RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/92
5 November 2001
(01-5345)
Trade Policy Review Body
TRADE POLICY REVIEW
MALAYSIA
Report by the Secretariat
This report, prepared for the third Trade Policy Review of Malaysia, has been
drawn up by the WTO Secretariat on its own responsibility.  The Secretariat has,
as required by the Agreement establishing the Trade Policy Review Mechanism
(Annex 3 of the Marrakesh Agreement Establishing the World Trade
Organization), sought clarification from the Government of Malaysia on its
trade policies and practices.
Any technical questions arising from this report may be addressed to
Mr. M. Hayafuji (tel. 739 58 73) or Mr. M. Daly (tel. 739 50 77).
Document WT/TPR/G/92 contains the policy statement submitted by the
Government of Malaysia.
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on Malaysia.Malaysia WT/TPR/S/92
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS vii
(1) E CONOMIC ENVIRONMENT vii
(2) D EVELOPMENTS CONCERNING INSTITUTIONAL FRAMEWORK viii
(3) T RADE AND TRADE -RELATED POLICIES , PRACTICES AND MEASURES viii
(4) S ECTORAL ISSUES x
(5) O UTLOOK xi
I. ECONOMIC ENVIRONMENT 1
(1) O VERVIEW 1
(2) M AIN POLICY DEVELOPMENTS 5
(i) Macroeconomic policies 5(ii) Structural policies 8
(3) D
EVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENT 10
(i) Composition of trade 10
(ii) Direction of trade 10
(iii) Trends in inbound and outbound foreign direct investment 13
(4) O UTLOOK 14
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 15
(1) O VERVIEW 15
(2) G ENERAL CONSTITUTIONAL AND LEGAL FRAMEWORK 15
(3) D EVELOPMENT AND ADMINISTRATION OF TRADE POLICY 16
(i) Administrative framework 16(ii) Advisory and review processes 17
(4) T
RADE POLICY OBJECTIVES 17
(5) T RADE AGREEMENTS AND ARRANGEMENTS 18
(i) Multilateral agreements 18
(ii) Regional arrangements 19(iii) Bilateral agreements 22
(6) T
RADE DISPUTES AND CONSULTATIONS 23
(7) F OREIGN INVESTMENT REGIME 23
III. TRADE POLICIES AND PRACTICES BY MEASURE 25
(1) I NTRODUCTION 25
(2) M EASURES DIRECTLY AFFECTING IMPORTS 27
(i) Registration, customs valuation, and procedures 27(ii) Tariffs 28(iii) Other charges affecting imports 37(iv) Import prohibitions, restrictions, and licensing 37
(v) Contingency measures 41
(vi) Government procurement 41(vii) State-trading 44WT/TPR/S/92 Trade Policy Review
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Page
(viii) Local-content requirements and the vendor programme 44
(ix) Other measures 45
(3) M EASURES DIRECTLY AFFECTING EXPORTS 45
(i) Procedures 45(ii) Export taxes, charges, and levies 46
(iii) Export prohibitions, restrictions, and licensing 47
(iv) Duty and tax concessions 48(v) Export subsidies 50(vi) Export finance, insurance, and guarantees 50(vii) Export promotion and marketing assistance 51
(4) M
EASURES AFFECTING PRODUCTION AND TRADE 52
(i) Legal framework for businesses 52(ii) Taxation and tax measures 52(iii) Non-tax incentives 56(iv) Standards and other technical requirements 56(v) Sanitary and phytosanitary regulations 59
(vi) Intellectual property rights 60
(vii) Role of state-owned enterprises and privatization 64(viii) Competition policy and regulatory issues 66(ix) Corporate governance 67
IV. TRADE POLICIES BY SECTOR 68
(1) I
NTRODUCTION 68
(2) A GRICULTURE 68
(i) Main features 68(ii) Policy objectives for the sector 69(iii) Main policy instruments in the agriculture sector 70
(3) M
INING AND QUARRYING 71
(4) M ANUFACTURING 72
(i) Features 72(ii) Policy objectives for the sector 73(iii) Main policy instruments for the sector 74(iv) Key subsectors 75
(5) S
ERVICES 79
(i) Features 79
(ii) Policy objectives for the sector 79(iii) Financial services 80(iv) Telecommunications 87(v) Transport 91
REFERENCES 95
APPENDIX TABLES 101Malaysia WT/TPR/S/92
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CHARTS
Page
I. ECONOMIC ENVIRONMENTI.1 Merchandise trade by product, 1996 and 1999 11
I.2 Merchandise trade by partner, 1996 and 1999 12I.3 Foreign direct investment by origin, 1996 and 2000 13
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Simple average applied MFN tariff rates, by HS section, 1997 and 2001 31
III.2 Distribution of MFN tariff rates, 1997 and 2001 32III.3 Tariff escalation by 2-digit ISIC industry, 1997 and 2001 33III.4 Applied AFTA tariff rates, by HS section, 1997 and 2001 35
III.5 Applied MFN and AFTA tariff rates, by HS section, 2001 36
III.6 Import licensing, by HS section, 2001 40III.7 Export licensing, by HS section, 2001 49
TABLES
I. ECONOMIC ENVIRONMENT
I.1 Main macroeconomic indicators, 1996-2000 1
I.2 Share of GDP and employment by sector, 1996-2001 4
III. TRADE POLICIES AND PRACTICES BY MEASUREIII.1 Tariff structure in Malaysia 28
III.2 Applied MFN tariff averages by stage of processing, 1997 and 2001 30III.3 Ministry/agency responsible for issuing licences, 2001 39III.4 Government procurement, 1996-2000 42
III.5 Federal government tax revenues, 1997-2001 53
III.6 Main direct tax incentives for investment 54III.7 Indicators of standards development in Malaysia, 1996-2000 57III.8 Accredited laboratories in Malaysia, as of February 2001 58III.9 Actions taken under the Copyright Act 1987, 1987-2000 61
III.10 Financial position of NFPEs, 1997-2000 65
IV. TRADE POLICIES BY SECTORIV.1 Production of selected agricultural commodities and land use, 1990, 1995 and 2000 69
IV.2 Overview of domestic support measures, 1996-98 71IV.3 Manufacturing value-added in Malaysia, 1994-1997 73IV.4 Tariff on automotive products, 2001 76
IV.5 Performance of Malaysia's electronics industry, 1996-2000 78
IV.6 Share in total assets of the financial system by institution, 1997-2000 81IV.7 Performance of the Malaysian banking system, 1996-2000 82IV.8 Overview of the Malaysian insurance sector, 1996-2000 84IV.9 Market structure of telecommunication and multimedia in Malaysia, 2001 87IV.10 Traffic handled at Malaysian airports, 1996-2000 91
IV.11 Number of ships calling at Malaysian ports and volume of cargo handled, 1996-2000 93WT/TPR/S/92 Trade Policy Review
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APPENDIX TABLES
I. ECONOMIC ENVIRONMENT
AI.1 Exports by product groups, 1995-99 103
AI.2 Imports by product groups, 1995-99 104AI.3 Exports by destination, 1995-99 105AI.4 Imports by origin, 1995-99 106
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
AII.1 Overview of selected trade-related legislation, June 2001 107
AII.2 Main trade-related ministries and their affiliated agencies and statutory bodies, 2001 109
AII.3 Status of selected notifications to the WTO, 1 June 2001 111
III. TRADE POLICIES AND PRACTICES BY MEASURE
AIII.1 Average MFN tariff, by HS chapter, 1997 and 2001 113
AIII.2 Average MFN and AFTA tariff, by HS chapter, 1997 and 2001 118AIII.3 Duty concessions granted in Malaysia 121AIII.4 Products subject to import licensing requirements/approval, 2001 122AIII.5 Products subject to export licensing requirements, 2001 126AIII.6 Malaysia's notifications under Article 10.6 of the Agreement on Technical Barriers to Trade,
July 1997 - December 2000 128
AIII.7 Non-financial public enterprises (NFPEs), 1999 132Malaysia WT/TPR/S/92
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SUMMARY OBSERVATIONS
(1) ECONOMIC ENVIRONMENT
1. During the period under review
(1997-2001), Malaysia's economy has
remained relatively open to trade and foreign
investment.  This is especially true of thegoods sector;  by comparison, the services
sector is more closed, although judging from
the recently launched Eighth Malaysian Plan,
the Government does envisage opening up the
sector gradually.  Imports and exports ofgoods and services were equivalent to 106%
and 117% of GDP on average during the
period 1997-2000.  Inbound foreign direct
investment (FDI) typically accounts for
between one quarter and one third of privateinvestment in each year, while the stock of
inbound foreign direct investment (FDI)
currently amounts to nearly half of GDP.
Moreover, according to a globalization index
used in a recent independent survey, Malaysia
is in the top 20 of the most globalized
economies.
2. In the second half of 1997, Malaysia
was struck by the Asian financial crisis, which
contributed to a severe deterioration in its
economic performance in 1998.  This
deterioration occurred despite apparentlystrong economic fundamentals (including full
employment, low inflation, a high national
saving rate, a prudent fiscal position, and a
reasonably sound banking system).
Nonetheless, both capital and total factorproductivity (TFP) growth had dropped
markedly (from an annual average rate of
2.4% in 1990-1995 to 0.9% in 1995-2000),
perhaps reflecting over-investment, if not an
increasingly inefficient allocation of capital.The outcome was that, after having grown on
average by more than 8% annually since the
recession of 1985, real GDP fell by 7.4% in
1998 owing to a large drop in private
domestic demand caused by a sharp decline in
investment and, to a lesser extent, by lower
consumption.  As a consequence, theunemployment rate rose to 3.3% in 1998, up
from 2.5% in the previous year.  Inflation
doubled, from 2.6% in 1997 to 5.3% in 1998,partly due to higher import prices resulting
from the depreciation of the ringgit, which fell
from about RM 2.8/US$ in the third quarter of
1997 to RM 3.8/US$ a year later.
3. Initially, Malaysia responded to the
crisis by tightening financial policies, but withthe further worsening of the economic
situation, the Government changed its policy
stance towards the end of 1998, cutting
interest rates and raising government
spending in order to stimulate the economy.In addition, with a view to supporting the
domestic financial markets, and to provide
scope for the easing of monetary and fiscal
policies, temporary controls were imposed on
selected capital account transactions and theringgit was pegged at RM 3.80 per U.S.
dollar.
4. The issue of whether these
macroeconomic policies, especially the
imposition of capital controls, helped
Malaysia to recover more quickly from the
crisis has been highly debated.  Indeed, at thetime the capital controls were put in place,
markets both in Malaysia and elsewhere in
South East Asia appeared to have already
stabilized.  Nonetheless, the economy did
rebound, with GDP growing by 6.1% in 1999and by 8.3% in 2000 so that at the end of
2000, real output in value terms exceeded the
pre-crisis level (however, per capita income
was US$3,531 in 2000, around 20% lower
than the pre-crisis level).  This rebound can beattributed to rising private consumption and a
revival in domestic investment as well as to
strong export growth owing to the fact that
Malaysia's trading partners kept their markets
open throughout the crisis.  Unemploymentdeclined to 3.1% in 2000 and inflation slowed
from 2.8% in 1999 to 1.6% in 2000.
5. A sustained recovery of the Malaysian
economy depends not just on prudent
macroeconomic policies, but also on
structural reforms.  The Asian crisis revealed
weaknesses in several areas, including incorporate structure and governance as well as
in the financial system.  Accordingly, the
Government has taken steps or announcedWT/TPR/S/92 Trade Policy Review
Page viii
plans to restructure the corporate and
financial sectors.  These are in addition to a
long-standing privatization programme and
labour market reforms.  The Government has
also adopted measures to diversify the
economy by further widening and deepeningthe industrial base, enhancing the contribution
of the agriculture to GDP, and by fostering the
development of the services sector.
(2) D
EVELOPMENTS CONCERNING
INSTITUTIONAL FRAMEWORK
6. There have been a few noteworthy
changes in Malaysia's trade-related
institutional framework since its previous
Trade Policy Review.  In January 1998, the
National Economic Action Council (NEAC)was established as a consultative body to the
Cabinet with a view to dealing with economic
problems arising from the Asian financial
crisis, and in July 1998, the NEAC announced
the National Economic Recovery Plan
(NERP).  Further, with a view to strengthening
the resilience of Malaysia's financial market,Danaharta (the national asset management
company), Danamodal (a special purpose
vehicle to revitalize the banking sector), and
the Corporate Debt Restructuring Committee
(CDRC) were established under NERP.  In1997, the National Consumer Affairs Council
was also formed under the chairmanship of
the Minister of Domestic Trade and Consumer
Affairs, to deal with consumer protection
issues.
7. WTO Agreements continue to play a
pivotal role in the formulation of Malaysia's
trade and trade-related policies.  Regional
arrangements are also important, notably
those involving the Association of South EastAsian Nations (ASEAN) and the Asia Pacific
Economic Cooperation forum, and various
bilateral agreements, including in areas not
covered by WTO Agreements.  Malaysia
coordinates its policies on WTO matters with
other ASEAN members, and, at the same time,
it endeavours to ensure that its participation inregional trade arrangements is consistent with
the main principles underlying the WTO
Agreements.(3) T
RADE AND TRADE -RELATED
POLICIES , PRACTICES AND
MEASURES
8. During the period under review,
Malaysia's economy has remained relatively
open as far as international trade in goodsand foreign investment are concerned.  While
some trade barriers were raised "temporarily"
in the wake of the Asian financial crisis,
certain restrictions on foreign direct
investment (FDI) were at the same timerelaxed, also temporarily.  In addition, the
Government, by promoting corporate and
financial restructuring, has taken steps to
address structural weaknesses that became
more evident during the crisis.  Nonetheless,there are several barriers to trade and
investment that still constitute potentially
important distortions to competition and thus
potential impediments to Malaysia's long-term
development.
9. The tariff continues to be the main
border measure on imports; it also accountsfor 5.8% of total tax revenues.  As a
consequence of "temporary" increases in rates
in 1998, the average applied MFN tariff
increased from 8.1% in 1997 to 9.2% in 2000.
This rise in tariff protection was facilitated bythe fact that one third of tariff lines are not
bound and, even for those lines that are
subject to bindings, bound rates often
considerably exceed applied rates.  This lack
of bindings, together with the gap betweenbound and applied rates, can impart a degree
of unpredictability to Malaysia's tariff.
Furthermore, the multiplicity of applied rates
contributes to the complexity of the tariff.
However, the decline in non-ad valorem tariffsfrom 4.5% of all tariff lines in 1997 to only to
0.7% in 2000 has increased the transparency
of the tariff, as such duties tend to conceal
tariff "peaks".  Tariff peaks apply, inter alia, to
automobiles, beverages, textiles and clothing.
With an increase in the number of tariffs both
below 10% and above 30%, the dispersion inapplied MFN rates has risen, thereby
increasing the potential for the tariff to distort
the allocation of resources to the detriment of
Malaysia's economy.Malaysia WT/TPR/S/92
Page ix
10. The average level of tariff protection
is lower than that indicated by the simple
applied MFN average owing to tariff
concessions, often for capital and intermediate
inputs, as well preferential rates, particularly
those favouring ASEAN countries;  indeed theaverage rate of duty collected on total imports
was 1.3% in 2000 (compared with 3% in
1997).  The widening gap between the average
level of applied MFN tariffs and the average
level of the preferential AFTA tariff hasincreased the potential for trade diversion.
ASEAN's share of Malaysia's imports rose
substantially between 1996 and 1999,
although this trend may be due more to the
depreciation of ASEAN countries' currenciesin the wake of the Asian financial crisis than to
the AFTA.  Insofar as trade diversion does
occur owing to the AFTA, and outweighs trade
creation, it could possibly be detrimental to
Malaysia's non-ASEAN trading partners.
11. Apart from import prohibitions
implemented for national security, religious,and environmental reasons, various non-tariff
border measures barriers are also used as
instruments of Malaysia's trade and
development policy.  In particular, an
increasing proportion of tariff lines is subjectto import licensing;  for some agricultural and
industrial products, such licencing can
seemingly provide the authorities with scope
for administrative discretion.  On the other
hand, Malaysia is not a major user ofcontingency measures;  during the review
period, it has taken few anti-dumping (AD)
actions and no countervailing (CV) or
safeguard measures.
12. Local-content requirements were
abolished in 2000, except in the case of the
automobile industry.  Government
procurement procedures, notably preference
margins, tend to favour locally owned
businesses, particularly where relatively small
amounts are involved.  Foreign suppliers are
usually excluded for contracts of largeramounts unless the supplies or services are not
available locally;  for works contracts, foreign
contractors are allowed to participate if there
is no local expertise. Malaysia is not a party tothe GPA, although it does participate in the
WTO working group on transparency in
government procurement.  Furthermore,
restrictions on foreign ownership encourage
local participation in companies operating in
Malaysia, although these restrictions tend tobe relaxed for companies with higher exports.
13. Some items, notably forest products,
crude oil, and selected palm oil products, are
subject to export duties, which account for
around 2% of total tax revenues.  A fewproducts are also subject to prohibitions,
restraints, and licensing requirements.  At the
same time, assistance is provided to exports
through, inter alia, tariff concessions, tax
relief, export processing zones, concessionarycredits, insurance, and guarantees as well as
promotion and marketing assistance.
14. Tax measures are among the main
instruments of Malaysia's economic
development strategy.  They include a wide
array of investment incentives that are offered
to various manufacturing activities, includingexports thereof, agriculture, tourism, and
other approved service sectors, research and
development, training, and environmental
protection.  It appears that some of these
incentives might have been provided as a quidpro quo for local-content requirements that
the authorities sometimes attached to
investments;  with the removal of most of these
requirements, the question arises whether such
incentives are still necessary.  Tax incentivesare often costly (in terms of tax revenues
forgone) and their effectiveness is not always
clear.  While tax as well as non-tax incentives
for investment can sometimes be justified on
grounds of "market failure", they also run therisk of subsidizing good investments, which
need no such assistance and could well have
been undertaken in any event, or turning
otherwise dubious investments into profitable
ones.  Insofar as incentives have stimulated
investment in the latter, they may well have
contributed to over-investment, and to adistortion in the allocation of resources,
thereby possibly contributing to the fall in
total factor productivity that occurred in
Malaysia during the early 1990s.WT/TPR/S/92 Trade Policy Review
Page x
15. Malaysia is gradually bringing
domestic standards into line with international
norms.  Although 31% of the 2,862 Malaysian
standards currently in force are aligned with
or based on international standards, 80% of
the new standards developed by Malaysia in1998 and 1999 correspond to international
standards.
16. Since its previous Review (in 1997),
Malaysia has enacted two new laws and
amended four others to strengthen theprotection of intellectual property rights and
bring domestic legislation into conformity with
the TRIPS Agreement.  It has also stepped up
enforcement of IPR laws, especially those
pertaining to copyrights.
17. State-owned enterprises continue to
play an important role in the Malaysian
economy, especially in petroleum, electricity,
transportation, telecommunications, and
postal activities.  Aside from their own
operations, some of these enterprises provide
finance not just to each other, but also toprivate companies.  For example, PETRONAS,
the highly profitable state-owned oil company
has purchased stakes in, inter alia, automobile
and shipping companies , and Khazanah
Holdings, a state-owned investment fund, haspurchased shares in a private company's
telecom unit.  However, the Government has a
long-standing privatization programme,
although the onset of the Asian crisis has
seemingly slowed its progress.  Indeed, theGovernment has bought back stakes in some
companies.
18. Currently, Malaysia does not have a
comprehensive competition law.  It does,
however, have various other laws that regulatethe activities of enterprises and protect
consumer interests.  Moreover, with a view to
fostering competition in telecommunications,
the Government has recently established
competition guidelines for this sector.  Steps
are being taken to improve corporate
governance in Malaysia.(4) S
ECTORAL ISSUES
19. The Malaysian economy is relatively
open to both trade in goods and foreign
investment, although rice and automotive
products are notable exceptions.  The
electronics sector appears to offer a strikingexample of the benefits of an open regime in
fostering development.  The sector has drawn
significant flows of foreign direct investment
(FDI), has had fairly little tariff and non-tariff
protection, and has grown to account forapproximately 2.5% of global electronics
production:  it has been among the main
engines of Malaysia's growth, and its strong
external competitiveness was an important
element in Malaysia's recovery from Asianfinancial crisis, with the sector accounting for
more than half of Malaysia's total exports.  By
contrast, the domestic automotive sector has
been relatively sheltered from foreign
competition;  it has been protected by high
tariffs and supported by various other
incentives;  the sector has been successful inwinning a large share of the domestic market
but, contrary to stated objectives, its exports
are modest, suggesting perhaps a certain lack
of external competitiveness.
20. The Government's recently launched
the Eighth Malaysia Plan envisages a further
gradual opening of the services sector, which
accounts for over half of Malaysia's GDP, but
is not yet as open to trade as  agriculture and
manufacturing.  This is largely because ofrestrictions on foreign direct investment,
which is necessary for the establishment of
commercial presence, the main mode of
delivery for most services.  Commercial
presence is generally confined to jointventures, in which combined foreign
ownership cannot exceed 30%.  Insofar as
barriers to commercial presence restrict
competition in the provision of services, they
tend to impair efficiency in the sector, so that
the prices paid for these services, both by
businesses and households, are higher thanwould be the case in a more competitive
market.  The resulting higher costs of doing
business could hamper the competitiveness of
all firms in Malaysia that require essentialMalaysia WT/TPR/S/92
Page xi
services (such as energy, finance,
telecommunications, and transportation) as
inputs in their production and delivery of
goods and services.
21. The Government's plans to further
open the financial services sector tointernational competition, reform measures
undertaken by the Securities Commission, and
steps taken to promote corporate governance
and corporate restructuring are all mutually
supporting.
(5) 
OUTLOOK
22. Malaysia is a trading nation, with
exports and foreign direct investment playing
an important role in its economy.  The recent
sharp slowdown in the U.S. economy, and
Japan's further weakening, pose majorchallenges for Malaysia's trade and
investment outlook and thus to Malaysia's
short- and medium-term economic prospects.
Indeed, the Central Bank predicts that growth
will fall to between 5% and 6% in 2001,
mainly due to the slowdown in exports to the
United States (the Asian Development Bankhas forecast growth of 4.9% in 2001),
notwithstanding stimulative fiscal measuresadopted in March 2001.  This raises the
question of whether Malaysia's economic
policy has perhaps over-emphasised exports at
the expense of domestic demand (i.e. national
saving is excessive), making it too dependent
on foreign markets (and a narrow range ofproducts, namely electronics).
23. Another major challenge looming on
the horizon is the impending accession of
China to the WTO.  China is a formidable
competitor in Malaysia's export markets,including electronics, it also competes
strongly with Malaysia for FDI.  Indeed,
China has recently attracted a lion's share of
inbound FDI in the region.
24. The Government has made
considerable progress in addressing structural
weaknesses that became more evident during
the Asian crisis, by promoting corporate and
financial restructuring.  A more liberal trade
and investment regime could also contribute
greatly not just to a sustained economic
recovery, but also to Malaysia's long-termeconomic development.