way as domestically-produced goods as
regards excise duty; an exception concerns
the rebate of excise duty for national car
manufacturers.
Approximately 27% of
Malaysia's tariff lines are subject to import
licensing, a substantial part of which appears
to be non-automatic. This would seem to
provide the authorities with scope for
administrative discretion to encourage or
discourage certain types of activity.
In
particular, the Ministry of International Trade
and Industry (MITI) oversees a system of
approved permits that allows the holder to
import foreign-built or assembled cars and
distribute them locally; this can act as a
quota, restricting the total number of cars that
can be imported. Malaysia has become quite
an active user of contingency measures,
initiating 17 anti-dumping actions during the
review period, and has been the target of
26 investigations. Malaysia is also planning
to develop safeguard legislation.
11.
Malaysia has phased out all
remaining trade-related investment measures
as well as local-content requirements in the
automotive industry.
The Government
continues to be an important purchaser of
goods and services, with the government-
Malaysia
procurement market equivalent to 20% of
GDP in 2004.
Preferential government
procurement procedures continue to favour
locally owned businesses, especially for
smaller amounts. International tenders are
invited only if goods and services are not
available locally.
The Government also
affects procurement and supply of goods and
services through its extensive ownership of
enterprises. Malaysia is not a party to the
WTO Plurilateral Agreement on Government
Procurement.
12.
Export duties and export licensing
measures play a role in Malaysia's industrial
policy. Export taxes and extensive licensing
arrangements are applied to certain exports
such as timber, which has the effect of
discouraging the export of those goods and
reducing their domestic prices. The aim of
such measures, according to the authorities, is
to foster the development of downstream
industries, which provide value-added content.
In 2001, 36% of Malaysian tariff lines were
subject to export licensing requirements and in
2005 the situation appears to be similar. At
the same time, export assistance is provided
through various measures, including: import
duty exemptions/drawbacks, tax relief,
concessionary credits, insurance, and
guarantees, as well as government-sponsored
promotion and marketing assistance.
13.
Standards activities have been
recognized as one of Malaysia's priorities to
achieve developed nation status by 2020.
Malaysia aims to align Malaysian standards
with international standards and, as of May
2005, some 51% of Malaysian standards were
so aligned, up from 35% in 2001. Malaysian
standard
setting
committees
choose
international standards as the primary option
in revising standards and creating new ones;
about 80% of around 350 standards adopted
annually are aligned. Malaysia's role in the
development of halal certification, earned the
citation of the UN Codex Alimentarius
Commission of Malaysia as the best global
example for halal food production. This
reflects the objective of the Government to
WT/TPR/S/156
Page ix
develop the country as a hub for halal food
products.
14.
Tax incentives have long been an
important instrument of Malaysia's economic
development strategy.
They apply to
investments in manufacturing, agriculture,
tourism and approved services as well as
R&D, training, and environmental protection
activities.
No estimates are available
concerning total tax revenue forgone as a
result of the tax incentive schemes. The
Malaysian system of tax incentives may not
necessarily be leading to improved investment
performance. The publication of estimates of
tax revenues forgone would improve fiscal
transparency in Malaysia and contribute to a
more effective tax policy.
15.
The Malaysian Government has
strengthened its intellectual property regime.
It has sought to improve the enforcement of
intellectual property rights, in particular to
curb infringement of copyrights and trade
marks. The Malaysian authorities maintain
that they have had considerable success in
eradicating optical disc product piracy,
although piracy would seem to remain a
problem along with counterfeiting.
16.
Malaysia
does
not
have
a
comprehensive competition law, but set itself
the target of a drafting a broad competition
law by the end of 2005.
17.
The authorities have focused on the
improvement of corporate governance,
essential for an efficient capital market
capable of mobilizing and channelling savings
into the most productive investments.
Requirements for companies to be listed on the
stock exchange have been revised, the Capital
Markets Master Plan was established in 2001
to set out the strategy for reform, and
government-linked companies (GLCs) are
being restructured.
18.
The State continues to have a strong
presence in most sectors of the economy,
mainly through over 40 listed and non-listed
GLCs, with combined assets equivalent to
WT/TPR/S/156
Page x
more than half of Malaysia's GDP. Some of
the biggest GLCs are Petronas (oil and gas),
Tenega (power), Malaysian Airlines, Proton
(the car company), and Telekom Malaysia.
Recent steps to reform these companies are
part of a broader effort to improve the
transparency and performance of GLCs
through the introduction, inter alia, of key
performance indicators and performancelinked compensation for their managers. The
objectives are to create a more arms-length
relationship between the State and GLCs,
make
them
more
independent
and
commercially oriented and encourage greater
private investment in the GLCs.
(4)
Trade Policy Review
and tourism, with the aim of developing
products in new areas of growth.
21.
The most important agricultural
activities are production of food commodities
and of plantation crops for international
markets, led by palm oil, rubber, and timber.
To promote the development of agriculture,
which accounted for 7.5% of gross exports in
2004, the Government is focusing on
increasing productivity and competitiveness
through higher value-added activities and
utilization of modern technology.
In
particular, current development expenditure is
focused on agriculture and R&D in halal
products is being actively promoted.
TRADE POLICIES BY SECTOR
19.
During the review period, competition
has intensified for Malaysian industries as
domestic barriers are dismantled through
bilateral and regional FTAs and through WTO
negotiations, and as low-wage countries,
especially
China,
erode
Malaysia's
competitive advantage in unskilled, labourintensive manufacturing.
Competitive
pressures are moving the Malaysian economy
to the upper end of the value-chain, producing
knowledge- and technology-intensive goods as
well as supplying services. In 2001, the Third
Outline Perspective Plan and the Eighth
Malaysia Plan emphasized the Government's
commitment to moving from an input-driven to
a
knowledgeand productivity-driven
economy in order to generate sustainable
economic
growth
and
maintain
competitiveness. A significant challenge in
this regard is the speed at which new domestic
sources of growth can be found, which
depends considerably on the gains in total
factor productivity (TFP). In 2001, this was
projected to grow at an annual rate of 2.8%,
but was substantially lower, at 0.8% for the
period 2001-03. It was expected to return
during 2004-05 to around 1.7%, more in line
with Malaysia's historical experience.
20.
The Government is promoting
domestic and foreign investments in selected
subsectors,
notably
high-technology
manufacturing, ICT, biotechnology, education,
22.
The manufacturing sector has long
been the catalyst of growth. Malaysia, one of
largest exporters of semiconductors in the
world, is now climbing the value chain to
move its electronics industry from commodity
chip-making to testing and design in order to
stay ahead of competitors.
Generally,
however, Malaysia's export orientation may be
more difficult to sustain as an increasing
number of countries pursue export-led
economic growth. Despite heavy protection
over the years, Malaysia's domestic car
makers, and notably Proton, have seen their
market share decline as the Malaysian car
market becomes increasingly open. With the
2008 deadline for liberalization of the
automotive sector drawing nearer, some
segments of the industry may have to
restructure
to
achieve
international
competitiveness.
23.
Services accounted for some 60% of
GDP in 2004. In general, the services sector
is not yet as open to trade as agriculture and
manufacturing, due perhaps to restrictions on
foreign direct investment. The Government
has identified services as one of the key
drivers of economic growth, with the focus on
selected industries, including tourism, health,
education, Islamic finance and information
and communications technology (ICT)-related
and manufacturing-related services. Tourism
has become Malaysia's most successful service
sector and has increased in importance as a
Malaysia
source of economic growth. Negotiations at
regional and global level to liberalize trade in
services
offer
both
challenges
and
opportunities for Malaysia's relatively
protected sector in terms of the need to
increase competitiveness.
In financial
services, for example, Malaysia has sought to
boost the competitiveness of locally owned
financial institutions, through measures to
enhance consolidation and mergers, in
anticipation of increased competition from
foreign-owned financial services providers.
(5)
OUTLOOK
24.
Healthy foreign exchange reserves, a
relatively small external debt, as well as
financial and corporate sector restructuring
have strengthened the economy and its
resistance to external shocks. Nonetheless, the
economy remains vulnerable to downturns in
key markets.
The near-term outlook is
favourable with real GDP growth projected to
moderate to 5% in 2005 and 5.5% in 2006 in
line with global trends. The main concern is
lower than anticipated growth in the external
demand for Malaysia's exports stemming from
sustained,
substantially
higher
than
anticipated world oil prices.
25.
In the medium term, Malaysia is likely
to remain vulnerable to industrial countries'
WT/TPR/S/156
Page xi
business
cycle,
although
continued
implementation of sound macroeconomic
policies and sustained structural reform efforts
could diversify the industrial and export
structure more rapidly than expected and
strengthen Malaysia's resilience to shocks.
Policies will continue to focus on improving
the business and investment climate primarily
by reforming government-linked companies,
which play a major role in the Malaysian
economy.
26.
On the trade and investment front,
import competition may be expected to
intensify as domestic barriers are dismantled.
Malaysia expects exports to ASEAN to grow
due to further liberalization of intra-ASEAN
trade. In the face of increased competition
from China in goods markets, Malaysia is
focusing on higher value-added exports and
encouraging services exports.
Malaysia
recognizes that it has a role as a gateway to
the ASEAN market and is offering incentives to
foreign companies as it competes for FDI
against regional neighbours and the much
bigger economies of China and India. A
flexible exchange rate regime, backed by
sound economic fundamentals, may enhance
investors' perception of the country and
encourage inflows of capital. Domestic and
foreign investment is likely to remain a key
factor in bringing about Malaysia's
transformation
to
a
knowledge-based
economy.