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IV. TRADE POLICIES BYSECTOR
(1) Overview
1. Thetrade andtrade-related measures described inChapter IIIeachtendtofavour onesector
oranother overothers. Forexample, average applied MFN tariffs arerelatively highforimports of
products liketropical fruits, vegetables, beverages, tobacco, textiles, aswellasmotor vehicles and
motorcycles compared tomostother primary andmanufacturing sectors, forwhich tariffs arelowif
notzero. Non-tariff border measures, largely involving non-automatic licensing fortheadministration
ofSPSstandards andenvironmental reasons aswellasforprotectionist purposes, aremore pervasive
foragricultural products andautomobiles thanforthemajority ofotherproducts (Table AIV.1). Export
taxes andother charges arelevied mainly onprimary products. Taxincentives areconcentrated in
machinery andelectronics aswellaswood, paper andrubber products. Other measures, including
regulations which limitmarket access, pertain mainly totheservices sector.
2. These measures, bothindividually andincombination, mayaffect various industries andeven
firms differently, thusproducing "winners", namely thenetbeneficiaries, andrelative "losers", that
is,those industries orfirms whoeither donotbenefit from suchmeasures orareadversely affected
bythem. Forinstance, therelatively hightariffs onimported automobiles together withtheexcise
taxreduction applicable toselected automobile manufacturers, directly favour producers ofthelatter.
Moreover, given theinterlinkages between sectors, measures applied toonesector mayfeedthrough
toothers; forexample, insofar asmeasures applied togoods andservices produced inonesector tend
toincrease theirprices, andthose goods andservices areusedasinputs byanother sector, thelatter's
costswillbeadversely affected. Bycontrast, taxandnon-tax incentives orsubsidies accorded tofirms
producing goods andservices inonesector, reduce notonlythecostsofthose firms, butalsothecosts
offirmselsewhereforwhomthosegoodsandservicesareinputs.Similarly,measuresdirectlyapplicable
toinputs, notably capital andlabour, affect thecostsfaced byfirms using those inputs. Evenaseemingly
general measure, suchasaninvestment orR&D incentive, affects different industries andfirms
differently, depending ontheircapital andR&D intensities.
3. While government assistance maynotnecessarily beoneofthemaindeterminants ofbusiness
decisions, itwould besurprising ifthewide array ofmeasures currently usedinMalaysia didnot,
inonewayoranother, significantly influence theallocation ofresources between andwithin sectors.
Onewould expect resources tohave moved from those sectors, such asmost agricultural and
manufacturing sectors, thatreceive relatively little, ifany,assistance bymeans ofthese measures to
those sectors thatareheavily favoured.
4. Malaysiahasindeedexperiencedsignificantinter-sectoralshiftsinproduction,andthusresources,
since thelastReview (Table I.3). Inbroad terms, production hasshifted from agriculture and
resource-based industries intomanufacturing andservices. Asaconsequence, thecombined share
oftheprimary sector inGDP fellfrom 28.5in1990 to19.9in1996. Bycontrast, theshare of
manufacturing inGDProsefrom30.5in1990to34.2percentofGDPin1996, while thecorresponding
share ofservices increased from 42.5to44.8 percent.WT/TPR/S/31 Trade Policy Review
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(2) Primary Sector
(i) Main Features
5. Malaysia 'sagricultural trade policies are,withafewnotable exceptions, remarkably liberal,
especially asfarastariff andnon-tariff border measures areconcerned. Generally speaking, import
tariffs onagricultural products arelow,averaging 4.8percentin1997, ifspecific duties areexcluded.
However, veryhighspecific duties (involving advalorem equivalents ofupto1,772 percentona
fewsensitive items) quadruple theaverage tariff foragricultural products to20.2percent. Although
awide range ofproducts remain subject toimport licensing andsanitary andphytosanitary (SPS)
measures, itappears thatthese measures restrict imports inonlyasmall number ofcases. Non-border
measures, notably credit subsidies, arealsoused. These subsidies, together withaninflux oflow-skilled
foreign workers, haveenabled Malaysia tomaintain thecompetitiveness ofitsagricultural products
onworld markets. Indeed, exports ofpalmoilhaveensured asignificant trade surplus inagricultural
trade (Chart IV.1).1Land areas usedforpalm oilhaveincreased significantly, partly reducing land
available forother agricultural commodities; thelackofarable landisaconstraint onthedevelopment
oftheagricultural sector inMalaysia (Table IV.1).
Table IV.1
Production ofselected agricultural commodities andtheir useofland, 1990, 1995 and2000
Land areaused
('000hectares)Production
('000tonnes)Small-
holder
production
share (%)Number of
producers
('000)
1990 1995 2000a1990 1995 2000a1996 1996
Industrial commodities
Rubber 1,823.1 1,696.0 1,400.0 1,291.0 1,106.1 1,014.0 ... 59.0b,c.
Palm oil 2,029.5 2,479.0 2,622.2 7,939.3d10,209.2d11,934.0d... ...
Cocoa 419.8 245.0 250.0 247.0 151.9 156.0 ... 37.4b
Pepper 11.5 8.6 8.1 31.0 16.5 15.6 ... ...
Pineapple 9.3 11.8 14.7 168.3 178.0 191.0 ... ...
Tobacco 10.2 10.5 10.0 10.2 10.3 13.0 ... ...
Food commodities
Paddy 662.6 666.3 400.0 2,016.3 2,159.2 1,940.0 95 296.0
Coconut 314.1 284.0 219.7 1,530.8 2,190.5 3,300.0 90 168.4
Vegetables 31.4 36.3 42.1 693.9 793.8 1,050.0 100 17.5
Fruits 177.3 244.5 345.1 1,257.0 1,136.0 1,027.0 95 305.0
Totale5,546.3 5,769.2 5,368.4 n.a. n.a. n.a. ... ...
n.a. Notapplicable.
... Notavailable
a Forecast.
b Peninsula Malaysia only.
c Employment atestates asreported onthe1994 Census.
d Including crude palm oilandpalm kernel production.
e Total includes landusebyother agricultural crops andlivestock production.
Source: Dataprovided bytheMalaysian authorities; 1994 Annual Census ofcoconut, cocoa, teaandrubber estates; andGovernment
ofMalaysia (1996), Seventh Malaysia Plan, Kuala Lumpur, p.p.230-231.
1DatabasedontheHSdefinitionofAgricultureasagreedintheUruguayRoundsuggeststhatin1995Malaysia
imported US$3.7 billion ofagricultural products ascompared toUS6.9 billion ofexports. 76.7 percentof
Malaysia 'sagricultural exports consisted ofanimal andvegetable fatsandoils,which includes palm oil.Malaysia WT/TPR/S/31
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WT/TPR/S/31 Trade Policy Review
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6. Themining sector makes animportant contribution toGDP, employment, tradeandgovernment
revenue. Oilandgasarethemain products. Whereas goldproduction hasincreased, tinproduction
hasdeclined substantially asaconsequence ofthegradual depletion ofdeposits (Table AIV.4).2
Malaysia 'spolicy objective inthesector istoensure theefficient exploitation ofthecountry 'snatural
resources andthetransfer oftechnology andknow-how tolocal resource-based companies. Trade
policies inthissector havebeenliberalized since theprevious review, withbothexport andimport
duties reduced.3However, price controls continue toapply toindividual petroleum products.4The
state-owned oilcompany Petronas alsocontinues tobethemain vehicle (other thanexport taxes) for
theappropriation ofresource rents from oilandgas. Totheextent thatPetronas isobliged bythe
Ministry ofFinance 'spublic procurement regulations toaccord preferences toMalaysian firms
(Chapter III(4)(v)), these resource rents are,ineffect, partly usedtocross-subsidize those firms'
activities.5Although Petronas continues toenjoy significant market power, thetrade liberalization
measures applied toother mining sub-sectors havetended tocontribute toamore efficient exploitation
ofMalaysia 'snatural resources.
(ii) Policy objectives intheagricultural sector
7. Policies intheagricultural sector areguided bytheNational Agricultural Policy (NAP),
1992-2010,formulatedinJanuary1992(AnnexII.1).TheNAPdefinesastheoverridingpolicyobjective
"themaximisation ofincome through optimal utilization ofresources".6Sub-objectives ofthepolicy
include abalanced andsustainable development oftheagricultural sector andanenhanced integration
with other sectors, particularly thefood-processing sector. These objectives focus agricultural
development mainly onactivities withacompetitive edgeandthusoffering higher economic returns,
while constraints originating fromthesub-objectives leadtosignificant protection inasmall number
ofsectors. Policies areadministered bytheMinistries ofAgriculture, Primary Industry andFinance,
aswellasbytheMalaysian Industrial Development Authority (Table II.1).7
2Malaysia hasbecome anetimporter oftinastheannual production oftinhasdeclined gradually.
Consequently, Malaysia nolonger seesaroleforitself intheAssociation ofTinProducing Countries (ATPC)
andwilltherefore bewithdrawing from theAssociation witheffect from 1January 1998.
3Export duties onalmost allminerals other thanpetroleum have been abolished orreduced. Furthermore,
inthe1996budget,importdutyongoldwasremovedsoastoencouragethedevelopmentofthejewelleryindustry.
4Theretail price forindividual petroleum products aresubject tocontrols under thePrice Control Act1946
andtheControl ofSupplies Act1961 (Chapter III(4)(vi)). Prices aredetermined through anAutomatic Pricing
Mechanism(APM),asestablishedin1983,afterconsultationbetweentheGovernmentandindustryrepresentatives.
TheMechanism aims toprovide anequitable andtimely basis forretail price adjustments toreflect changes in
productioncostsandoperatingexpenses.Themechanismisbasedona"costbuild-up"whichcomprisesproduction
costs, exchange rates, operating costs, company margins, dealers commissions, andgovernment duties/subsidies.
5However, preferential treatment ingovernment procurement isonlygiven tolocally available suppliers.
Furthermore, Petronas isrequired toaccord preferential treatment tolocal suppliers only forvalues upto
RM15million. Procurement exceeding RM15million isopen tointernational bidders.
6Government ofMalaysia (1993), p.4.
7TheMinistry ofAgriculture isthemain government authority formulating agricultural andfishery policies
(Table II.1). Asinthecaseofother Ministries, public, semi-public andprivate organizations advise thisMinistry
onspecific issues (Table AIV.3). Forestry andresource based industries areunder theMinistry ofPrimary
(continued...)Malaysia WT/TPR/S/31
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(iii) Main policy instruments intheagricultural sector
Border measures
8. Inorder toenhance productivity gains andreduce inflation8,theMalaysian authorities have
liberalized import conditions attached tofood, especially beef, chicken andvegetables.9With the
exception ofeggsandunmanufactured tobacco, import tariffs arezeroforallproducts forwhich
quantitative restrictions were "tariffied" inaccordance withtheWTO Agreement onAgriculture.10
Import tariffs onagricultural items produced intemperate climates areparticularly low. Forexample,
tariffs ononions, potatoes, wheat, andmaize areallzero. Advalorem components ofimport tariffs
fortropical fruitandvegetables arealsolow. Bycontrast some advalorem equivalents ofspecific
duties onsome "sensitive" products areveryhigh (Table IV.2). However, withtheexception of
unmanufactured tobacco andrice,allother tariffs, including those ontropical fruit, arescheduled to
bereduced to0-5percentby1January 2003.
Table IV.2
Selected agricultural product groups subject tospecific duties
HS
category
(2-digit)Descripton Number oflines Average excluding
AVEs ofspecific,
mixed andalternative
duties
(percent)Average including
AVEs ofspecific,
mixed and
alternative duties
(percent)
0708 Leguminous vegetables, shelled or
unshelled, fresh orchilled5 1.0 165.8
0801 Coconuts andcashewnuts 7 2.1 5.7
0803 Bananas 5 5.0 73.0
0804 Dates, figs,pineapples,
avocadoes, guavas, mangoes and
mangosteens7 5.7 29.4
0805 Citrus fruit, fresh ordried 9 9.4 13.1
0807 Melons andpapaws (papayas) 4 5.0 54.0
0810 Fresh fruitn.e.s. 15 5.0 37.8
2401 Unmanufactured tobacco 5 5.0 356.7
Source: Calculated bytheWTO Secretariat from dataprovided bytheMalaysian authorities.
7(...continued)
Industries. Agro-processing industries areunder thepurview oftheMinistry ofInternational Trade andIndustry
andinvestment incentives foragricultural activities areallocated through theMalaysian Industrial Development
Agency (MIDA) (Chapter II(2)). TheMinistry ofFinance isthefinal arbiter onimport andexport tariffs.
8Food accounts for34.9percentoftheconsumer price index, while beverages andtobacco account foran
additional 3.6percent(Bank Negara Malaysia (1996a), p.P-101.
9Government ofMalaysia (1996a), p.19.
10Import tariffs oneggsare5percentandimport tariffs onunmanufactured tobacco andtobacco refuse are
5percentplusRM50perkg.withadvalorem equivalents in1996 ranging from 8.8to907.4 percent.WT/TPR/S/31 Trade Policy Review
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9. Malaysia does notofficially maintain tariff quotas forproducts forwhich quantitative
restrictions havebeentariffied, buthasreserved, butnotused, therighttousethespecial safeguard
provisions under theWTO Agreement onAgriculture.11However, these products remain subject to
import licences whose validity varies byproduct: forsome agricultural products, suchaschicken, eggs,
meatandproducts, theyarevalidforonemonth, while those forother products, suchastobacco, are
validforoneyear(Table III.6). Import licences forcoffee andcabbages areissued depending onthe
situation ontheMalaysian market thusconstituting a"variable quota".12Import licensing, tomonitor
theimplementationofSPS,environmentalandothertechnicalmeasuresis,astobeexpected,particularly
important foragricultural products.13Labelling isalsoimportant forfoodproducts imported into
Malaysia (Chapter III(4)(iv)).14
10. Malaysia hasnoexport subsidy programmes subject toreduction commitments.15Rubber,
pepperandsomewooditemsaresubjecttoexporttaxes,ostensiblyonenvironmentalgrounds.However,
export taxes forlogsandpalm oilarealsolevied toencourage domestic processing ofthese items
(Chapter III(3)(ii)). Furthermore, some agricultural exports, suchaspoultry, prawns, milk, tropical
fruitandvegetables, aresubject toexport licensing requirements (Table AIII.5).
Domestic policy measures
11. Thelargest outlay inconnection withadomestic support programme involves thefinancing
ofaminimum price forrice(seebelow). Other programmes concern public investment indrainage
andirrigation facilities, subsidies forfertilizers, support forresearch anddevelopment, andsupport
formarketingandextensionservices(TableIV.3).Inaddition,theCentralBank(BankNegaraMalaysia)
provides funding ataconcessionary rateof1percenttofinancial institutions foronward lending to
customs at4percenttopromote investment innewproductive capacity.
11WTO document G/AG/N/MYS/3, 16April 1996.
12In1995,importsforbothcabbageandcoffeeexceededthetariffquotasallocatedinMalaysia'sWTOSchedule
(WTO document G/AG/N/MYS/4, 10July1996). Moreover, minimum prices aremaintained forcabbage at
60c/kg. Some 71percentofcoffee consumption isimported, theremainder being locally produced by
smallholders.
13In1995, import licensing tomonitor theimplementation ofSPSandenvironmental measures covered
100percentoftariff lines inHSchapters 1and10;itcovered between 60and100percentoftariff lines in
HSchapters 2,5,6,7,8and11;anditcovered between 20and60percentoftariff lines inHSchapters 4,
9,12,32,36,38,47,62(Chapter III(2)(iii)).
14Labelling isgoverned bytheFood Act(1983) andtheFood Regulation (1985) aswellasthePrice Control
(Labelling byManufacturers, Importers, Producers andWholesalers) Order 1990.
15WTO document G/AG/N/MYS/2, 6March 1996.Malaysia WT/TPR/S/31
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Table IV.3
Overview ofdomestic support measures, 1995-96
Measure name Description Value ofMeasure
(RM m.)
1995 1996
Price subsidy andguaranteed
minimum priceaSeeSection IV(2)(iv). 386.0 400.0
Fertilizer subsidybThemeasure isaimed atincreasing productivity andinencouraging
good agricultural practices (GAP) amongst small holders. Paddy
farmers withpaddy landbelow 2.4hectares or6acres ofpaddy land
receive 40kg.(2bags) ofureaand80kg.(4bags) mixture (nitrogen,
phosphate andpotassium) forevery acre.86.0 90.0
Agricultural creditbThemeasure isaimed atreducing production costs andencouraging
farmers tobelessreliant onoutright subsidies. Concessionary credit is
alsoprovided topromote innovations onagricultural practices,
promote productivity improvements, hence increasing production and
income. Individual farmers andsmall holders onlyareeligible for
these credit concessions.450.0 Discontinued
since 1996
Drainage andirrigation
facilitiesaGeneral services which benefit rural andsmall-holder farmers 240.7 287.0
Research anddevelopmentaGeneral service provided tomost crops andagricultural programmes
involving small-scale farmers toreduce unitcosts, enhance efficiency
andfinding newusers35.6 30.0
Marketing supportaMarketing ofproduce islimited tosmall-holder producers 15.1 21.5
Extension servicesaGeneral services which benefit rural andsmall-holding farmers and
include pesticide inspection services andtransfer oftechnology to
producers4.6 4.4
a Notified totheWTO bytheMalaysian authorities asameasure which isexempt from thereduction commitment asa"Green
box" measure.
b Notified totheWTO bytheMalaysian authorities asameasure which isexempt fromthereduction commitment under theprovisions
ofspecial anddifferential treatment "Development Programmes".
Source: WTO document G/AG/N/MYS/6, 20January 1997; andinformation provided bytheMalaysian authorities.
(iv) Policies targeted atthepaddy andricesector
(a) Paddy
12. Paddy production increased between 1990 and1994, butsince thenhasdeclined somewhat
(Table AIV.2). In1995, paddy farming covered thethirdlargest landareausedforagriculture after
palm oilandrubber estates, with 95percentmanaged bysmall-holder producers; atotal of
296,000 producers wereengaged inricefarming (Table IV.1). Theself-sufficiency ratioforpaddy
dropped from 80percentin1990 to75percentin1995 andisexpected todropto65percentby
theendoftheSeventh Malaysia Planin2000.
13. TheGovernment maintains aGuaranteed Minimum Price andaPaddy Price Subsidy forpaddy
farmers. Theobjective isto"ensure afairandstable price ofpaddy andtoreduce theincidence of
poverty among thepaddy farmers". Under theGuaranteed Minimum Pricescheme, Bernas (aprivatized
state-trading enterprise) undertakes tobuypaddy fromfarmers atnotlessthantheguaranteed minimum
price, which iscurrently RM49.61 per100kg.forlonggrain andRM46.30 per100kg.formediumWT/TPR/S/31 Trade Policy Review
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grain.16Under thepaddy pricesubsidy programme, theGovernment makes fixedpayments (currently
RM24.81 per100kg.)tofarmers forthepaddy soldbythemtoanycommercial ricemill. Thissubsidy
isinaddition totheprice received bythefarmers forthepaddy, andconstitutes thelargest source of
domestic support foragricultural production (Table IV.3).
(b) Rice
14. Only onecompany, "Bernas Berhad", ispermitted toimport riceintothecountry
(Chapter III(2)(v)).17Bernas hasnostatutory power orauthority andissubject tothesame lawsand
rulesasother ricemillers andtraders inthecountry; itundertakes toimport riceandimplement rice
price subsidy programmes under along-term contract withtheGovernment.18Bernas generally buys
riceabroad under contracts valid forthree-to sixmonth periods.19Thedeficit isdetermined bythe
shortfall ofproduction overconsumption. Imports gradually increased during theperiod 1994-96,
butareexpected todecline somewhat in1997 (Table IV.4).
Table IV.4
Domestic production andimports ofrice, 1992-97
('000metric tons)
Item 1992 1993 1994 1995 1996 1997a
Domestic riceproduction 1,240 1,288 1,314 1,373 1,370 1,370
Imports 452 395 343 437 562 500
Estimated consumption 1,692 1,683 1,657 1,810 1,932 1,870
a Forecast.
Source: WTO document G/STR/N/1/MYS, 15August 1995; andinformation provided bytheMalaysian authorities.
15. Price controls apply tostandard riceatRM85.31 per100kg.andforpremium quality rice
atRM92.51 per100kg.Ricemillers arerequired toproduce 30percentoftheiroutput atstandard
andpremium quality. Astheyarefreetodetermine prices forsuper quality rice,profits realized on
16Under theRiceOrder (Control ofGrades andPrices) 1992, ricemarketed inMalaysia isclassified according
tothree major grades, namely super grade, premium grade andstandard grade.
17Distribution oftheimported ricebyBernas isalmost entirely bymeans offirst-hand sales; theimported
riceissoldex-Bernas warehouse towholesalers whointurndistribute ricedirectly toretailers. Bernas does
notcompete todistribute ricedirectly toretailers. There aremore than1,000 ricewholesalers inthecountry.
Furthermore, Bernas manages astockpile asafood reserve tomeet contingency needs andtoensure astable
supply ofriceintothemarket.
18Bernas procures paddy from farmers andmills riceasabusiness operation. Itcompetes with176other
private ricemillers intheprocurement ofpaddy andmarketing ofitsmilled rice. Bernas purchases about
45percentofthemarketable surplus paddy annually.
19Ostensibly,riceimportsarebasedoncommer cialandmarketingconsiderations.Thetype,gradeandquality
ofricethatisimported isdetermined bydomestic market preferences andneeds. Import sources arechosen
onthebasis ofcommercial considerations, namely quality andprice. Bernas procures thericethrough exporters
intherelevant exporting countries bywayofquotations ortenders. Forstrategic reasons, Bernas hasalso
diversified itssources ofsupply inorder toreduce itsover-dependence onasingle source, which might make
supply vulnerable during periods ofsupply difficulty orcrisis. Thailand andVietNamarethemajor ricesuppliers
forMalaysia (WTO document G/STR/N/1/MYS, 15August 1995).Malaysia WT/TPR/S/31
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thisqualitymaybeusedtocross-subsidizetheminimumproductionrequirementforstandardandmedium
quality.
(3) Manufacturing
(i) Main features
16. Incontrast toagriculture andmining, themanufacturing sector hasbeenthedriving force of
theMalaysian economy since themid-1980s. Over the1986-95 period, manufacturing value added
increased byanannual rateof13.5percentascompared toanaverage GDP growth of7.8percent;
in1995, theshare ofmanufacturing inGDP reached 33.1percent. During thesame period,
manufacturing employment grew atanannual rateof8.9percentreaching 2million or10percent
ofthepopulation in1995. Increases inthescaleofemployment andthevolume ofcapital employed
(byvirtue ofinvestment) werethemain determinants ofincreases inmanufacturing output andvalue
added, while totalfactor productivity growth wasonlyofminor importance (Chapter I).Export demand
formanufactured products, which grew atanaverage annual rateof28.6percentduring theperiod
1986-95, hasbeentheengine ofgrowth inthissector. In1996, manufactures accounted for81percent
oftotalexports. Growth ofthemanufacturing sector wasalsoresponsible forstrong import growth
giventhatin1996,theimportcontentofmanufacturedgoodswas36.2percent(downfrom38.4percent
in1994). Imports required forexport processing thuscontributed toMalaysia 'shighratiooftrade
(imports plusexports) toGDP, which at180percentin1993-1996 ishighincomparison withmany
other WTO members (Chapter I).
17. Border measures aresignificant formanufactured products, withapplied tariffs ranging from
zeroto290percent. Although average tariffs havedeclined markedly sincethelastreview ofMalaysia 's
trade policies, tariff escalation anddispersion haswidened, possibly increasing thedistorting impact
oftariffs onthedomestic allocation ofresources; andexport processing zones anddutydrawback
systems facilitate duty-free treatment ofimports required forexport processing. Import licensing is
alsopervasive, although itmayberestrictive onlyforafewproducts (Chapter III(2)(iii)). Anti-dumping
andcountervailing dutylegislation isinplace, butatthisstage notwidely applied.
18. Avariety ofnon-border measures isalsoused, including standards, government procurement
preferences andparticularly taxandnon-tax incentives. Notwithstanding doubts concerning theefficacy
ofvarious incentives aimed atattracting foreign direct investment (Chapter III,BoxIII.4), such
investment hasundoubtedly made animportant contribution tothehigh rateofgrowth ofthe
manufacturing sector. Indeed, more thanhalfofallmanufacturing firms'equity isforeign-owned;
theproportion isevenlarger inthecaseofexport-oriented firms.
19. Border andnon-border measures haveaffected different industries andfirms differently, with
some industries taking advantage ofvarious measures morethanothers. Electronics firms, forinstance,
havegreatlybenefitedfromlocatingtheiroperationsinexportprocessingzones,whichexemptproducers
fromimport duties onrawmaterials andintermediate inputs, andhavetaken advantage oftaxincentives
forinvestment. Theelectronics industry hasalsobeenoneofthemain beneficiaries ofMalaysia 's
openness toforeign direct investment, asdemonstrated bythefactthatapproximately 96percentof
thesector 'sequity isforeign-owned (Table AIV.6). Asaresult, electronics (included inHSChapter 85)
comprised over48percentofmanufactured exports in1995, upfromunder 42percentin1992, during
aperiod inwhich totalmanufactured exports practically doubled (Chart IV.2).WT/TPR/S/31 Trade Policy Review
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Malaysia WT/TPR/S/31
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20. Whileborderandnon-bordermeasureshaveplayedaroleinalmostallmanufacturingindustries,
itwould appear thattheautomobile andtextile andclothing industries havebeensubject tomeasures
thatareparticularly strongly targeted. Specifically, reduced excise taxes, domestic content requirements
and"vendor" programmes aswellasimport tariffs andlicensing haveplayed animportant roleinthe
developmentoftheMalaysian"national"automobileindustry.TradepoliciesimplementedbyMalaysia's
tradingpartnersandcomplementedbyMalaysia'spoliciesinASEANtogetherwithindustrialadjustment
assistance haveplayed animportant roleinthedevelopment andrestructuring ofthetextile andclothing
industry.
(ii) Textiles andclothing
21. Textiles andclothing isatraditionally important manufacturing sector, which in1996stillmade
astrong contribution toGDP, employment andexports (Table AIV.5). Employment inthesector has
declined since 1993; however, textile production andexports continued togrow andhasbecome
increasingly capital intensive. Bycontrast, clothing production declined during 1993-95, asassembly
operations were shifted offshore. Itrecovered somewhat in1996 (Table IV.5). TheUnited States
andtheEUwere themajor destinations ofclothing exports with, respectively, RM1.5billion and
RM1billion in1995 outofatotaloflessthanRM3.5billion.20
Table IV.5
Overview ofdevelopments inthetextile andclothing sector, 1990-96
1990 1991 1992 1993 1994 1995 1996
ProductionaTexiles (million metres
ofcotton cloth)120.3 145.7 159.2 164.2 206.8 222.7 180.9
Clothing (million units) 69.3 75.6 80.1 80.3 79.4 72.8 74.3
Value added (RMb)aTextiles 17.2 19.9 20.9 24.0 31.3 36.6 ...
Clothingb9.2 9.8 10.6 11.1 11.8 12.6 ...
Employment ('000)cTextilesd30.4 30.7 32.4 34.1 33.1 33.0 31.8
Clothing 45.4 47.2 47.4 49.1 46.2 43.3 42.0
Imports (US$ m.)eTextiles 951 1,131 1,307 1,193 1,394 1,535 1,551
Clothing 76 96 130 128 160 154 156
Exports (US$ m.)eTextiles 343 453 570 668 831 1,129 1,193
Clothing 1,315 1,529 1,877 1,953 2,071 2,266 2,395
... Notavailable.
a Bank Negara Malaysia (1996).
b Including footwear andmade-up textile goods.
c Department ofStatistics (various issues).
d Firms withmore than100employees forthenatural fibre, spinning andweaving mills, dyeing, bleaching, printing, andfinishing
ofyarns andfabric except batik, synthetic fibremills, andfirms withmore than20employees forknitting mills.
e UNSTAT, Comtrade database 1996 exports andimports havebeenestimated through applying totalmerchandise trade annual
growth bythe25largest trading partners, derived from national statistics, totheproduct breakdown of1995.
Source Data provided bytheMalaysian authorities; Bank Negara Malaysia (1996), Quarterly Bulletin, FirstQuarter, Vol.11,No.1;
Department ofStatistics Malaysia (various issues), Monthly Manufacturing Statistics, Kuala Lumpur; andUNSTAT, Comtrade
database.
20Ministry ofInternational Trade andIndustry (1996b), p.93.WT/TPR/S/31 Trade Policy Review
Page 102
Import tariffs21
22. Despite adecline overthepastdecade (Chart III.1), average tariffs ontextile andclothing items
werestill17.2percentin1997. Tariff escalation inexcess ofthatfortheaverage manufacturing sector
hasincreased protection fordown-stream producers (Table IV.6). However, thephasing-in ofAFTA
preferences may have already reduced theimpact oftariff escalation somewhat. Imports of
fully-processed items from AFTA countries aresubject toaverage tariffs oflessthanhalftheMFN
rates, provided theysatisfy therelevant rulesoforigin. By2003, thismargin ofpreference mayincrease
to75percentifMFN tariffs arenotreduced. Foreign equity andforeign labour constitute about three
quarters andonequarter ofthesectoral total, respectively (Table AIV.6). Since the1993 Review of
Malaysia 'strade policies, thetextile andclothing sector isoneofthefewsectors thathaveactually
received assistance under the"Industrial Adjustment Allowance" (Chapter III(4)(ii)).22
Table IV.6
Structure ofMalaysia 'sMFN andAFTA tariffs, selected years
(Percentoftotalnumber oftariff linesunless otherwide indicated)
IndicatorMFN tariffs
AFTA tariffsbExcluding estimates ofAVEs
forspecific duties andspecific
components ofmixed and
alternative dutiesIncluding
AVE
estimatesa
1988 1993 1997 1997 1997 2003
Manufactured products (ISIC 3)
Rawmaterials 5.9 5.8 3.2 3.2 2.1 0.9
Semi-processed 18.3 15.3 7.0 7.4 4.8 1.9
Fully processed 18.1 15.4 11.9 15.4 10.5 5.3
Textile, wearing apparel andleather industries (ISIC 32)
Rawmaterials 3.2 3.0 0.3 0.3 0.0 0.0
Semi-processed 28.5 17.6 15.4 16.1 9.2 4.1
Fully processed 28.0 23.6 19.7 19.7 8.5 4.4
a Estimates ofadvalorem equivalents of96specific duties, 157mixed duties and62alternative duties wereprovided bytheMalaysian
authorities totheWTO Secretariat.
b NoAVEs arecalcultated forAFTA ratesexpressed asspecific, mixed oralternative duties. However, some products onthe
General Exclusion Listwere expressed asamargin ofpreference overspecific MFN duties forwhich AVEs were available.
Forthese products aswellasfor"sensitive" and"highly sensitive" unprocessed rawmaterials which arenotyetincluded inthe
AFTA schedules, AVE estimates were included.
c AFTA preferences areanalysed onthebasis oftheMFN tariff schedule andtherefore contain bydefinition thesame number
oftarifflines; inpractice aslightly different classification isusedtoadminister tariffpreferences (Customs Duties Order (Common
Effective Preferential Tariff) 1995andCustoms Duties Order (Common Effective Preferential Tariff) (Amendment) 1997follow
adifferent classification compared toCustoms Duties Order 1996amended byCustoms Duties (Amendment) (No.3) Order 1996).
d According tothe1995 Harmonized System tariff classification. Thechange tothe1996 Harmonized System classification on
balance aggregated some bound lines, while some unbound linesweresplit. Asaresult, under the1996 HStariff classificaton
62.4linesarebound. Theactual imports forwhich tariff linesarebound remain generally unchanged.
e Using APEC 1995 import weights, excluding Brunei andthePhilippines, while 1994 dataareusedforAustralia.
Source: Calculated bytheWTO Secretariat andUNCTAD fromdataprovided bytheMalaysian authorities totheWTO Secretariat; and
Comtrade data.
21Malaysia alsoreserves therighttouseimport quotas under theWTO Agreement onTextiles andClothing.
Allarticlesofcottonandothertextilematerialincluding"kainsarongbatik"classifiedunderHScode6211.42.000
and6211.49.000 require andimport licence (Table AIII.4).
22Firms inthewood-based products, palm-oil processing andmachinery andengineering sectors arealso
eligible toreceive such assistance.Malaysia WT/TPR/S/31
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Export quotas
23. Under theWTO Agreement onTextiles andClothing, Malaysia 'sexports ofsuchitems tofour
WTO Members namely theUnited States, theEuropean Union, Canada andNorway aresubject to
import quotas. These quotas areallocated tomanufacturers onthebasisofpastperformance andthose
withconfirmed orders. Manufacturers whohavefullyusedtheirquota receive anadditional quotas
of3to6percentduring thefollowing year, while manufacturers whodonotusetheirquotas must
surrender theunused portions bytheendofJuneeachyear. Those whodonotsurrender unused quotas
losetheunused allocation from theireligibility forthefollowing year.
24. Exports totheUnited States arecovered bythelargest number oftextile andclothing quotas,
followedbyexportstoCanada,theEuropeanUnionandNorway.Quotautilizationratesvarybyproduct
andovertime, butremain aserious restraint onexports. In1996, quota utilization ratesexceeded
100percentforcotton andsynthetic dresses, andknitted shirts totheUnited States, forwinter outwear
toCanada, andjerseys andpullovers totheEuropean Union (Table AIV.7).
Rules oforigin issues
25. Therules oforigin regulating preferential trade within ASEAN havechanged since thelast
Review andtherulesoforigin forexports totheUnited States changed effective 1July1996. Changes
intheASEAN rules oforigin applied totextile andclothing products aimtofacilitate interregional
trade inthese products (Chapter III(2)). Thechange inrules oforigin applied bytheUnited States
note,interalia,thatfinishing oftextile fabrics inasource doesnotconfer origin, aswasthecaseunder
theprevious ruleswhich allowed twofinishing operations toconfer origin toaproduct.23According
toanagreement reached between theUnited States andtheEU,exports ofdischarge-printed fabric
imported fromMalaysia andfinished intheEuropean Union areregarded asoriginating fromtheEU
under thenewrulesoforigin applied bytheUnited States. Furthermore, exports ofclothing assembled
outside Malaysia (such asinVietNam, SriLanka orother low-wage economies) fromclothing parts
made inMalaysia areunder thenewrules considered tooriginate from thecountry ofassembly and
notMalaysia. Malaysia anditsASEAN partners haveexpressed concern about thischange inrules
oforigin asapplied bytheUnited States.24
(iii) Automobiles andtheirparts
26. Passenger carproduction inMalaysia hasmore thandoubled since 1990, reaching over
300,000 units by1996, twothirds ofwhich contained anengine smaller than1,600cc. During the
same period, sales values ofmotor vehicles tripled, while those ofparts andaccessories increased
six-fold. By1996, 14assembly andmanufacturing firms were supplying themarket, thuslimiting
thescope fortherealization ofeconomies ofscale. Alarger number offirms wereproducing parts
andaccessories, frequently specializing intheproduction ofspecific items. Inspiteofrising exports,
imports ofmotor vehicles andtheirpartscontinue tobealmost tentimes aslarge asexports. Almost
twothirds ofthevalue ofimports consist ofcompletely built-up models andparts originating from
Japan (Table IV.7).
23WTO (1997a).
24WTO (1997a).WT/TPR/S/31 Trade Policy Review
Page 104
Table IV.7
Overview oftheautomobile sector, 1990-96
1990 1991 1992 1993 1994 1995 1996
Production ('000)
Passenger carsbelow 1,600 cc. 106.5 128.0 119.3 116.4 131.2 181.9 226.0
Passenger cars1,600 cc.andabove 24.4 24.5 17.6 28.7 42.1 59.0 86.5
Commercial vehicles 73.7 78.9 34.7 34.7 37.7 46.1 74.8
Sales value (RMbillion)
Motor vehicles 2.0 2.4 2.4 3.0 3.7 5.7 7.5
Parts andaccessories ofmotor vehicles 0.4 0.6 0.5 0.8 1.2 1.7 2.4
Employment ('000)
Motor vehicles 7.5 8.1 7.2 7.6 9.4 13.0 15.9
Parts andaccessories ofmotor vehicles 4.3 4.9 5.2 9.2 11.8 14.2 16.1
Number offirms
Motor vehicles 9 9 10 12 13 12 14
Parts andaccessories ofmotor vehicles 28 29 36 45 56 61 69
Value added (RMbillion) 1.3 1.8 1.6 2.0 2.4 ... ...
Exports (US$ million)a121 147 200 235 219 279 295
Imports (US$ million)a1,312 1,522 1,150 1,325 1,810 2,785 2,816
Imports from Japan (US$ m.)a1,007 1,214 873 1,062 1,363 2,084 1,891
... Notavailable.
a UNSTAT, Comtrade database; 1996 exports andimports havebeenestimated through applying totalmerchandise trade annual
growth bythe25largest trading partners, derived from national statistics, totheproduct breakdown of1995.
Source: Department ofStatistics Malaysia (various issues), Monthly Manufacturing Statistics, Kuala Lumpur andUNSTAT, Comtrade
database.
Policy objectives
27. Thethrust oftheMalaysian Government 'spolicy withregard totheautomotive sector isto
shifttheemphasis fromassembling activities intofull-scale manufacturing operations withtheirown
design andbigger production capacities, toincrease efficiency bothinmanufacturing anddistribution,
expand intomature export markets andtostrengthen thecomponent partsandaccessories sub-sector.25
Themaininstruments aretariffpolicies, local-content requirements andindustrial linkage programmes
tofacilitate technology transfer. Other incentives include promotion oftheuseofstandards, tax
incentives forcomponent suppliers, andgovernment support forinvestment abroad (Table IV.8).
Import licensing
28. Import licences forcompletely knocked-down (CKD) motor vehicles areonlyissued tomotor
vehicle assemblers. Completely built-up (CBU) units aresubject toimport quotas, aswellastoan
import tariff ofupto200percent. Allassemblers areallowed toimport 80CBU unitspercompany
peryear(Chapter III(2)(iii)). Bumiputra companies whoareappointed asfranchise holders byoverseas
25Ministry ofInternational Trade andIndustry (1996a).Malaysia WT/TPR/S/31
Page 105
principal vehicle manufacturers areallocated anannual ceiling of600unitsforpassenger cars,360units
fordual-purpose vehicles and500units formotorcycles.26
Table IV.8
Government support fortheautomotive industry inMalaysia
Support facility Proton Perodua USPD Other franchise
Import dutyonimported
completely knocked-down
units13% 0% 0% 42%
Import dutyoncompeting
completely built-up unitsUpto1,800 cc:
140%Over 1,800 cc:
170%Upto2,500 cc:
170%Over 2,500 cc:
200%
Excise dutyascompared tothe
normal ratea50%ofthenormal
rate50%onexclusive
models, zeroon
basic modelzeroonallmodels normal rate
Sales tax 10% 10% 10% 10%
Standards Automotive manufacturers andassemblers willberequired tocomply withtheUN/ECE
standards inthenearfuture. However, there isnoadvance automobile testing facility and
design centre inthecountry.b
Technology transfer During 1993-95, 50technology transfer agreements were concluded inthetransport equipment
sector.c
Measures topromote Malaysian
component suppliersVendor programmes andmotor vehicle component manufacturers havebeenclassified as
promoted products which areeligible fortaxincentives (Chapter III(4)(ii)).
a Normal excise duties areformotorcycles smaller than150cc,10percent; motorcycles withacapacity ofmore than150cc,
20percent; busses, nil;trucks, nil;passenger vans, 30percent; panel vans, nil;4-wheel drives, 45percent; passenger cars,
withavalue oflessthanRM7,000, 25percent, withavalue ofbetween RM7,000 andRM10,000, 30percent, withavalue
between RM13,000 andRM20,000, 50percent, withavalue between RM20,000 andRM25,000, 60percentandwitha
value overRM25,000, 65percent.
b Ministry ofInternational Trade andIndustry (1996), Second Industrial Master Plan1996-2005, Kuala Lumpur, p.p.263-64
c Ministry ofInternational Trade andIndustry (1996), Malaysia International Trade andIndustry Report 1995/96, Kuala Lumpur,
p.242.
Source: Information provided bytheMalaysian authorities andsources listed above.
Import tariffs
29. Import tariffs encourage thedomestic assembly ofCKD vehicles, astariffs onsuchvehicles
aresubstantiallylowerthanthoseonCBUvehicles.Tofurtherencouragethelocalproductionofselected
items, these havetoberemoved from CKD imported carsinorder toqualify forthelower tariff.
However, imports ofthese items areinsome cases subject tolower tariffs thantheCKD imported
motor vehicles.27
26Bumiputracompaniesaredefinedascompanieswhereatleast51percentoftheindividually-ownedcompany
isowned byBumiputra Malaysians; atleast51percentoftheBoard ofDirectors isBumiputra including the
Chief Executive, theManaging Director, theGeneral Manager andother keyposts; atleast51percentofthe
employees areBumiputra; thefinancial management iscontrolled byBumiputra; andtheorganizational chart
andthemanagement functions must reflect thatthecompany ishandled byBumiputra.
27Mandatory deleted components formotorcycles are: tyres andtyreflaps/inner tubeprotectors; electric
accumulators/batteries; paints, sealers, thinner, fillers, chemical phosphates, acids andrustprotectors; oilsand
grease separately packed; drive chains; chain guards/chain cases; rearview mirrors; spokes; nipples; control
(continued...)WT/TPR/S/31 Trade Policy Review
Page 106
30. ASEAN 'sIndustrial Cooperation (AICO) Scheme wasintroduced effective 1November 1996.
Under theScheme cooperating firms become immediately eligible forthe2003 AFTA tariffs
(Chapter II(3)(iii) andIII(2)(ii)). ASEAN 'sBrand-to-Brand Cooperation Scheme isbeing phased out
withtheintroduction ofthenewAICO Scheme.28However, existing BBCcompanies continue toenjoy
themargin ofpreference forproducts approved before November 1996untiltheexpiry oftheapproved
carmodel.
Local-content requirements
31. Following agradual increase overtime,passenger carsofupto1,850 cc.arerequired toachieve
alocalcontent of60percentandpassenger carsof1,851 to2,850 ccandcommercial vehicles ofup
to2,500 kg.gross vehicle weight tohavealocalcontent of45percent(Table IV.9).29Tomonitor
therealization ofthistarget, eachassembler isrequired toreport thelocalcontent achieved byeach
model assembled inMalaysia totheMinistry ofInternational Trade andIndustry, which hasassigned
apre-determined local-content percentage toeachcomponent. Assemblers areallowed totransfer
over-achievement inlocalcontent ofaparticular model toother models. Assemblers areencouraged
toexport components which areinternationally competitive, andexport performance canbetaken into
consideration inarequest forawaiver from compliance withthetarget. Theauthorities mayinvite
producers toreduce thenetselling price ofanymodel fornon-compliance withthelocal content
requirement. Todatenosuchsanctions havebeenenforced onassemblers fornon-conformity with
thelocal-content provisions. Although theauthorities areconcerned about thelowlocal content in
eachofthecomponent partsproduced inMalaysia30,nopolicy initiatives havebeentaken toaddress
thissituation. Theprogramme hasbeennotified totheWTO Committee onTrade-Related Investment
Measures.31
27(...continued)
cables; kickstarter levers; engines; shock absorbers including front forkandoilcushion units ofallsizes.
Mandatory deleted components forpassenger andcommercial vehicles are:airfilters; alternators andvoltage
regulators; batteries; carpets andunderlays; coilsprings; exhaust systems; external body protective mouldings;
flasher relays; fueltanks; glass; horns; leafsprings; meltdamping sheets; mudflaps; radiators; radiator
hoses; seatbelts; seatandslide assemblies; seatpads; shock absorbers; spark plugs; starter motors; tubeless
tyrevalves; tubing forbrakes, clutches andfuel; tyres; wheel nuts; windscreen washers; wiper motors;
wire harnesses; u-bolt assemblies comprising spring pinsandshackle pins/bolt andshackle assemblies for
commercial vehicles.
28SeeGATT(1993) foradescription oftheBBC Scheme.
29Ministry ofInternational Trade andIndustry (1996a).
30Ministry ofInternational Trade andIndustry (1996a).
31TheWTO notification concerning theprogramme listsastherationale forthislocal-content stipulation "an
upgrading ofengineering andtechnical skills intheinfant component-parts industry" (WTO document
G/TRIMS/1/MYS/1, 12April 1995). Malaysia submitted arevised notification pursuant toArticle 5.1ofthe
TRIMS Agreement on14March 1996 (G/TRIMS/N/MYS/1/Rev.1, 18March 1996) Japan noted thatthis
notification wassubmitted nearly oneyearafter theexpiry ofthedeadline fornotifications under Article 5.1
andasked formore detailed information onthelocal-content requirement related toinvestment incentives and
onthelocal content policy onmotor vehicles (G/TRIMS/M/5, 27November 1996). Theprogramme appears
tohave hadasignificant impact onthedevelopment oftheautomobile andcar-parts sector, ofwhich exports
have developed rapidly during recent years.Malaysia WT/TPR/S/31
Page 107
Table IV.9
Local content targets fortheautomobile sector, 1992-96
Type ofvehicle 1992 1993 1994 1995 1996
Passenger carsofupto1,850 cc. 30 40 50 55 60
Passenger carsof1,851 to2,850 cc.and
commercial vehicles upto2,500 kg.GVW20 30 35 40 45
Passenger carsofabove 2,850 cc.and
commercial vehicles ofabove 2,500 kg.GVWOnly mandatory deletion items arerequired tobelocally sourced.
Source: Information provided bytheMalaysian authorities.
32. Under theGovernment 'sVendor Development Programme, theProton Component Scheme
wasestablished in1988todevelop localsmall andmedium sizedsuppliers ofcomponents andindustrial
services. Under theProgramme, tripartite arrangements havebeenintroduced, involving theMinistry
ofInternational Trade andIndustry (MITI), anchor companies andfinancial institutions which provide
loans tothevendor. TheProton MR0.5billion Component Scheme wascontinued asacontractual
partofitsprivatization (Chapter III(2)(iv)). TheVendor Programme allows SMItoshare inthebenefits
ofeffective assistance received byProton.32
(4) Services
(i) Overview
33. In1996, services contributed almost 45percentofGDP and47percentofemployment.
After manufacturing, theservices sector isthefastest growing sector oftheeconomy, justexceeding
average GDPgrowth during the1990-96 period. Thefastgrowing service sub-sectors include transport,
communications andfinancial services, which provide inputs intothefaster growing manufacturing
sector. Thegrowing importance ofservices, particularly business services, isemphasized intheSecond
Industrial Master Plan.
34. Malaysia hasalarge deficit onitsforeign services trade, largely attributable tothenegative
balances infreight andinsurance andinvestment income (Chart I.4). Other services, which include
education services, arealsoindeficit. Bycontrast, tourism hasbeenamajor netforeign exchange
earning sector since 1990.
35. Servicesimportsandexportsabroadmaybedeliveredthroughcross-bordersupply,consumption
abroad, commercial presence, andbythepresence ofnatural persons. InMalaysia, cross-border supply
isparticularly important forthetransport, re-insurance andvalue-added telecommunications sectors.
Although there arepractically noquantitative restrictions ontheuseofforeign transport companies,
there arevarious taxandother incentives encouraging theuseoflocalsuppliers. Other incentives
areusedtoencourage theuseoflocally incorporated insurance companies.
32Such Programmes maybecome more commercial aseffective assistance forProton declines when import
tariffs forcarsandcarparts arereduced inthecontext oftheimplementation ofMalaysia 'sAFTA Commitments
from onaverage 35.7percentin1997 to4.2percentin2003 (Forexample, thephasing-in ofMalaysia 'sAFTA
TemporaryExclusionList-1999,indicatesthatimporttariffsonsomecompletelybuild-upautomobileswilldecline
from 200percentin1997, to20percentin1999 and5percentin2003).WT/TPR/S/31 Trade Policy Review
Page 108
36. Consumption abroad isimportant forinternational trade intourism andeducation services.
There isanactive policy topromote tourism inMalaysia. Tourism abroad isinpractice unrestricted,
butforeign tourist companies inMalaysia whowishtopromote foreign destinations inMalaysia have
tomarket theirservices through Malaysian companies. Thedemand foreducation abroad aswellas
unrestricted overseas travel hasresulted inalargenumber ofMalaysians studying abroad, particularly
inAustralia andtheUnited Kingdom.33Currently, foreign universities areencouraged toestablish
branches inMalaysia orhavetwinning programmes withMalaysian educational institutions sothat
thecountry might become acentre ofexcellence andanexporter ofeducation services infuture.
37. Forthedelivery ofmostother services, acommercial presence isrequired, usually involving
someinvestment.Withsomeexceptions,theacquisitionofvotingrightsbyforeigninterestsinMalaysian
companies islimited toanaggregate share of30percent. Inmany services companies withaforeign
partner theshare isinpractice farsmaller. Aggregate foreign investment intheservices sector isthus
substantially lessthantheaverage 51percentequity ownership realized inthemanufacturing sector.
38. Foreign professionals canbeemployed bybothforeign affiliates andMalaysian companies.
Inbothcases thenumber andcategory ofprofessionals areregulated bytheMalaysian authorities.
Furthermore, inkeyservice sectors, suchasfinancial services, thenumber offoreign professionals
thatmaybeemployed byMalaysian-owned companies isalsoregulated. Bycontrast, intheMulti-media
Super Corridor, allrestrictions onforeign ownership andthepresence offoreign professionals have
beenremoved, soastofacilitate thedevelopment ofthese projects.34
WTO Commitments
39. InitsGATSSchedule,Malaysiahasnotmadeanyhorizontalcommitmentscoveringcross-border
supply andconsumption abroad. Commercial presence isgenerally limited tojointventures inwhich
equity byforeigners islimited to15percentbyasingle orgroup offoreign interests ortoanaggregate
foreign interest of30percent. National treatment reservations havebeentaken foralldealings in
land, property andrealestate aswellasfortaxincentives andBumiputra preferences.
40. ThecommitmentsmadebyMalaysiaunderGATSwereallconsistentwithcurrentpolicyaffecting
foreign participation inthedomestic services sector. However, Malaysia 'soffer under theInterim
Agreement onFinancial Services increased aggregate foreign shareholding permitted infinancial leasing
andstockbroking companies from thecurrent levelof30percentto49percentasof1July2000.
Under theAgreement onTelecommunications Services Malaysia bound existing levels andcreated
some competitive safeguards formarket access inthissector. Malaysia participates intheongoing
Financial Services negotiations.
33TheFederal Government 'sexpenditure onscholarships andeducational aidamounted toRM766million
in1995 andRM704in1996. Thelion'sshare ofthiswasspent onscholarships forMalaysian students seeking
aneducation abroad.
34Inaddition tothepresence ofhighly-qualified foreign professionals, there arealsoalarge number oflow-
skilled foreign workers inMalaysia (Chapter III(4)(i)). Intheservices sector, low-skilled foreign workers are
particularlyimportantintheconstructionsectorwheretheyreportedlyconstituteupto70percentoftheworkforce
(World Bank, 1995).Malaysia WT/TPR/S/31
Page 109
(ii) Financial services
(a) Overview
41. In1996, financial services contributed around 12.2percenttoGDP andaround 5.5percent
tototalemployment.35Value added perworker infinancial services isthusmorethandouble thenational
average. Although other sub-sectors alsomake asignificant contribution tovalue added infinancial
services36,thebanking sector isthemain manager offinancial assets.37Themarket share ofthe
Employees Provident Fund (EPF), which isbased oncompulsory contributions ofemployers and
employees, hasgradually declined, although total assets under itsmanagement have increased
substantially. Insurance funds arelessimportant asguardians offinancial assets (Table IV.10). The
Kuala Lumpur Stock Exchange andrelated securities exchanges haveimproved theefficiency ofsavings
mobilizationandinvestmentallocation.ForeigninstitutionsplayasignificantroleinMalaysia'sfinancial
services sector. Since 1979, nonewbanking licences havebeenawarded toforeign orlocalinvestors.
Table IV.10
Share intotal assets ofthefinancial system byinstitution, 1970-96
(Percentunless otherwise indicated)
1970 1977 1985 1990 1991 1992 1993 1994 1995 1996
Total (RM million) 11.6 37.5 166.1 309.1 372.2 436.6 570.5 628.2 733.0 915.2
Shares intotal(percent)
Bank Negara Malaysiaa20.8 20.7 9.9 12.1 12.0 14.4 17.6 14.8 12.1 10.5
Banking system 42.9 47.2 59.6 60.6 58.0 56.1 53.8 54.1 56.4 58.3
Commercial banks 38.4 37.8 45.1 44.2 41.2 40.2 39.4 38.6 40.3 39.6
Finance companies 4.6 7.0 10.7 12.8 13.2 12.6 11.1 11.7 12.5 13.1
Merchant banks 0.0 2.4 3.8 3.6 3.6 3.3 3.3 3.8 3.7 3.7
Provident, pension andinsurance funds 27.2 21.8 19.7 18.3 18.8 18.6 17.3 18.9 18.9 18.2
Employees provident fund 19.5 15.6 14.9 15.1 14.3 14.3 12.7 13.5 13.4 12.9
Other provident funds 3.9 2.4 1.8 1.6 1.4 1.4 1.7 2.0 2.0 2.0
Lifeinsurance funds 2.8 2.6 2.2 0.8 2.3 2.1 2.0 2.4 2.4 2.3
General insurance funds 1.0 1.2 0.8 0.8 0.8 0.9 0.9 1.0 1.1 1.0
Development finance institutionsb1.1 2.4 2.4 1.9 1.7 1.5 1.6 1.5 1.6 1.4
Savings institutionsc5.6 4.7 4.9 3.2 2.5 2.3 2.4 2.5 2.1 1.9
Other financial intermediariesd2.4 3.3 3.5 3.9 7.0 7.1 7.3 8.4 8.8 9.7
a Includes Bank Negara Malaysia andCurrency Board.
b IncludeMalaysianIndustrialDevelopmentFinanceBerhad(MIDF),AgriculturalBankofMalaysia,BorneoDevelopmentCorporation,
Sabah Development Bank Berhad, Saban Credit Corporation, Development Bank ofMalaysia, andIndustrial Bank Berhad.
c Includes National Savings Bank, Bank Kerjasama Rakyat andthecooperative societies.
d Includes discount houses, unittrusts, building societies, Pilgrims Management Fund Board, Credit Guarantee Corporation and
Cagamas Berhad.
Source: Yusof, Zainal Azam, Awang Adek Hussin, Ismail Alowi, LimChee SingandSukhdave Singh (1996), "Financial Reform in
Malaysia", in:Gerad Caprio, Jr.,IzakAtiyas andJames A.Hansen (eds.) Financial Reform Theory andExperience, Cambridge
University Press, Cambridge, p.p.276-320; andBank Negara Malaysia (various issues), Annual Report, Kuala Lumpur.
35Such shares arenotunusual, forexample in1995 theU.S.financial services sector employed 5.8percent
ofthework force andgenerated 17.1 percentofGDP (WTO, 1997).
36Forexample value added bystock commodity andforeign exchange brokers increased from lessthan
RM0.5billion in1989 toRM4.7billion in1994. During thesame period employment increased from 4,100
to11,500, suggesting asignificant increase invalue added perworker (Table AIV.8).
37Islamic banks donotpayorcharge interest butmayprovide depositors withashare ofthebank'sprofits.
Inaddition toIslamic banking byspecialized institutions, other financial institutions mayalsooffer suchservices
through their existing branches.WT/TPR/S/31 Trade Policy Review
Page 110
Government regulation
42. Banking andinsurance services areprimarily supervised andregulated bytheCentral Bank
ofMalaysia, while theSecurities Commission isthemain regulator ofthesecurities sector. Since
1975, selected financial institutions havebeenrequired tosatisfy minimum lending thresholds forsocial
policy reasons.38TheEmployees Provident Fund (EPF) andother insurance funds arerequired to
investaminimumshareoftotalinvestmentsingovernmentsecurities.However,theseminimumlending
andinvestment requirements, forsocial reasons, havebeenrelaxed during the1990s.
43. Prudential regulation ofthebanking andinsurance sectors isparticularly important asnoprivate
orpublic deposit insurance exists. While nobank orinsurance company hasgone bankrupt since
independence, theBank Negara Malaysia didrescue threebanks inthemid-1980s. Atwo-tier banking
supervision system wasintroduced inDecember 1994 forcommercial banks, inJanuary 1996 for
merchant banks, inApril 1996 forfinance companies, andasimilar two-tier supervision system is
under consideration fortheinsurance sector. Tier-1 institutions areassessed tobefinancially stronger
thantier-2 institutions andthussubject tosomewhat lighter regulation. Some foreign commercial banks
havebeenaccorded tier-1 status.39Recently, prudential requirements havebeentightened inviewof
developments inrealestate andstock markets.
(b) Banking services
44. Thebanking system experienced rapid growth during the1990s asmanaged assets increased
byover50percent(Table IV.11), interest income more thandoubled, pre-tax profits more thantripled
andreturns onequity increased byover20percent(Table IV.11). Asexpected inarapidly growing
economy, theshare ofnon-performing loans intotalloans dropped fromover20percentin1990 to
under 4percentin1995.
Licensing
45. Bankingservicesareprovidedbycommercialbanks,financecompanies,merchantbanks,discount
houses andcredit guarantee corporations. Allsuppliers ofbanking services, including branches and
automatic teller machines arelicensed bytheCentral Bank. In1995therewere37commercial banks,
40finance companies, and12merchant banks licensed inMalaysia.40Allforeign banks arelocally
incorporated, asrequired bySection 4oftheBanking andFinancial Institutions Act1989.41Theparent
38Under 1996 Lending Guidelines allcommercial banks arerequired tolendaminimum of30percentof
allloans totheBumiputra community atmarket rates, provide aminimum RM1billion guarantee cover under
theNew Principal Guarantee Scheme forloans withavalue ofRM500,000 andbelow, forwhich amaximum
interest rateofthebank lending rateplus2percentapplies; andtoprovide housing loans forhouses costing
RM100,000andbelowforwhichamaximuminterestrateofthebanklendingrateplus1.75percentor9percent,
whichever islower, applies.
39Ofthetentier-one commercial banks, fourareforeign-owned, while theother sixaredomestically owned.
40Finance companies specialize inhire-purchase andhousing loans while competing withcommercial banks
forsavings andfixed deposits. TheCredit Guarantee Corporation provides guarantee cover forcommercial banks
onloans tosmall businesses. Discount houses arefinancial intermediaries thatmobilize short-term funds from
other financial institutions withexcess liquid funds which want totemporarily allocate them asearning assets.
(Yusof etal.,1996 p.p.281-82.)
41Aforeign bank isabanking institution which isnotmajority-owned (51percent) byMalaysian parties.
Existing foreign banks inMalaysia are100percentowned bytheir parent bank.Malaysia WT/TPR/S/31
Page 111
banks ofsuchlocally incorporated foreign-owned banks areallowed tocontinue holding 100percent
interest intheirMalaysian subsidiaries; incontrast toinsurance institutions, theirisnorequirement
fordivestment ofshare-holding bytheparent bankinfavour ofMalaysian interests. Foreign parties
mayalsoacquire uptoanaggregate of30percentequity interest inexisting Malaysian-owned banks.
ForoffshorebanksintheLabuanInternationalOffshoreFinancialCentre,therearenoforeign-ownership
restrictions. Entry canbeintheform ofabranch orasubsidiary.
Table IV.11
Performance oftheMalaysian banking system, 1990-96
(RMmillion andpercent)
Financial yearending 1990 1991 1992 1993 1994 1995 1996a
Netinterest income 4,115 4,832 5,658 6,973 8,868 10,392 13,389
Pre-tax profit 1,985 2,271 2,657 3,788 5,205 6,869 8,721
Average shareholders 'funds andnetworking
funds9,250 12,872 15,853 18,736 21,532 26,215 31,687
Return onassets (%) 1.4 1.3 1.3 1.5 1.7 1.9 2.0
Return onequity (%) 21.5 17.6 16.8 20.2 24.2 26.2 27.5
Specific provisions/total loans (%) 5.3 3.6 3.4 3.2 2.2 1.6 1.0
General provisions/total loans (%) 0.7 0.9 1.1 1.3 1.6 1.6 1.9
Non-performing loans/total loans (%) 20.3 15.6 14.9 12.6 8.1 5.5 3.9
a Preliminary.
Source: Government ofMalaysia (1996), Seventh Malaysian Plan, Kuala Lumpur; anddataprovided bytheMalaysian authorities.
46. Outofatotalof37commercial banks, 14areforeign owned; in1996 these foreign-owned
banks managed 23percentofassets, granted 26percentofloans, managed 21percentofdeposits
andgenerated 33percentoftotalpre-tax profits inthesector. Since 1979, nonewlicences have
beenissued. However, offshore banking licences areissued tobanks carrying outoffshore banking
business ontheFederal Territory ofLabuan. Although newbranches andautomatic teller machines
arebeingauthorizedfordomesticbanks,foreignbanksmaynotestablishnewbranches,includingoff-site
automatic teller machines. Thelatter, inparticular, constitutes amajor impediment totheexpansion
offoreign-owned banks, given therapid growth ofthebranch andautomatic teller machine network
ofdomestically-owned banks. Ofthetotal40finance companies, fourare100percentforeign owned,
while sixhavesome foreign equity participation. Nonewlicences havebeengranted since 1984.
Nineofthe12merchant banks havesome foreign participation. Although nonewbanklicences for
on-shore banking havebeengranted inrecent years, foreign institutions mayentertheMalaysian market
through arepresentative office orthrough theacquisition ofanexisting institution.42
47. Inviewoftheshortage ofspecialized staffwithsuitable experience, blanket approval isgranted
forbanks toemploy three expatriate specialists atanyonetimeineachoffourcritical areas, namely
trade finance, corporate finance, treasury products andinformation technology. Inrespect offoreign
banks, these areinaddition totwosenior posts which canbefilled byexpatriates. Itisnoteworthy
thatdomestic-owned banks arethussubject tomore stringent regulations onhiring expatriates than
foreign-owned institutions. Fortheemployment ofspecialists orexperts innon-critical areas, prior
42Themaximum permissible share holding inalicensed institution is10percentforanindividual (domestic
orforeign) and20percentforother entities. Aggregate foreign share holding inalicensed institution is
30percent.WT/TPR/S/31 Trade Policy Review
Page 112
approval oftheCentral Bank isstillrequired. Commercial banks mustensure thatbanking skills and
technology associated withtheemployment ofexpatriates aretransferred tolocalstaff.43
Credit facilities
48. There isalimitofRM5million equivalent inaggregate onforeign currency borrowing by
residents fromnon-residents andon-shore banks, whether Malaysia orforeign-controlled. Non-resident
controlled companies (NRCCs) mayborrow uptoRM10million fromdomestic sources. Theamount
ofcredit granted byforeign-controlled banking institutions inMalaysia toNRCCs should notexceed
40percentoftotalcredit facilities obtained byNRCCs frombanking institutions. Thisrequirement
wasintroduced tocounter anti-competitive collusion between NRCCs andforeign-owned banks which
would exclude Malaysian-owned banks from providing credit toNRCCs. Thisruleis,however,
implemented flexibly toensure thatNRCCs haveready access tobanking facilities atcompetitive prices
tomeettheirfinancial requirements. Malaysia iscommitted toincreasing thepercentage to50percent
oftotalcredit facilities obtained byNRCCs in2000. NRCCs account for3.4percentofallbankloans
suggesting thatthemarket share oftheforeign-owned banks incorporated inMalaysia isnotsignificantly
affected. Effective from 1July1996, allcommercial banks areallowed toopen foreign currency
accounts forqualified residents. Prior tothatdate,onlytier-1 commercial banks, whether Malaysian-
orforeign-controlled commercial banks were allowed toprovide suchservice.
Differences between foreign-owned andMalaysian-owned banks
49. Attheendof1996, foreign-owned commercial banks hadahigher loan-deposit ratiothan
domestic-owned banks (0.977 compared to0.870). Therisk-weighted capital ratioofforeign-owned
commercial banks was10.7percentcompared to11.2percentforMalaysian-owned banks, bothratios
werethuswellabove theBasel requirement of8percent. Foreign-owned commercial banks employed
proportionally lessstaffperdeposit orloanthandomestically owned banks. Theauthorities believe
thatsome ofthese differences canbeexplained byarequirement thatbanks which open additional
branches inurban areas arealsorequired toextend theirservices torural areas.
WTO commitments44
50. Under itsGATS Schedule, Malaysia iscommitted toallowing 14wholly owned commercial
banks toremain wholly owned bytheirexisting shareholder. Afurther commitment toallow entry
islimited toupto30percentequity participation byforeign banks inMalaysian banks.45This
commitment issubject tothefollowing limitations. Aforeign bank wishing toacquire more than
5percentofaMalaysian bankisrequired tocontribute tothefinancial andeconomic development
ofMalaysia, andthecountry oforigin musthavesignificant tradeandinvestment interest inMalaysia.
Inaddition, thecountry oforigin should nothavesignificant direct representation intheMalaysian
banking industry. Aninstitution owned orcontrolled byaforeign government isnotallowed tocontrol
acommercial ormerchant bankinMalaysia. Acommercial bankisnotallowed toacquire ashare
inanother commercial bank, butmaydosoinamerchant bankandviceversa.Persons arenotallowed
toacquire 5percentormore oftheequity ofabankiftheyalready havesuchashareholding inanother
43Bank Negara Malaysia (1996b).
44WTO document GATS/SC/52/Suppl.1, 28July1995.
45Furthermore, there isnocommitment toallow single orrelated non-Malaysian persons toholdmore than
20percentoftheequity ofaMalaysian bank. Thecommitment allows onlynon-Malaysian banks toholdsuch
equity inMalaysian banks.Malaysia WT/TPR/S/31
Page 113
licensedfinancialinstitution.Newservicesaresubjecttoprudentialcriteria.Entrybyforeigninstitutions
through arepresentative office isallowed, butitmayonlyundertake research, exchange ofinformation
andliaison services.
51. Forbanks, Malaysia iscommitted toallowing theentry oftwosenior managers foreach
institution withanaggregate foreign shareholding inexcess of50percent. Further commitments have
beenmade toallow employment offoreign experts. Entry islimited toamaximum period ofafive
years. Acommitment toallow theestablishment ofoffshore banks isconfined toLabuan.46
(c) Insurance
Overview
52. TheMalaysian insurance sector experienced rapid growth during theperiod 1990-96. Inline
withrapidly rising GDP during thatperiod, lifeinsurance premiums more thandoubled. Growth in
general insurance premiums wasslightly slower, withmore than20percentbeing reinsured abroad.
Thedomestic retention rateofreinsurance premiums inMalaysia dropped gradually from over
77percentin1990to73percentin1995, butsubsequently improved markedly to78percentin1996.
Thetrend ininsurance fundassets wasbroadly similar tothatinpremiums (Table IV.12).
Table IV.12
Overview oftheMalaysian insurance sector ,1990-96
1990 1991 1992 1993 1994 1995 1996
Number ofregistered companies
Direct lifeinsurance 4 3 5 5 5 5 5
Direct general insurance 39 39 40 41 40 40 40
Direct composite insurance 135 15 14 13 13 13 13
Reinsurance 1 1 1 2 3 4 7
Insurance brokers 46 44 36 36 37 34 37
Lossadjusters 43 45 43 42 42 43 43
Lifeinsurance agents 37,373 45,716 54,370 68,531 80,615 93,881 92,018
General insurance agents 14,456 12,607 15,206 17,478 19,139 21,552 25,222
Total premium (RMmillion)a3,170.1 3,854.7 4,578.9 5,326.7 6,501.1 7,818.5 9,317.1
PercentofGNP 2.9 3.1 3.3 3.5 3.7 3.8 4.0
Lifeinsurance (RMmillion) 1,643.1 2,030.3 2,408.6 2,957.4 3,653.7 4,525.5 5,098.5
General insurance (RMmillion) 1,979.1 2,401.1 2,896.0 3,235.2 3,940.7 4,512.3 5,378.0
General reinsurance placed outside Malaysia 452.1 576.7 725.7 865.9 1,093.4 1,219.3 1,159.4
Retention rateofreinsurance (percent) 77.2 76.0 74.9 73.2 72.3 73.0 78.4
Insurance funds assets (RMmillion) 9,498.1 11,325.1 13,658 17,025.3 20,905.1 24,831.4 30,048.9
Lifeinsurance assets (RMmillion) 7,097.2 8,323.3 9,793.8 12,118.7 14,862.2 17,358.1 20,467.2
General insurance assets (RMmillion) 2,400.9 3,001.8 3,864.2 4,986.6 6,042.9 7,473.3 9,581.7
a Netofreinsurance outside Malaysia.
Source: Bank Negara Malaysia (1995 and1996), 32nd and33rdAnnual Reports oftheDirector General ofInsurance, 1995 and1996,
Kuala Lumpur; anddataprovided bytheMalaysian authorities.
46Offshore banks inLabuan arepermitted toaccept foreign currency deposits only.WT/TPR/S/31 Trade Policy Review
Page 114
53. Asof31December 1995, 65insurance companies operated inMalaysia, ofwhich 13were
incorporated abroad, including sixforeign insurers. Thelatter, which accounted for55percentof
alltotallifepremiums, aresignificantly larger thanMalaysian-incorporated companies.47Theinsurance
industryemployed19,480peoplein1996(excludinginsuranceagents):8,368atmanagerial/supervisory
level, 9,843 atclerical leveland1,269 atnon-clerical level. Forty-eight non-Malaysians wereemployed
atthemanagerial/supervisory level, butnoneatother levels.
54. Theinsurance industry isregulated bytheInsurance Act1996, administered bytheBankNegara
Malaysia. Bank Negara places emphasis ontherestructuring oftheinsurance industry topromote
effective Malaysian participation. Between 1975and1996, atotalof44foreign-incorporated insurers
hadrestructuredtheiroperationsinMalaysiainto34Malaysian-incorporatedinsurersinwhichMalaysian
participation isgradually increasing (Table IV.13).48Foreign participation ininsurance brokers and
lossadjusters islower thanthatininsurance companies.
Table IV.13
Distribution ofpaid-up capital ofMalaysian-incorporated insurers, 1992-96
(Percentoftotalunless otherwise indicated)
1992 1993 1994 1995 1996
Total paid-up capital ofMalaysian incorporated
insurers (RMmillion)884.7 1,153.2 1,229.1 1,450.3 1,742.9
Held byMalaysians 66.3 66.2 67.1 69.0 67.7
Bumiputra 36.9 37.9 38.5 36.8 37.1
Non-Bumiputra 29.4 28.3 28.6 32.2 30.6
Held bynon-Malaysians 33.7 33.8 32.9 31.0 32.3
Source: Bank Negara Malaysia (1996), 33rdAnnual Report oftheDirector General ofInsurance 1995, Kuala Lumpur; anddataprovided
bytheMalaysian authorities.
55. Except forsixforeign-incorporated professional reinsurers, which arenotsubject tothe
requirement oflocalincorporation, theremaining seven foreign insurers arerequired toincorporate
locally by30June1998. TheGovernment hascommitted initsWTO GATS Schedule toallow these
branches offoreign insurance companies toretain upto49percentforeign-held equity iftheyrestructure
ownership bythatdate. Companies which restructure theirownership afterthatdatearesubject to
amaximum foreign ownership share of30percent. Nonewinsurance companies arebeing licensed
except forreinsurers. Foreign equity inlocally incorporated insurance companies isnormally limited
toaminority stake (usually 30percent), although theCentral Bank sometimes grants exceptions.
56. Inaddition toincentives topromote Malaysian ownership, taxincentives areavailable tothe
insurance sector.49Some ofthese incentives areconditional upon localownership ofthecompanies.
Forexample, sums received bywayofannuities granted under annuity contracts issued byMalaysian
47Bank Negara Malaysia (1996c).
48Bank Negara Malaysia (1996c).
49"Tax reductions andexemptions werealsoprovided toencourage thedevelopment oftheinsurance industry
which hasthepotential tocontribute togrowth andmobilise long-term savings tosupport thenation 's
industrialisation drive". (Bank Negara Malaysia, 1996b.)Malaysia WT/TPR/S/31
Page 115
insurers, which weredefined inthe1996budget aslifeinsurers whose ownership ormembership are
heldinmajority byMalaysian citizens.50
Reinsurance
57. Therelatively small sizeofMalaysian-incorporated insurance companies hasledtoanincreasing
reliance onreinsurance. In1996, 21.6percentofwritten premiums inthegeneral insurance sector
wereplaced withreinsurance companies outside Malaysia. Bycomparison more thanhalfofmarine,
aviation andtransit reinsurance premiums wereplaced outside Malaysia, which wassubstantially higher
thancorresponding reinsurance premiums forfireandmotor vehicles (Table IV.14). Theauthorities
continue efforts to"optimise" national retention.51InApril 1997, thefirstlifereinsurance company
waslicensed toprovide reinsurance inMalaysia. Thecompany isajointventure between members
oftheLifeInsurance Association ofMalaysia andaforeign reinsurer.
Table IV.14
Malaysian reinsurance premiums, 1990-96
(Percentunless stated otherwise)
1990 1991 1992 1993 1994 1995 1996
Marine, aviation andtransit (RMmillion) 179.5 218.5 230.5 308.8 382.5 400.2 412.0
Placed inMalaysia 51.6 37.3 37.3 34.4 33.5 35.8 41.7
Placed outside Malaysia) 48.4 62.7 62.7 65.6 66.5 64.2 58.3
Fire(RMmillion) 405.4 461.4 590.6 684.4 851.8 940.8 1,002.6
Placed inMalaysia 53.1 53.3 54.0 55.9 53.6 55.1 59.9
Placed outside Malaysia 46.9 46.7 46.0 44.1 46.4 44.9 40.1
Motor (RMmillion) 156.3 210.7 324.2 331.1 375.7 461.0 498.7
Placed inMalaysia 80.8 78.0 68.4 69.6 72.6 74.3 82.0
Placed outside Malaysia 19.2 22.0 31.6 30.4 27.4 25.7 18.0
Miscellaneous (RMmillion) 313.4 377.3 451.0 493.3 636.2 785.1 864.8
Placed inMalaysia 53.4 52.8 54.1 47.1 46.4 45.9 50.5
Placed outside Malaysia 46.6 47.2 45.9 52.9 53.6 54.1 49.5
Source: Bank Negara Malaysia (1996), 33rdAnnual Report oftheDirector General ofInsurance 1995, Kuala Lumpur; anddataprovided
bytheMalaysian authorities.
WTO commitments52
58. Malaysia iscommitted toallowing amaximum of30percentaggregate foreign shareholdings
inexisting locally incorporated insurance companies.53Nocommitment hasbeenmade togrant new
licences. However, asmentioned above, acommitment hasbeenmade toallow anaggregate foreign
50Bank Negara Malaysia (1996c).
51Bank Negara Malaysia (1996c).
52WTO document GATS/SC/52/Suppl.1, 28July1995.
53Acquisition byaforeign insurance company ofanaggregate shareholding ofmore than5percentinalocally
incorporatedMalaysianinsurancecompanyissubjecttoconditionsregardingtheabilitytocontributetoMalaysia's
development andtheexisting level ofrepresentation ofthecountry oforigin oftheforeign insurance company.
There arealsorestrictions ontheacquisition ofinterests byinsurance companies orpersons thatalready hold
interests inMalaysia.WT/TPR/S/31 Trade Policy Review
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shareholdingof49percentinexistingbranchesofforeigninsurancecompanies(andpartlyforeign-owned
insurance companies which arelocally incorporated) which incorporate locally andrestructure their
shareholding sothatforeign shareholding shallnotexceed 49percentby30June1998. Subsequent
disposal ofthe49percentoranypartthereof after30June1998 shallbemade toaMalaysian party
andaggregate foreign shareholding shallnotexceed 30percent. Further, Malaysia hascommitted
itself toissuing seven newlicences fornon-life reinsurance within tenyears ending 30June2005.54
Entry asanoffshore reinsurance company isconfined toLabuan.
(d) Securities trading
59. TheKuala Lumpur Stock Exchange (KLSE), theKuala Lumpur Options andFinancial Futures
Exchange(KLOFFE)andtheMalaysianMonetaryExchange(MME )areMalaysia'sstockandderivatives
exchanges. AttheendofMarch 1997, market capitalization oftheKuala Lumpur Stock Exchange
wasRM793billion. Futures contracts oftheKuala Lumpur Composite Index werelaunched when
trading began onKLOFFE on15December 1995. Three-month Kuala Lumpur inter-bank offered-rate
(KLIBOR) futures began trading on28May1996. Trading volume ontheKuala Lumpur Commodities
Exchange (KLCE) was,in1996, confined tothetrading ofcrude palm oil(CPO) futures.55
60. TheMalaysian Securities Commission (SC)isthemainregulatory authority covering activities
onallstock exchanges.56TheCommission isresponsible fortheenforcement oftheSecurities
Commission Act1993, theFutures Industry Act1993, andtheSecurities Industry (Central Depository)
Act1991and,togetherwiththeRegistrarofCompanies,theSecuritiesIndustryAct1983(TableAII.1).57
54Fortheseven newlicences, entry willbethrough branches orlocally incorporated jointventures. Inissuing
these licences, priority willbegiven to:theforeign reinsurers orjoint ventures ofthetop100reinsurers who
meet certain criteria; those whoareintending tobasetheirregional headquarters inKuala Lumpur andhaveplans
tooperate regionally through jointventures; andthose whocomply withtheobjectives of,inter alia, optimum
retention oflocal risks. Aggregate foreign shareholding inthejoint ventures willnotexceed 49percentand
priority willbegiven tojointventures withlocal partners which havecertain characteristics ofsizeandstrength.
55Contracts declined from525,889 lotsin1995 to498,118 in1996 (equivalent to12.5million tonnes ofcrude
palm oilin1996). Reflecting thedecline intrading volume, theaverage daily turnover was2,004 lotsor
50,098 tonnes in1996 ascompared to2,160 or53,996 tonnes in1995. Thedecline inturnover wasduetoless
volatile movements incrude palm oilprices during theyear(section (2)(iii)(b)). (Bank Negara Malaysia, 1997b).
56TheSecurities Commission Actof1993 established theSecurities Commission consisting ofanExecutive
Chairman, whoisentrusted withday-to-day administration oftheCommission, fourmembers representing the
Government, andfourother members. Thefunctions oftheSecurities Commission areto:advise theMinister
ofFinanceonallmattersrelatingtothesecuritiesandfuturescontractsindustries;regulatetheissuanceofsecurities;
regulate thedesignation offutures contracts; regulate thetake-overs andmergers ofcompanies; regulate all
mattersrelatingtounittrustschemes;beresponsibleforsupervisingandmonitoringtheactivitiesofanyexchange,
clearing house andcentral depository; takeallreasonable measures tosafeguard theinterests ofpersons dealing
insecurities ortrading infutures contracts; promote andencourage proper conduct among members ofthe
exchangesandallregisteredpersons;suppressillegal,dishonourableandimproperpracticesindealinginsecurities
andtrading infutures contracts andintheprovision ofinvestment advice orother services relating tosecurities
andfutures contracts; consider andsuggest reforms ofthelawrelating tosecurities orfutures contracts including
changes totheconstitution, rules andregulations ofanyexchange anditsclearing house; encourage the
development ofthesecurities andfutures markets inMalaysia; andperform anyfunctions conferred byorunder
anyother act.(Ministry ofFinance, 1995).
57TheSecurities Commission hasissued, inter alia,Policies andGuidelines forIssue/Offer ofSecurities,
Guidelines onAsset Valuation forsubmission totheSecurities Commission, Guidelines onUnitTrust Funds
(continued...)Malaysia WT/TPR/S/31
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Inaddition, twoother agencies areinvolved: theKLSE (aself-regulating private sector organization),
andtheForeign Investment Committee.
Licensing ofstockbrokers
61. Trading insecurities iscarried outbymember companies incorporated inMalaysia. However,
a"member company" cannot bea"member oftheKLSE"; members oftheKLSE canbeeither natural
persons orcorporations whoareshareholders ofamember company. Anatural person must, interalia,
beaMalaysian citizen ofatleast21years ofagewithrelevant qualifications andwork experience.
Acorporate member isrequired toacquire atleast51percentofastockbroking company andhave
minimum shareholder funds ofRM100million. Ifthecorporation isafinancial institution, itmust
obtain theappraisal oftheBank Negara Malaysia toapply formembership. Foreign companies can
usually ownnomore than30percentoftheequity inanexisting local stockbroking company, but
Malaysia hasmade acommitment initsWTO GATS Schedule toallow foreign stockbroking companies
upto49percentequity participation bytheyear2000. There areatpresent 60licensed stockbroking
companies inMalaysia, ofwhich tenhaveforeign participation.
62. There arethreecategories ofmembership oftheMalaysian Monetary Exchange (MME); Broker
Membership, Non-broker Membership andLocal Membership. Broker andNon-broker Membership
isopentocompaniesincorporatedinMalaysiawhichfulfilthepublishedcriteria.Aforeignstockbroking
company applying formembership canholdamaximum of49percentequity inanexisting Malaysian
stockbroking company andmustcomply withallrequirements asapplied tolocalcompanies. MME
isprepared toassist anon-resident applicant intheapplication forawork permit uponformal admission
asalocalmember iftheapplicant undertakes towork aminimum period oftwoyears asalocal, gives
afullcommitment forregular attendance ontheMME trading floor, andtrades aquarterly average
of300lotspermonth.
63. Membership oftheKLOFFE consist oftrading members, local members andother classes
ofmembers ascreated bytheExchange. Trading members must, interalia,beincorporated under
theCompanies Act1965 andfulfil certain financial requirements. Aforeign stockbroking company
applying formembership canonlyholdamaximum of49percentequity inanexisting local
stockbroking firm. Local members areindividuals whohavepassed therelevant examination orbeen
granted anexemption fromthisrequirement. KLOFFE isprepared toassist non-residents whowish
tobecome members oftheExchange inobtaining workpermits uponformal admission totheExchange.
Upon nomination bytrading members, theExchange alsooffers trading permits toindividuals.
64. There arethreecategories ofmembership oftheKuala Lumpur Commodity Exchange (KLCE);
members (brokers andnon-brokers), localmembership andtrade affiliates. Members areMalaysian
companies ofgood business integrity whofulfil thefinancial requirements. Themaximum number
ofmembers is130andallarefullysubscribed58;membership maybeobtained through asecondary
market, which isadministered bytheKLCE. Local membership isopentoresidents ofMalaysia who
passaproficiency testontrading, register as"soleproprietor" andareguaranteed/qualified byaclearing
member andsatisfy listed financial requirements. Thequalifying clearing member mustbearegistered
dealer under theFutures Industries Act1993. Alocalmaytrade ontheflooroftheExchange onhis
57(...continued)
(revised on26May 1997), Guidelines onProperty Trust Funds andtheMalaysian Code onTake-overs and
Mergers 1987. TheMalaysian Code onTake-overs andMergers 1987 hastheforce oflawbyreason ofthe
existing provisions oftheSecurities Commission Act1993.
58Corporate members mayhave more thanonemembership oftheKLCE.WT/TPR/S/31 Trade Policy Review
Page 118
ownaccount orthatofhisclearing member. Trade affiliates areopentoanyMalaysian oroverseas
company fulfilling thefinancial requirements. Trade affiliates havenoflooraccess, butenjoy lower
brokerage fees. Atrade affiliate cantrade onitsownaccount orontheaccounts ofoverseas clients
through amember.
65. Representativeofficesofforeignbrokeragefirmsarepermittedtoundertakeresearch,information
andliaison services only, andmust beincorporated under theCompanies Act1965 andobtain an
investment adviser 'slicence. Representative offices arenotpermitted topublish orcirculate research
work inMalaysia.
66. Foreign fundmanagement companies (FFMCs) withaforeign equity share of100percent
donothaveaccess tolocalfunds. FFMCs withaminimum localequity participation of30percent
haveaccess tolocal institutional funds provided theymanage, orundertake tomanage, funds from
outside Malaysia uptotheamount ofUS$100 million andtheamount ofeachfundsourced fromwithin
Malaysia mustbeatleastRM10million. Inaddition, thefirsttenjointventure FFMCs willbeallowed
tomanage local unittrusts, subject tocertain criteria andconditions. Both fully andpartially
foreign-ownedFFMCsareeligibleforataxexemptioninrespectofincomederivedfromthemanagement
offunds heldoutside Malaysia. AllFFMCs arerequired tobelicensed asfundmanagers under the
Securities Act1983.59
Firms listed onthestock exchange
67. Proposals fortheissue ofsecurities and/or listing onastock exchange mustbesubmitted to
theSecurities Commission.60Foreign-based companies seeking alisting ontheKuala Lumpur Stock
Exchange musthaveasubstantial Malaysian interest.61Malaysian public companies wishing tooffer
theirsecurities abroad orlisttheirsecurities onasecurities exchange outside Malaysia arerequired
toseektheapproval oftheSecurities Commission.62
68. In1990,thecentralbankencouragedtheestablishmentoftheRatingAgencyofMalaysia(RAM)
toprovide credit ratings offirms issuing bonds andcommercial paper andtoprovide potential investors
withthenecessary financial information onwhich tobaseinvestment decisions. Since itsinception
in1990, RAM hasissued 326corporate ratings ofwhich 58during thefirsteight months of1996.63
InlinewithMalaysia 'saspiration ofbecoming aregional capital market, asecond rating agency, the
59Companies incorporated under theOffshore Companies Act1990 mayoffer fund management services
toresidents ofMalaysia. Companies intending tooffer fundmanagement services toresidents must comply with
onshore requirements.
60Section 32oftheSecurities Commission Act1993.
61Aforeign-based company isconsidered tohave"substantial Malaysian interests" if:more than50percent
oftheissuedandpaid-upcapitalofthecompanyisbeneficiallyheldbyMalaysianshareholdersresidentinMalaysia
havingmanagementcontrol;orthesinglelargestshareholderofthecompanyisMalaysianandresidentinMalaysia,
having management control andbeneficially holding notlessthan33percentoftheissued andpaid-up capital
ofthecompany atthetime ofapplication tooffer securities under these guidelines.
62Securities Commission Act1993, Section 32.
63Ministry ofFinance (1996).Malaysia WT/TPR/S/31
Page 119
Malaysian Rating Corporation Berhad (MARC), waslaunched bytheMinister ofFinance on
5September 1996.64
Quantitative restrictions applied tofirms investing ontheMalaysian stock exchanges
69. AnumberofstatutesplaceinvestmentrestrictionsonfundsestablishedbyanActofParliament.65
Forexample, theEmployees Provident Fund (EPF) isrequired tohaveinvested 70percentofitstotal
funds inMalaysian Government Securities (MGSs) andtoinvest 50percentofitsnewfunds inthese
securities. TheEPFcaninvest upto15percentoftotalfunds ontheKLSE. Insurance companies
arerequired toinvest aminimum of20percentoftheirfundinlowriskassets classified as"authorized
assets" (i.e.securities, billsorcertificates issued bytheFederal Government orBank Negara Malaysia
andCajama TieroneNotes andBonds) andmaynotinvest more than25percentincorporate bonds,
ofwhich nomore than10percentisallowed forunsecured issuers.
WTO Commitments
70. PromotioninMalaysiaofMalaysianstocksrequiresapprovalandprovisionofadvisoryservices,
which inturnrequires commercial presence. Commercial presence forsecurity brokerage islimited
torecognized foreign stockbroking companies through equity participation instockbroking companies,
orestablishment ofalocally incorporated jointventure withaMalaysian stockbroking company. At
present, aggregate foreign shareholding cannotexceed 30percentbut,subject toconditions, itmay
beincreased to49percentwitheffect of1July2000. Entry ofrecognized foreign stockbroking
companies isalsopermitted through arepresentative office. Malaysia hasreserved therighttolimit
theissuance ofnewlicences inaccordance with"economic needs" tests.
71. Malaysia notes initsGATS Schedule thattrades onanyMalaysian commodity futures exchange
mustbeconducted through companies incorporated inMalaysia which aremembers oftheexchange.
Foreign participation inanylocally incorporated jointventure company islimited to30percent, or
anyhigher percentage asdetermined bytherelevant authorities. Representative offices arepermitted
toundertake research, information andliaison services only. Thepresence ofnatural persons may
beconfined toonemanagement postperestablishment.
(iii) Telecommunications
(a) Structural change inthetelecommunications sector
72. Asinthecaseoffinancial services, developments intelecommunications affect notonly
consumers, butalsoother sectors forwhich telecommunications services areanimportant input. The
telecommunications sector inMalaysia hasexperienced significant growth during the1990s. Inthe
context ofarapidly changing technological environment, somesub-sectors andtechnologies havegrown
much faster thanothers. Forexample, thenumber ofresident andbusiness telephone linesincreased
from1.8to3.3millionbetween1991and1995,whilecellularphonesexperiencedmorethanaseven-fold
increase during thesameperiod (Table IV.15). Thenumber ofpeople waiting foratelephone decreased
from 81,780 in1990 to44,383 in1995; thenumber ofcomplaints declined from 31,600 to14,400
64Ministry ofFinance (1996).
65ExamplesaretheEmployeesProvidentFundAct1991,theEmployeesSocialSecurityAct1969,theInsurance
Act1996, theArmed Forces Fund Act1972, andthePension Trust Fund Act1991.WT/TPR/S/31 Trade Policy Review
Page 120
during thesame period; andlinecongestion declined from 15to3percent.66Liberalization ofthe
right tosupply telecommunications services hasundoubtedly made asignificant contribution tothe
sector 'srapid development.
Table IV.15
Telecommunications services statistics, 1991-96
Indicator 1991 1992 1993 1994 1995 1996
Number oftelephones (million) 1.8 2.1 2.4 2.9 3.3 3.8
Number oftelephones per100people 9.9 11.6 13.1 14.7 17.0 18.0
Leased circuits ('000) 18.8 21.4 24.9 29.9 37.5 40.9
Cellular telephones ('000) 131.7 206.4 340.1 571.7 1,005.1 1,513.6
Public telephones 46.8 65.2 81.1 104.4 181.9 213.7
Paging subscribers ('000) 62.0 80.0 109.0 128.8 149.3 133.4
Source: Jabatan Telekom Malaysia (1996), Annual Report 1994/1995, Kuala Lumpur; anddataprovided bytheMalaysian authorities.
(b) Policy objective andregulating authority
73. TheNational Telecommunications Policy (NTP) wasformulated in1994 tofacilitate the
modernization ofthesector through projections ofexpected developments andinvestment needs of
both physical infrastructure andhuman capital. Under theNTP, theMinistry ofEnergy,
Telecommunications andPostisresponsible fortheformulation ofpolicies andlong-term planning
ofthetelecommunications sector67,while theMalaysian Telecommunications Department (Jabatan
Telekom Malaysia, JTM) isresponsible forthesupervision ofthesector, withaviewtoencouraging
competition andensuring anorderly andefficient development ofthetelecommunications industry.68
JTM alsorepresents Malaysia invarious international telecommunications fora.69TheCustomer 's
Charter ofJTMsetsclear targets fortheprocessing ofcustomer complaints (14days), applications
forPublic Network licences (90days), radio station licences (30days) andapplications foramateur,
shipandaircraft licences (seven days).70Thecontent ofaudiovisual services, however, issubject to
additional regulations (Box IV.1).
66Government ofMalaysia (1996b).
67Forexample, theMinistry isincharge ofdrafting amulti-media "convergence" law(Table AII.1).
68Ministry ofEnergy, Telecommunications andPost(1994).
69JTM participates intheactivities oftheInternational Telecommunications Union (ITU), theInternational
Telecommunication Satellite Organization (INTELSAT), theInternational Maritime Satellite Organization
(INMARSAT), theAsia-Pacific Telecommunity (APT), theAPEC meetings dealing withtelecommunications,
theNegotiation Group onBasic Telecommunications attheWTO, bilateral meetings onfrequency coordination
ofsatellitenetworksandJointTechnicalCommitteesbetweenMalaysiaandThailand,andcooperationwithASEAN
dialogue partners (Chapter II(3)(iii)).
70Jabatan Telekom Malaysia (1996).Malaysia WT/TPR/S/31
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BoxIV.1: Market access issues inaudiovisual services
Applications forradio andtelevision licences aretobesubmitted totheMinistry ofInformation. There
arenosetstandards orprocedures fortheappraisal ofsuch applications. Thelicensing andenforcement
division oftheMinistry ofInformation drafts andenforces allterms andconditions applied to
broadcasting services. Aminimum 70percentbroadcasting timeforlocal programming applies; there
isatarget quota of80percent oftheprogrammes tobemetbylocal suppliers bytheyear 2000.
Broadcasting offoreign programmes issubject tothistarget. Allprogrammes whether foreign, local,
Malay orNon-Malay aresubject toguidelines against violence, horror, sexandcounter-culture.
Advertisements aresubject totheadvertisements code. Advertisements must project Malaysian culture
andidentity andreflect themulti-racial character ofthepopulation; promotion ofaforeign lifestyle isnot
allowed. Commercials must further comply withthe"Made inMalaysia" requirement andthusbeshot
locally bylocals using local actors/actresses andmusic composers. Allproducts advertised should be
available inMalaysia, although advertisements oftourist destinations areallowed provided theyareshot
byalocal crew. Advertisements fortourist destinations within ASEAN areexempt from this
requirement. Foreign filmfootage isallowed when itisdeemed necessary andrelevant totheproducts
asapproved bytheMinistry ofInformation.
WTO Commitments
Broadcasting services covering transmission from aforeign broadcast station offoreign broadcast matter
from foreign territory through television orradio isbound at20percentofscreening time; dubbing into
thenational language mayberequired. Theabsence ofrestrictions onconsumption abroad isalsobound.
Commercial presence isrequired forthecross-border supply ofmotion picture, video tapeandaudio
recording distribution services. Commercial presence may only berealized through alocally
incorporated joint venture withMalaysian individuals orMalaysian-controlled corporations orbothand
theaggregate foreign shareholding shall notexceed 30percent.
74. JTM isalsoresponsible forthedevelopment ofstandards andtype approval ofall
telecommunications equipment usedinMalaysia.71Themainobjectives aretoensure inter-operability,
compliance withinternational standards concerning theinterfacing ofcustomer equipment, maintain
quality, ensure thatnointerference iscaused toother users ofthenetwork, andprotect theintegrity
ofthenetwork andthesafety ofpersonnel.72JTMhasdeveloped technical standards forequipment
approval, andissues import permits fortelecommunications equipment (Table AIII.4). TheCustomer 's
Charter ofJTMrequires thatallapplications fortypeapproval willbeprocessed within 45daysand
thatimport licences willbeprocessed within fourdays.73Since March 1995, import permits have
alsobeenissued through anElectronic DataInterchange system allowing foraprocessing timeofone
totwodays.
71In1997, JTMestablished theInterconnection Steering Committee tosetguidelines ontheinterconnection
ofbasic andcellular services.
72Radio broadcast receivers arenotsubject totypeapproval, however.
73Jabatan Telekom Malaysia (1996).WT/TPR/S/31 Trade Policy Review
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(c) Licences andtheirconditions
75. According totheNational Telecommunications Policy "Theissuing oflicences willbecarried
outthrough abidding oranopentender system according tothecriteria oftheLicensing Board".74
Limitsontheforeign-ownershipofcompaniesprovidingbasictelecommunicationsisuptothemaximum
listed inMalaysia 'sWTO Schedule.75Resale oflicences orleased linesisnotpermitted.76Inaddition
tolicensing, tariffs forbasic telephone services aresubject tomaximum tariff ceilings, which apply
tobothfixed-line andcellular cervices, soastoensure optimum, efficient andproductive usage, avoid
marketdistortions,ensureinternationalcompetitivenessandensurewidespreadusageoftelephoneservices
inbothurban andruralareas.77Onarequest fromTelekom Malaysia, maximum prices wererebalanced
in1995forthefirsttimesince 198578,andthechanges wereeffective from1June1996.79Maximum
radio communications feeswere alsorevised in1995 forthefirsttimesince 1957.
76. Telekom Malaysia isMalaysia 'slargest telecommunications company. Thecompany was
established in1984 andacquired in1987 a20-year licence tooperate atelecommunications system
andin1989 acellular licence. Itwaspartly privatized in1990.80Telekom Malaysia hasbeengiven
priority withregard totheconstruction ofallfixed telecommunication linesintheMulti-media Super
Corridor (Box III.4) onthegrounds thatthecompany possesses therelevant infrastructure toundertake
suchwork. In1994, asecond network wasgranted arenewable 20-year licence which allows itto
establish,maintain,operateandworkatelecommunicationssysteminitiallyalongprivately-runconcession
highways. Soastomeetdemand alarge number ofnewlicences havebeenallocated toprovide for
avariety ofservices (Table IV.16).81Four oftheseven main telecommunications companies have
foreign partners.82Alllicences specify theservices tobeprovided, thuslimiting thesupply ofvalue
added services. Re-leasing oflinesisnotpermitted.
74Ministry ofEnergy, Telecommunications andPost(1994).
75WTO document GATS/SC/52/Suppl.2, 11April 1997.
76Telecommunications (Amendment) Act1993, Section 2;andTelecommunications Act1996.
77Jabatan Telekom Malaysia (1996).
78However, telephone linerental rates hadbeen inforce since 1982.
79Themaximum prices arepublished inJabatan Telekom Malaysia (1996).
80Reportedly,returnonassetsandproductionperemployeemorethandoubledafterprivatization,whilerevenue
persubscriber, direct exchange linesperemployee, speed ofaccess tobasic services, andresponse tocomplaints
andfaults alsoimproved significantly. (Government ofMalaysia, 1996b).
81During 1994, 1995 and1996 thenumber oflicence applicants wasrespectively 24,47and35;thenumber
oflicences granted wasrespectively 12,12and18andthenumber orrejections orcases under review was
respectively 12,35and17.
82Deutsche Telecom owns 29percentoftheshares ofCellular Communications Network (M)Sdn. Bhd.
(Celcom); Swiss Telecom owns 30percentofMutiara Telecommunications; U.S. West owns 20percentof
Binariang;andInternationalCableandWirelessowns30percentofSyarikatTelephoneWireless(STW).Telekom
Malaysia Berhad, TIME Telecommunications andMobikom have noforeign partners withanequity stake in
thecompanies.Malaysia WT/TPR/S/31
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Table IV.16
Basic telecommunications licences allocated, 1997
Type ofservice Number
of
licences
allocatedForeign participation Universal service obligations andother
conditions/comments
Local network 6 Twowitha3%foreign
ownership ratio, onewitha
21%andanother witha
20%foreign-ownership
ratio.Fivehaveacountry-wide universal service
obligation.
Trunk networks 7 Twowitha3%foreign
ownership ratio, onewitha
21%foreign-ownership
ratioandanother witha
20%foreign-ownership
ratio.Fivehaveacountry-wide universal service
obligation.
International networks 5 Onewitha30%foreign
ownership andonewith
21%foreign ownership and
another with30%foreign
ownership.Allhaveacountry-wide universal service obligation.
Paging 36 Three companies have
foreign ownership.Fivewithpractical national coverage, fivefor
Peninsular Malaysia andtheremaining forsmaller
areas.
Cellular andpersonal
communications8 Onelicensee has30%
foreign ownership andan
other has21%foreign
ownership.Allhaveacountry-wide universal service obligation.
Public landandmobile
radio12 None Three licences withcoverage ofPenninusular
Malaysia theother smaller areas.
CT2/Telepoint 1 None Coverage ofmajor towns inMalaysia.
Value-added services 21 Onecompany witha20%
share.Tenoperators withinternational coverage allwitha
variety ofservices.
Telecomm. services via
power lines3 None Onecompany eachinPeninsular Malaysia, Sabah
andSarawak.
Radio maritime 1 None Peninsular Malaysia.
Payphone 3 None Nation-wide coverage ofalloperators. Soasto
encourage thedevelopment inrural areas, forevery
twophone booths installed inurban areas the
operators havetoinstall onetelephone booth ina
rural area.
Radio leased channel
service7 None Onenationwide coverage theother local coverage.
Mobile satellite data 1 10%foreign owned. Mobile dataservice viasatelite.
Satellite 1 20%foreign owned. Malaysia launched itsfirstsatellite, Malaysia East
AsiaSatellite (MESAT) 1,on13January 1996 and
thesecond, MESAT 2,on13November ofthesame
year.
VSAT 4 Onecompany with30%
foreign ownership.Nationwide coverage ofalltelecommunications
services viaahubordirect tocustomer.
Radiolocation 1 None Nationwide coverage.
Satellite broadcasting 1 None Unrestricted.
Source: Information provided bytheMalaysian authorities.
77. Inearly 1996, there weretencompanies providing basic services including cellular. Inview
ofthelarge numbers, theauthorities encouraged mergers inorder toreduce thenumber ofoperators.WT/TPR/S/31 Trade Policy Review
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Thispolicy, however, wasnotsuccessful. InJuly1996, theMinister ofEnergy Telecommunications
andPostannounced thatMalaysia would notissueanynewlicences forfixednetwork operators. Only
existing companies aretoprovide services. According totheauthorities, thisistoavoid costly
duplication. Thisappears tobeasignificant departure from theprevious policy, which hadallowed
fortherapid growth intheprovisions oftelecommunications services andbenefited theMalaysian
economy ingeneral. Thechange willtendtobenefit existing licensees, possibly increasing prices for
consumers andotherusersoftelecommunications services asMalaysia doesnothavecompetition policy
tocounter collusion practices (Chapter III(4)(vi)).
(d) WTO commitments
78. Sector-specific commitments incorporated inMalaysia 'soriginal WTO GATS Schedule cover
value-addedserviceswhichareprovidedfromchannelsorlinesobtainedfromlicensednetworkoperators.
Market access through commercial presence isassured fordataandtransmission services83,mobile
dataservices andtelexandtelegraph services. Commercial presence istoberealized through alocally
incorporated jointventure orthrough partial acquisition ofanexisting licensed value-added services
operator. There isnocommitment toallow aggregate foreign share toexceed 30percent.
79. Malaysia isalsoparty totherecently concluded Telecommunications Agreement. Under the
Agreement itguarantees market access andnational treatment forspecific basic telecommunications
services uptoamaximum of30percentequity ofexisting public telecommunications operators.84
Malaysia didnotfullyadopt theregulatory reference paper oftheAgreement, nordiditmake any
commitments forfuture liberalization ofthemarket.
(iv) Transportation
80. Transportisimportantinitsownrightandbecauseitisaninputtoothertrade-dependentsectors.
Malaysia hasasignificant trade deficit intransport services. TheGovernment 'spolicy objectives are
toreduce thesectoral tradedeficit andtoensure thatMalaysia becomes aninternational transport hub.
(a) Airtransport
81. Airtransport developed rapidly during theperiod 1990-95 andisexpected tocontinue todo
so(Table IV.17). Malaysia Airlines isprivatized85,however, asanational carrier, itisrequired to
fulfilsome"social obligations" which gobeyond purecommercial appraisals. Newly established airlines
arerequired tocomply witheconomic, technical andoperational guidelines. Foreign ownership of
airlines iscurrently limited to30percentoftotalequity. Allairports aregovernment owned
corporatized entities andaremanaged onacommercial basis, subject totheregulations oftherelevant
83Servicescoveringelectronicmail,voicemail,on-lineinformationanddatabaseretrieval,enhancedfacsimile,
code andprotocol conversion.
84Thesub-sectors covered are:wired andwireless voice services; packet-switched datatransmission services,
including frame-relay services; circuit-switched datatransmission services; facsimile services; private leased
circuitservice;domestic/internationalsatelliteservicesandsatellitelinks/capacities(inclusiveofmobilesatellite);
satellite earth stations; international switching andother international gateway facilities; analogue anddigital
mobile services; paging services; trunked radio services; andvideo transport services.
85Malaysia Airlines islisted ontheKuala Lumpur Stock Exchange andapproximately 70percentofthestock
isheldbytheprivate sector; foreign ownership islimited toamaximum of30percentandstands currently
ataround 24percent.Malaysia WT/TPR/S/31
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Ministry. Theauthorities expect allexisting airports tobeprivatized bytheyear2000. Thenew
Kuala Lumpur International Airport willcontribute significantly tothenumber oflanding slotsavailable
atanygiven time.
Table IV.17
Traffic handled atMalaysian airports, 1990-2000
1990 1995 2000
(forecast)
Passengers (total '000) 17,323 25,584 37,592
Domestic ('000) 11,259 16,350 23,307
International ('000) 6,064 9,234 14,285
Cargo (total tonnes) 241,590 395,042 607,812
Domestic (tonnes) 68,853 105,380 158,031
International (tonnes) 172,737 289,662 449,781
Aircraft movements (total number) 287,151 411,323 596,694
Domestic 235,463 321,717 454,680
International 51,688 89,606 142,014
Source: Government ofMalaysia (1996), Seventh Malaysia Plan, Kuala Lumpur, p.356.
82. Airtransport isregulated bytheMinistry ofTransport. Allinternational anddomestic air
fareshavetobeapproved bytheMinistry. According totheauthorities, traffic rights aregranted in
relation tomarket demand andneedfortheprogressive growth ofairline services ona"fair, equitable
andreciprocal basis". Code sharing andother commercial arrangements aresubject togovernment
approval inorder toensure thattheyareinaccordance withthegeneral principles andentitlements
agreed tounder relevant bilateral airservices agreements.
83. Aviation charges reflect thelevelofservices provided byMalaysia. Aviation technical standards
arebased onICAO standards andprocedures, together withnational requirements.
International agreements
84. Nocommitments covering airservices havebeenmade intheWTO. Malaysia hasentered
intotworegionalmemorandaofunderstanding(MOU)coveringairservices;oneinvolvingtheexpansion
ofairservices intheIndonesia-Malaysia-Thailand Growth Triangle andoneconcerning theexpansion
oftheseservicesintheBrunei-Indonesia-Malaysia-PhilippinesEastASEANGrowthArea(ChapterII(3)).
Inaddition, Malaysia hasestablished bilateral airservice agreements with72countries.
(b) Maritime transport86
85. AsMalaysia 'sforeign trade hasgrown, thenumber ofships calling atMalaysian ports, the
average sizeofthose ships, andtheirtotalcargo hasgrown rapidly during the1990s. These trends
areexpected tocontinue during theSeventh Malaysia Planperiod (Table IV.18). Thenumber of
Malaysian registered shipsincreased from301in1990to600in1995. Thevolume carried byMalaysian
vessels increased onlyfrom 16.9million tonnes (16.4 percentoftotalcargo) to28.6million tonnes
(18.8 percentoftotalcargo).
86Manufacturers inSabah andSarawak whoexport rattan andwood-based products (excluding sawn timber
andveneer) areeligible fordouble deduction onfreight charges incurred irrespective oftheregistration ofthe
freighter, while other exporters receive suchdouble taxation allowances onlyforMalaysian registered ships.WT/TPR/S/31 Trade Policy Review
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86. Maritime transport isregulated bytheMinistry ofTransport. Domestic routes areprotected
byacabotage policy, although foreign vessels areallowed toplybetween PortKlang andPenang Port
andviceversa fortransshipment ofcontainers.87There aresignificant government procurement
preferences forMalaysian transport companies (Chapter III(4)(v)). Furthermore, the1996 Federal
Budget announced thatmeasures willbetaken toincrease theutilization oflocally owned ships and
thattheGovernment willintroduce more stringent conditions onnon-financial public enterprises88,
although nosuchmeasures haveyetbeentaken. Indirectly, Malaysian shipping companies maybenefit
fromalevyoncross-borderroadtransportwithSingapore,thepurposeofwhichistoencourageshipping
from Malaysia.89
Table IV.18
Number ofships calling atMalaysian ports andvolume ofcargo handled, 1990-2000
1990 1995 2000
(forecast)a
Number ofships calling 50,721 70,098 87,860
Total volume ofcargo (million tonnes) 103.4 152.3 254.5
General 25.3 30.1 36.2
Liquid bulk 47.2 60.7 87.6
Drybulk 15.2 23.7 41.3
Container 15.7 37.8 89.4
a Government ofMalaysia (1996), p.354.
Source: Government ofMalaysia (1996), Seventh Malaysia Plan, Kuala Lumpur, p.354.
87. Malaysian shipping agencies arepermitted tobemajority foreign-owned; themaximum foreign
equity condition hasbeenrelaxed from30to70percent.90Incontrast toairtransport, cargo sharing
and/or slotcharter arrangements oftheMalaysian International Shipping Corporation (MISC) are
considered apurely commercial arrangement.
88. Since the1994 yearofassessment, adouble deduction hadbeengranted forfreight charges
paidtoaMalaysian incorporated shipping company fortransportation onboard a"Malaysian ship".91
Thisdouble deduction hasbeenwithdrawn effective 1January 1997 (year ofassessment 1998). The
income ofashipping company, derived ordeemed tobederived from theoperations ofMalaysian
ships, isexempt from income tax.Dividends distributed from theincome ofashipping enterprise
87APEC (1996).
88Government ofMalaysia (1995).
89Government ofMalaysia (1996a).
90APEC (1996).
91"Malaysian Ship" isdefined asasea-going shipregistered assuchunder theMerchant Shipping Ordinance
1952 (Amended) other thanaferry, barge, tug-boat, supply vessel, crew boat, lighter, dredger, fishing boat
orother similar vessel" (Ministry ofFinance, 1995).Malaysia WT/TPR/S/31
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toshareholders arealsoexempt fromtax.92Theshipping industry isalsoassisted through theShipping
Fund.93
89. Toregister avessel inMalaysia, theowner ofthatvessel must beaMalaysian citizen or
corporationincorporatedinMalaysia,themajorityshareholdingmustbeheldbyMalaysians,themajority
oftheboard ofdirectors mustbeMalaysians, andtheprincipal place ofbusiness mustbeinMalaysia.94
In1996therewerenoimport duties onshipsweighing more than26tonnes gross (Harmonized System
tariff lines8904.00.100 and8904.00.200). Bycontrast, a25percentimport tariff applied toships
ofnotmore than26tonnes gross (HStariff line8904.00.300). Thenumber ofships registered in
Malaysia hasincreased significantly during the1990s (Table IV.19).
Table IV.19
Ships registered, 1990-95
Type 1990 1991 1992 1993 1994 1995
Oiltankers 63 65 72 88 91 108
Liquefied gascarriers 6 7 8 8 8 12
Bulk/Ore/Oil carriers 33 26 30 27 28 50
General cargo 180 191 206 257 257 369
Passenger/Cargo carriers 79 84 90 122 129 177
Container ships 15 21 24 22 20 21
Vehicle carriers 5 5 5 6 6 9
Others 616 672 791 1,004 1,111 1,386
Total 997 1,071 1,226 1,534 1,650 2,132
Source: Transport Statistics Malaysia (1995), Ministry ofTransport, Kuala Lumpur.
WTO Commitments95
90. Malaysia hasmade acommitment nottoimpose anyrestrictions oncross-border supply or
consumption abroad intheinternational maritime transportation services sector, excluding cabotage.
Inadditional comments itnoted thatthefollowing services attheportaremade available tointernational
maritimetransportsuppliersonreasonableandnon-discriminatorytermsandconditions:pilotage,towing
andtugassistance, provisioning, fuelling andwatering, garbage collection andballast waste disposal,
portcaptain 'sservices, navigation aids,shore-based operational services essential toshipoperations,
92Ministry ofFinance (1995), p.143.
93TheMalaysian Shipping Finance Fund (MSFF) wasestablished on30October 1992 toincrease shipping
capacity andtocarry Malaysia 'scargo, asameasure toovercome theproblem ofadeficit intheservices account
ofMalaysia 'scurrent account. TheFund consist ofaRM500million ShipFinancing Facility (SFF) anda
RM200million Shipping Venture Facility (SVF) which arebothallocated through theoffices oftheBank Negara
Malaysia.AnadditionalRM300millionisprovidedbytheprivatesector.Asoftheendof1996,RM410million
oftheSFFandRM200million oftheSVF were outstanding.
94WTO document GATS/SC/52, 15April 1994, p.57.
95InadditiontoitsWTOcommitments,MalaysiaisapartytoanumberofInternationalMaritimeOrganization
(IMO) conventions concerning Safety andShips Standards: Safety ofLifeatSea(SOLAS) 1974/1978, Standard
onTraining Certification andWatchkeeping (STCW)1978, Loadline Convention 1969, Maritime Pollution
(MAROPL) 1973/1978 andCollission Regulation (COLREG) 1972.WT/TPR/S/31 Trade Policy Review
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including communications, water andelectrical supplies, emergency repair facilities, anchorage, berth
andberthing services.
91. Bindingsoncommercialpresenceapplyonlyto"arepresentativeoffice,regionalofficeorlocally-
incorporated jointventure corporation withMalaysian individuals orMalaysian-controlled corporations
orbothandaggregateforeignshareholdinginthejoint-venturecorporationshallnotexceed30percent".
Therequirements toregister vessels inMalaysia islisted intheSchedule.
(v) International tourism
92. Malaysia isamajor tourist destination, witharound 7.2million arrivals in1996. Thetotal
employment created bytheindustry wasestimated tobeapproximately 106,200 in1995.96Malaysia
hadasignificant surplus intradeintourism services in1995asatotalof6.3million Malaysians travelled
overseas incurring anexpenditure ofRM5.8billion, compared to7.5million foreign tourists visiting
Malaysia, generating anincome ofRM9.9billion. Tourism receipts haveincreased sharply during
the1990s astheaverage length ofstayincreased somewhat andaverage expenditure pertourist doubled
(Table IV.20). In1997, 9.5million tourists areexpected tovisitMalaysia.97Improved access to
Malaysia, thanks tothenorth-south expressway aswellasincreased flight frequencies, hascontributed
tothisgrowth.
Table IV.20
Overview oftourist services exports, 1990-96
Year Tourist arrivals
(million)Tourist receipts
(RM billion)Average length ofstay
(days)
1990a7.5 4.5 4.6
1991 5.8 4.3 4.6
1992 6.0 4.6 4.7
1993 6.5 5.1 4.6
1994a7.2 9.0b4.8
1995 7.5 9.9b4.8
1996 7.2 11.4b5.4
a "Visit Malaysia" year.
b Including daytrippers, excursion andtransit passengers.
Source: Information provided bytheMalaysian authorities.
93. Topromote international tourism toMalaysia, tourist visasareonlyrequired forvisitors from
Bangladesh, China, Chinese Taipei, India, Pakistan, SriLanka. Novisasareissued tovisitors from
Israel.
96Government ofMalaysia (1996b).
97Government ofMalaysia (1996a).Malaysia WT/TPR/S/31
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94. Licences arerequired forTourism Training Institutions98,TourOperating andTravel Agency
Business99,andTourist Guides.100TheMinistry ofCulture, ArtsandTourism isintheprocess of
formulating regulations forthelicensing andenforcement ofTourist Accommodation Premises and
Tourist Restaurants asrequired bytheTourism Industry Act1992. Licences areissued bytheSecretary
General oftheMinistry, whoisappointed Commissioner ofTourism. TheMalaysia Tourism Promotion
Board wasestablished, under anActofParliament, topromote tourism inMalaysia.101TheBoard
isfinanced byParliament aswellasbyearnings onitsactivities.
95. Foreign investors areallowed totakeastakeofupto30percentinMalaysian tourism projects
forinbound tourism. Foreign investors arenotallowed toparticipate inticketing operations oroutbound
tourism.102Negotiations within ASEAN aimtoreduce investment restrictions oninvestors fromother
ASEAN countries. Investors canapply fortaxincentives through theoffices oftheMalaysian Industrial
Development Agency (MIDA) (Chapter III(4)(ii)).103Furthermore, aSpecial Fund forTourism is
administered bytheBank Negara Malaysia; applications aretobemade through commercial banks.104
WTO Commitments
96. Malaysia hasundertaken nottoimpose restrictions onconsumption oftourism services abroad.
Delivery oftourism services, including travel agencies andtouroperators, through commercial presence
isonlypermitted through joint-ventures inwhich foreign participation maynotexceed 30percent.
98Tourism Industry (Licensing ofTourism Training Institutions) Regulations 1994.
99Registrationfeesforoutboundtouroperatingbusinessesarefourtimesashighasregistrationfeesforinbound
touroperating businesses (Tourism Industry (Tour Operating Business andTravel Agency Business) Regulations
1992).
100Tourism Industry (Licensing andControl ofTourist Guides) Regulations 1992.
101Malaysia Tourism Promotion Board Act1992.
102Foreign destinations maybeadvertised inMalaysia, provided theadvertisements arefilmed byaMalaysian
crew.
103Establishment, expansion andmodernization ofhotels andtourist projects designated bytheMalaysian
IndustrialDevelopmentAgencyaspromotedactivitiesareeligibleforconsiderationofpioneerstatusandinvestment
taxallowance under thePromotion ofInvestment Act1986. Other taxincentives forthetourism industry are
administered under theIncome TaxAct1967 andinclude aninitial industrial building allowance of10percent
andasubsequentannualallowanceof2percent,plusadoubledeductionfortrainingandpromotionalexpenditure.
Inthe1997 Budget theGovernment proposed togrant these taxallowances forfiveyears fortheconstruction
ofmedium andbudget hotels, holiday camps andrecreational projects; andtheconstruction ofconvention centres
with ahallcapable ofaccommodating atleast 3,000 participants. Inaddition, local companies organizing
conferences bringing inatleast500foreign participants arealsotobegiven income taxexemptions uptothe
year2000 (Government ofMalaysia, 1996a).
104Non-resident controlled companies mayapply tothisfundprovided theinvestment ismade inMalaysia.WT/TPR/S/31 Trade Policy Review
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(vi) Professional services
(a) Overview
97. Professional services cover awide range ofservices, some ofthemain categories being
accountants,architects,doctors,engineers,lawyersandsurveyors.GDPestimatesincludetheseservices
in"other services", which contribute 2percenttoGDP. Incomparison toother sectors, arelatively
small number ofhighly qualified professionals isengaged insupplying these services. Inalmost all
professional services, value added increased byapproximately 150percentbetween 1989 and1994,
while increases inemployment varied between 40percentforaccountants andover100percentfor
architects (Table AIV.8). Market share ofthefourlargest firms wasrelatively lowat27.5percent
foraccountants, 11.5percentforarchitects, 2.6percentfordoctors, 15.4percentforengineers,
9percentforlawyers and12.4percentforsurveyors.105
98. Foreign trade insuchservices issmall butfeasible through cross-border supply, commercial
presence andpresence ofnatural persons. Foreign firms orindividuals wishing toprovide professional
services toMalaysian clients aregenerally required toberegistered withtherelevant Malaysian
professional associations. Such registration requirements aregenerally administered bytherelevant
professional service board orassociation.
Overview ofWTO Commitments
99. With regard tonational treatment, Malaysia hasagreed nottolimitthecross-border supply
orconsumption abroad ofthose professional services forwhich ithasmade commitments.106Malaysia
iscommitted tonotplacing anyrestrictions onnational treatment forthose business sectors forwhich
commitments havebeenmade, except thatsome services mustbeauthenticated byalicensed auditor
oraregistered authority.107Inthose sectors inwhich Malaysia hasmade acommitment toallow
commercial presence, itisinallcases limited toamaximum of30percent.
(b) Accounting services
100. TheAccountantsAct,1967(revisedin1972)requiresapersonwhointendstoprovideaccounting
services toberegistered asamember oftheMalaysian Institute ofAccountants (MIA). Suchaperson
shallbeadmitted asamember if,among other things, heorshehaspassed therequired examinations
ofifheorsheisamember ofoneoftheeleven associations ofaccountants.108Topractice asan
105Bank Negara Malaysia (1996b).
106Legal services; accounting, auditing andbookkeeping services; taxation services; architectural services;
engineering services; integrated engineering services; medical specialty services; computer andrelated services;
consultancyservicesrelatedtosoftwareimplementation;databaseservices;computersoftwaredevelopmentservices;
researchandexperimentalservicesonsocialsciencesandhumanities;rentalandleasingserviceswithoutoperators,
related toships (excluding cabotage andoffshore trades), aircraft, construction, mining andindustrial plant and
equipment; management consulting services; services incidental tomanufacturing; technical testing andanalysis
services; student placement services; convention andexhibition management services; andlandscaping services.
107Auditing, taxation, architectural, engineering, integrated engineering services must beauthenticated by
alicences authority inMalaysia.
108These include: Malaysian Association ofCertified Public Accountants; Institute ofChartered Accountants
ofScotland;InstituteofCharteredAccountantsinEnglandandWales;InstituteofCharteredAccountantsinIreland;
(continued...)Malaysia WT/TPR/S/31
Page 131
accountant inMalaysia, non-Malaysians mustobtain thenecessary work permit from theMalaysian
ImmigrationDepartment,beordinarilyresidentinMalaysiaandamemberofMIA.Aftertakingaccount
oftheinterests oflocalaccountants, theMIAoccasionally provides aletterofsupport totheImmigration
Department foritsmember firms whoseektorecruit staffabroad.109
WTO Commitments
101. Commercial presence mayberealized onlythrough alocally registered partnership witha
Malaysian firmandaggregate foreign ownership ofsuchfirmshallnotexceed 30percent.
(c) Legal services
102. Admission tothelegal profession isgoverned bytheLegal Profession Act1976. TheAct
requires alegalpractitioner tobe"aqualified person". Aqualified person isdefined asaperson who
possesses adegree oraqualification recognized bytheQualifying Board established under theAct.
TheActrecognizes lawdegrees from theUniversity ofMalaysia inSingapore, theUniversity of
Singapore andtheNational University ofSingapore. Other non-Malaysian degrees recognized bythe
Board arelawdegrees from 60listed lawfaculties intheUnited Kingdom, anexternal lawdegree
from theUniversity ofLondon, lawdegrees from 15recognized Australian lawschools andfive
recognized NewZealand lawschools.
103. Foreign lawfirms areallowed toundertake advisory work tolocal lawyers orlocal clients
from theirhome basewithout physical presence inMalaysia. Foreign lawfirms arefurther allowed
toundertake, through cross-border supply orphysical presence, legalservices covering advisory and
consultancy services relating onlytohome-country laws, international lawandoffshore corporation
lawsinMalaysia.
WTO Commitments
104. MarketaccessthroughcommercialpresenceisboundforcorporationsincorporatedintheFederal
Territory ofLabuan which provide legalservices tooffshore corporations established ontheTerritory.
108(...continued)
AssociationofCertifiedAccountants(UnitedKingdom);AustralianSocietyofAccountants;NewZealandSociety
ofAccountants; Canadian Institute ofChartered Accountants; Institute ofChartered Accountants ofIndia; and
Institute ofCost andManagement Accountants (United Kingdom).
109TheMIA currently hasjustover10,000 members. Bytheyear2020, demand foraccountancy services
isexpected torequire atleast sixtimes thecurrent number ofaccountants.WT/TPR/S/31
Page 132Trade Policy Review
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