RESTRICTED  WORLD TRADE  
ORGANIZATION  WT/TPR/G/156 
12 December 2005  
 
(05-5811) 
Trade Policy Review Body Original: English 
   
 
  
 
TRADE POLICY REVIEW 
 
Report by 
 
MALAYSIA 
 
  
 
Pursuant to the Agreement Establishi ng the Trade Policy Review Mechanism 
(Annex 3 of the Marrakesh Agreement Establishing the World Trade 
Organization), the policy statement by Malaysia is attached. 
 
 
 
Note: This report is subject to restricted circ ulation and press embargo until the end of the first 
session of the meeting of the Trade Policy Review Body on Malaysia. Malaysia WT/TPR/G/156 
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CONTENTS 
 
  Page 
I. ECONOMIC DEVELOPMENTS 5 II. TRADE POLICY DEVELOPMENTS 7 
 (1) O
VERVIEW  7 
 (2) ASEAN  7 
III. SECTORAL POLICIES 8 
 (1) M ANUFACTURING SECTOR  8 
 (2) A GRICULTURE SECTOR  9 
 (3) S ERVICES SECTOR  9 
IV. FUTURE DIRECTION AND STRATEGY 10 
  
 Malaysia WT/TPR/G/156 
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I. ECONOMIC DEVELOPMENTS 
1. The Malaysian economic growth averaged 5.5% in the four years between the last trade 
policy review in December 2001 and the present review in January 2006. 
2. The period during which the previous review took place was against the background of the 
1997 Asian financial crisis.  Real GDP growth wh ich was 0.3% in 2001, increased to 4.4% in 2002, 
5.4% in 2003 and 7.1% in 2004.  Third quarter 2005 growth was 5.3% and for the year as a whole, growth is expected to be 5% due to the overall global slowdown. 
3. Since the last review, the Malaysian economy has faced a number of challenges, including the 
global slowdown in 2001, the SARS outbreak in 2003, and the recent oil price hikes of 2004/2005. 
Measures have been put in place to strengthen th e economy, particularly in enhancing domestic 
demand, to overcome an unpredictable external envir onment.  Fiscal and monetary policies were also 
put in place to stimulate domestic demand-led growth.  These placed the economy on a sustainable growth path in the last 4 years.  
4. The measures include policies that focused on ge nerating higher value-added activities in the 
manufacturing and services sectors, encouragement of more active participation of the private sector 
and emphasising the development of human capital.   The Malaysian economy has since experienced 
more broad-based domestic-demand led growth, while  greater diversity in export income and trading 
markets should gradually reduce over-dependen ce on traditional external sources of growth. 
5. Overall, the present growth of the Malaysian economy has been increasingly characterised by 
broad-based expansion in economic activities, w ith growth emanating from both domestic demand 
and external sources.  Several stimulus packag es implemented in 2002 an d 2003 led to higher 
domestic demand growth of 7.5% in 2004. Domestic demand growth in 2005 is expected to remain 
strong at 6.9%, led by higher private investment e xpenditure as well as private consumption.  This is 
borne out by third quarter GDP figures showi ng that domestic demand strengthened by 9.4%. 
6. Inflation was higher at 2.9% in the first ten months of 2005 compared with 1.4% in 2001.  
Prices of food, transportation and cigarettes were higher in 2005 as cost-push pressures and, to a 
lesser extent, sustained demand conditions, contribute d to the increase in headline inflation.  The 
recent Government announcement of freezing fuel price increases until year-end, and highway toll 
charges until end-2006 is expected to contain infla tionary pressures.  The sustained expansion resulted 
in continued low levels of unemployment, with the rate remaining stable at 3.5%.  The labour force 
increased from 10.2 million in 2002 to 10.6 million in 2005.  
7. The manufacturing sector remains a strong contributor to GDP growth.  It expanded by 8.4% 
in 2003 and 9.8% in 2004.  A weakening is expected in 2005 due to a slow down in the semiconductor market in the first half of 2005.  The services sector which contributes 58% to GDP is 
expected to maintain a growth of 5.8% in 2005,  due to sustained domestic economic activities. It 
registered a third quarter growth of 7.3%.  Agricu lture, with a 8.5% share of GDP, had robust growth 
due to higher commodity prices and policies aimed at modernising the sector as well as encouraging 
commercially viable ventures.   
8. Private investment expanded in the manufacturing, services, oil, gas and agriculture sectors in 
2005.  The foreign exchange administration rules w as liberalised on 1 April 2005 to further enhance 
the business environment and promote wider risk management options to encourage investment 
activities.  Higher export earnings in the last few years generated additional financing for investment 
activities.  WT/TPR/G/156 Trade Policy Review 
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9. Approved investments in the manufacturing sector registered a significant increase of 57.2% 
to RM 19.9 billion in the first 9 months of 2005, compared with RM 12.7 billion in the corresponding period of 2004. In this context, domestic invest ments increased by 34.9% to RM 9.5 billion, while 
foreign investments increased by 85.3% to RM10.4 billion.  Most of these investments were in the 
electronics, electrical, base metals, food processing and transport equipment sectors. 
10. The external sector outlook remains favourable, with gross export earnings projected to grow 
by 10.8% in 2005, despite a moderation in global export growth.  An upturn in demand for electronic products particularly PCs in the latter half of 2005, as well as resource- based products including 
petroleum-based products have accounted fo r a large share in this increase.  
11. Malaysia's external trade expanded by 9.7% in the first nine months to reach RM710.6 billion. 
With exports accounting for 55% of total trade, the trade surplus is e xpected to increase to 
RM 54 billion in 2005, compared with RM 45 billi on in 2004.  Malaysia’s major trading partners 
remain the US, Japan and China, which together account ed for almost 40% of total trade.  Trade with 
ASEAN accounts for about 25% of total trade. 
12. Since the last trade policy review in 2001, Mala ysia’s international r eserves have risen to 
RM 285.2 billion as at 15 November 2005, compared with RM 117.2 billion as at 31 December 2001. 
These reserves were sufficient to finance 8.4 months  of retained imports and were 5.7 times the short-
term external debt.  The strong reserves position is due to eighth consecutive year of current account 
surpluses due mainly to net receipts in the mercha ndise account of 15.7% of GNP.  Nevertheless the 
services account, which is traditionally in deficit due  to transportation, other services and Government 
transactions outflows, has seen stronger net recei pts in the travel account, as well as receipts from 
education and health.  
13. On 21 July 2005, the fixed exchange rate re gime of RM 3.80 to US$1 was replaced with a 
managed float system. The Malaysian Ringgit is now monitored against a trade-weighted basket of 
currencies.  The primary motivation for the policy shift was to better position Malaysia to respond and 
benefit from the structural changes occurring in th e region and in the international environment.  
Despite the shift in regime, the primary objective of exchange rate policy continues to be the 
promotion of exchange rate stability.  Being a sm all and open economy, a stable exchange rate 
environment against major trading partners is im portant to achieve sustainable growth and price 
stability.  During the period covered by this revi ew, the selective exchange control measures 
introduced on 1 September 1998 have all been lifte d, with only the non-internationalisation of the 
Malaysian Ringgit remaining. 
14. While the early part of the review period emph asised a more expansionary fiscal policy to 
ensure continued sustainability of growth in the f ace of adverse external developments, the focus in 
the last two years has been to improve the Govern ment’s fiscal position, while giving careful attention 
towards supporting the expansion of private sector  activities.  The budget deficit has since narrowed 
from 5.6% of GDP in 2002 to an estimated 3.8% in  2005.  The reduction in the fiscal deficit is due to 
an increase in Government revenue and more effe ctive management of Government expenditure. 
Government revenue increased by 7. 3% in 2004 and a growth of 6. 5% in 2005 is anticipated, due 
mainly to increased contributions from indirect ta xes and non-tax revenue, especially from petroleum 
royalties and dividends.  
15. Despite a more relaxed fiscal policy previous ly, the Government has taken strong steps to 
ensure prudent debt management. Malaysia’s extern al debt registered a decline, from RM 200 billion 
in 2004 to an estimated RM 195 billion in 2005 or 40 .2% of GDP.  The ratio of short-term external Malaysia WT/TPR/G/156 
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debt to international reserves is only 14.3%, while  the external debt service ratio remains at a low 
level of 5.7%, given strong export earnings. 
16. The sustained rates of growth over the past f our years have resulted in the growth in per 
capita income to RM 17,741 in 2005, from RM 13,739 in  2002, representing an average increase of  
8.9%.   
II. TRADE POLICY DEVELOPMENTS 
(1) OVERVIEW  
17. Malaysia’s trade policy continues to focus on greater integration into the world economy and 
enhancing its global position as a trading nation.  Ma laysia has consistently maintained its position as 
the 18th largest global exporter and the 20th larges t importer in the last few years.  Merchandise 
exports are expected to amount to 109.3% of GDP in 2005, while imports are expected to represent 
89.4% of GDP.  
18. Trade policies have focused on ensuring th at export growth remains robust through 
strengthening its presence in traditional markets and di versifying into non-traditional export markets.  
Trade policies have focused on both internal and external improvements to ensure that export 
performance remains on track.  Domestically, polici es are geared towards the promotion of high 
quality and innovative products, crea ting brand awareness and consumer  recognition.  Another major 
objective is to diversify the product range away from over-reliance on electrical and electronic 
products. 
19. The trade regime has been progressively liber alised  as part of economic development 
policies. The tariff structure is simplified to encourage imports. Malaysia’s tariff lines, at ad valorem  
basis covers 99.3% of total tariff lines.  Average a pplied tariff levels improved to 8% after increasing 
to 9.2% during the Asian fi nancial crisis in 2001.   
20. Malaysia seeks greater market access under th e Doha negotiations for agricultural products, 
industrial goods and services.  Success in the ne gotiations will ensure greater market access and 
positively impact on development. 
21. Bilateral and regional channels  are also pursued to strengthen the export market base. 
Negotiations have been concluded on the Jap an-Malaysia Economic Partnership Agreement 
(JMEPA), and on an early harvest package with Pa kistan.  Bilateral negotiations are on-going with 
Australia, New Zealand and Pakistan.     
22. Malaysia is actively promoting trade in new a nd emerging markets, with the fastest growth 
being in China, India, Middle East countries and new EU members.  
(2) ASEAN 
23. In October 2003, the Leaders of ASEAN agreed, inter alia,  to establish an ASEAN Economic 
Community (AEC).  Under the AEC, ASEAN will be  a single market and an integrated production 
base.  In moving towards the AEC, ASEAN ha s instituted new mechanisms and measures to 
strengthen the implementation of the existing ec onomic initiatives including the ASEAN Free Trade 
Area (AFTA), ASEAN Framework Agreement on Services (AFAS) and ASEAN Investment Area (AIA).  As an integral part of the AEC, ASEAN will work towards the integration of 11 priority 
sectors.  These sectors which account for 52.7% of  intra-ASEAN trade include rubber-based products, 
textiles and apparel, wood, automotive, fisher ies, electronics and agro-based products.   WT/TPR/G/156 Trade Policy Review 
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24. Measures to achieve the integration include ta riff elimination on 85% of the products by 
2007, liberalisation of the services sectors coveri ng e-ASEAN, healthcare and tourism by 2010 and 
cooperation activities aimed at reducing impediments to  trade.  Other areas of cooperation include the 
completion of the Fourth Package of services liberalisation, adoption of a deadline of August 2006 to 
complete the Fifth Package, cooperation activities to facilitate investment flows under the AIA and 
finalisation of the ASEAN Single Window to fac ilitate electronic clearance of trade documents.  
25. These measures are intended to accelerate regional in tegration in the priority sectors, facilitate 
movement of business persons, skille d labour and talents, and strengthen the institutional mechanisms 
of ASEAN.  An Enhanced Protocol on the Dis pute Settlement Mechanism was signed on November 
2004.    
26. Malaysia has been progressively transferring its  products into the CEPT Scheme beginning 1 
January 1993.  Malaysia has tran sferred 75 unprocessed agricultural products from the Sensitive List 
(SL) to the CEPT Inclusion List (IL) on 27 December 2003.  These products include swine and poultry, tropical fruits, vegetables, tobacco and t obacco products, sugar and coffee.  Effective from 1 
January 2005, Malaysia has also included all th e deferred CBU and CKD automotive products into 
the CEPT Scheme, where import duties on CBU have b een reduced to 20 percent, while import duties 
on all CKD have been eliminated. The CBU import duties were further reduced to 15% in October 
2005 and will be reduced to 5 percent on 1 January 2008.  Tariff lines on paddy and rice from the Highly Sensitive List (HSL) were also included into the IL in 2005.  
27. With the inclusion of these products, Malaysia  completed the inclusion of all manufactured, 
processed and unprocessed agricultural products into the CEPT Scheme.  As a result, 99.3% of the 
products come under the CEPT concessions, of which 96.9% are between zero to 5%, while 60.3% of 
the products are at zero duty.  Malaysia has perm anently excluded alcoholic beverages and arms and 
weapons from the CEPT Scheme.  
28. As of Sept 2005, 98.9% of the products in the CEPT IL of ASEAN-6 (Brunei, Indonesia, 
Singapore, Philippines, Thailand and Malaysia) have been brought down to the 0-5% tariff range.  
The commitments to complete tariff eliminati on has progressed well, with 64.2% of the products 
having been eliminated.  The average tariff fo r ASEAN-6 under the CEPT Scheme has decreased to 
1.9 % from 12.8% in 1993. 
29. The ASEAN-China Free Trade Agreement on Goods was signed on 29 November 2004. 
ASEAN also has on-going FTA negotiations with Au stralia/New Zealand, India, Japan and Korea. 
III. SECTORAL POLICIES 
(1) M
ANUFACTURING SECTOR  
30. The manufacturing sector remains a dynamic engine of growth for Malaysia with an 
estimated share of 31.5% of GDP in 2005, compared to  30% in 2001.  This was due to recovery in the 
economy during the course of the review period.  
31. The bulk of manufacturing activities remain conc entrated in the electrical and electronics 
(E&E) sector, mainly in semi conductors, which account for a share of 35% of the production. 
However, other sub-sectors in the manufacturing sector  such as plastics and chemical products (21%), 
construction-related industries, food and beverages (10%) and wood/rubber based industries (5%) are 
also important manufacturing activities c ontributing to growth in this sector. Malaysia WT/TPR/G/156 
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32. The manufacturing sector accounts for 82% of total exports, with the E&E sector accounting 
for 65% of total exports of manufactured goods in  2005.  Other sectors which contributed to export 
earnings include the chemicals sub-sector (8%), ir on and steel (4%) and petroleum products (4.3%).  
33. Strategies in place are aimed at diversifying  manufacturing activities and promotion of new 
growth areas that is knowledge and technology- driven.  These include pharmaceutical, machinery 
equipment, aerospace, marine, biotechno logy, and food-processing industries.  
34. Efforts are being made in promoting manufacturing activities in the food sector with the aim 
to be a global producer and exporter of halal food  and products.  Malaysia is working towards 
enhancing international recognition of its halal standards and promotion of its halal brand. 
(2) AGRICULTURE SECTOR  
35. Despite its small share of 8.5% of GDP the ag ricultural sector continues to contribute to 
overall development in terms of output and export ear nings.  The thrust of Government policy is to 
improve productivity and competitiveness through a doption of new farming methods and modern 
technology. 
36. Output of the main commercial crops such as palm oil, rubber and food commodities 
strengthened during the period under review as pri ces for commodities increased due to enhanced 
demand from emerging economies as well as higher prices of competing oils.  Palm oil constitutes the largest value-added contributor to the agriculture sector, with a share of 36.5%, while forestry and 
logging’s share was 13.7% and fishing’s share was 11.8%.    
37. Market sentiments for palm oil have remain ed positive due to increasing demand for edible 
purposes and as an alternative use in the production of  bio-diesel.  The palm oil outlook is promising 
due to the increase intake for domestic downstream industries and phasing out of the import quota on palm oil in 2006 by China.  
38. The challenge for palm oil and other crops is to improve produc tion through higher yields and 
to diversify its market base.  In addition, effort s to accelerate the modernisation of the sector will 
continue.  Production of fruits a nd vegetables, livestock farming and aquaculture will be increased to 
meet domestic consumption needs and exports. 
(3) S
ERVICES SECTOR  
39. This sector is an important component of the economy.  The aim is to build a resilient and 
strong services sector to ensure balanced and broad-based growth.   
40. The services sector is expected to  account for 58 % of GDP in 20 05 as against 43% in 1995.  
It provided one out of every two jobs in Malays ia or 50% of total employment of 10.5 million in 
2004.  
41. Malaysia will focus on information and co mmunications technology (ICT), tourism and 
education sectors as sources of growth.  The G overnment will enhance development of the 
Multimedia Super Corridor (MSC) and leverage on lead ing-edge technologies.  Malaysia is promoting 
ICT in manufacturing to move up the value chai n and promoting shared services and outsourcing 
services. 
42. Malaysia is promoting education, health, cons truction, and tourism to generate growth and 
foreign exchange earnings.  WT/TPR/G/156 Trade Policy Review 
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43. There is a consistently high level of fore ign presence in this sector.  Of the total 29 
commercial banks (including Islamic banks), 14 are fully foreign-owned and foreigners account for 
more than 30% of total commercial banking assets.   In the insurance sector, 20 of 49 insurance 
companies are foreign-owned, and the foreign mark et share amounts to around 70% and 40% of life 
insurance premiums and general insurance premiums, respectively.   
44. The Financial Sector Master Plan (FSMP), launched in 2001, set out the recommendations to 
be implemented over 10 years in three phases. While measures to increase domestic capacity had been implemented in the first phase, these measures will continue to be strengthened during the second and 
third phases to enhance the effectiveness of the financial sector in meeting the requirements of the 
economy, enhance domestic competition and strengthe n the infrastructure for consumer protection. 
This will collectively ensure that the financial sect or is able to adjust to and respond positively to 
competition arising from greater de regulation and liberalisation.  
45. Malaysia is now advancing into the second phase of the FSMP, where the policy of gradually 
deregulating and liberalising the financial sector will be complemented with the objectives of bringing 
increased benefits to the overall economy.  In th e second phase, greater operational flexibility to 
foreign financial institutions operati ng in Malaysia will be accorded, so that they can better serve the 
needs of the economy.  This will include the ability  for foreign banks in Malaysia to establish new 
branches. Apart from this upcoming measure, Malays ia has also, since 2001, already implemented a 
number of measures that accord greater operational flexibility to foreign financial institutions in 
Malaysia.  This included allowing locally-incorporat ed foreign banks to offer full-range transactional 
internet banking services since 1 January 2002, earlie r than scheduled.  All insurers in Malaysia 
(including foreign-owned insurers) have also been allowed to offer a full range of life and general 
insurance products through the in ternet, to employ expatriates in expanded areas of operations, and 
significant outsourcing flexibility.  Since 17 April 2003, foreign-owned insure rs in Malaysia with 
foreign shareholding up to 51% also had greater operational flexibility to open up to two branch offices in one year.  
46. The policy on foreign participation will be furt her reviewed in the third phase of the FSMP.  
Malaysia has, however, brought forward a number of  liberalisation measures to introduce new foreign 
competition in the financial sector during the peri od under review, such as issuing three new Islamic 
banking licences to qualified foreign players with 100%  equity ownership.  Other measures to allow 
greater foreign participation included raising the fore ign equity limit to 49% from 30% in investment 
banks, takaful companies and domestically-owned Islamic banks, as well as allowing commercial 
banks to provide factoring services as part of their commercial banking business or through a subsidiary, where the subsidiary can  have up to 100% foreign equity. 
IV. FUTURE DIRECTION AND STRATEGY 
47. Malaysia has made rapid strides in economic development despite the downturn caused by the 
Asian financial crisis eight years ago.  This r ecovery has been due mainly to the Government’s 
adoption of appropriate policies a nd strategies to ensure sustainability of growth.  The Government 
has successfully pushed for hi gher value-added activities in manufacturing, focusing on improving 
services delivery, harnessing the dynamism of the private sector, whilst increasing investment in human capital. 
48. Malaysia will continue to build resilience by: 
- increasing competitiveness through productivit y enhancement, raising the quality of 
the workforce and greater application of knowledge. Malaysia WT/TPR/G/156 
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- ensuring sound economic fundamentals and strong financial and corporate sectors. 
- stimulating private investment as well as attracting quality FDI. 
- promoting new sources of growth in the manufacturing and services sector. 
- pursuing effective macro-economic management with fiscal prudence. 
49. It is expected that prospects for the Malays ian economy will remain favourable in the short-
term, supported by both external and domestic demand  growth.  As such economic growth in 2006 is 
expected to strengthen to 5.5%.  
50. For the medium-term, the Government is form ulating new policy directions and strategic 
thrusts under the Third Industrial  Master Plan (2006–2020), the Ninth Malaysia Plan (2006–2010) and 
the second phase of Vision 2020. 
 
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