Thankfully it wasn’t a political review, given today’s news about Anwar Ibrahim’s sodomy conviction. Less noticed by the press, the WTO conducted a Trade Policy Review of Malaysia this week. The country received some high praise for economic progress – and some slaps on the hand for still being pretty opaque in its trade regime.
It is national policy in Malaysia that the country is building to become a “high income” country by 2020. We can’t yet say this is assured, but progress is being made with some profound changes in Malaysia’s trade patterns. The WTO secretariat points out: “Malaysia remains externally competitive with its comparative advantage seemingly shifting from electrical goods and electronics manufacturing towards processed commodities and natural gas.” There is some tax reform going on, possibilities for rationalizing Malaysia’s extensive subsidy programs, and a new goods and services tax (GST) coming online next year. Goods and services trade adds up to 162.4% of GDP, an indicator of how outward-looking the country has to be.
Malaysia has done an excellent job of steering clear of trade disputes. The country hasn’t filed any new dispute cases at the WTO in several years, nor have other WTO members filed cases against Malaysia. Antidumping investigations have been started against steel wire rod, biaxially oriented polypropylene film, and hot rolled coils from other Asian countries. That said, Kuala Lumpur has generally made it easier to do business:
Reforms undertaken since 2010 to improve the business environment in Malaysia have included cutting processing times for dealing with customs permits; eliminating and simplifying licensing requirements; and reducing the time required for the approval of construction permits.
Tariffs are not a major revenue source for Malaysia, but are seen as a prime tool to regulate trade. The country still does not use ad valorem tariffs to the extent the rest of the world would like to see. There are too many specific duties, alternate duties and compound tariffs that can be applied. That said, Kuala Lumpur should be applauded for unilaterally dropping its average customs duty from 7.4% in 2009 to 5.6% in 2013. That said, tariffs can range from zero to 90%. Also, Malaysia has not lowered its tariff bindings along with its applied tariffs. This gives KL the freedom to increase tariffs again without warning or reason.
Import licenses are required for a substantial number of products, apparently a tool for helping several favored industries and regulating the volume of imports generally. Customs clearance, however, has gotten easier as Malaysia moves from a system focused on clearance to one implemented through post-clearance audits.
Malaysia has a complex export regime that invokes export taxes and licensing to limit some exports, and subsidies to encourage others. The country limits exports of timber and crude palm oil to help build domestic processing industries, and generally prohibits exports of anything subject to domestic price controls (wheat flour, diesel, some petrol, liquefied petroleum gas, sugar, and cooking oil). An income tax exemption is available to exporters of fresh and dried fruits and flowers, ornamental plants and ornamental fish, and manufactures and some services. Goods produced in export processing zones may be required to observe local content requirements.
The Malaysian economy remains one of the most highly subsidized in the region and the world. A reform aimed at rationalizing the subsidies regime on gasoline, cooking gas, electricity, and road tolls was launched but has accomplished little so far.
The Malaysian government is heavily involved in business, through state-owned or controlled companies (oil, gas, key strategic utilities and services), or through local support programs that favor Malaysian companies over foreign competitors. Kuala Lumpur imposes offset or countertrade requirements, and overtly favors local suppliers in government procurements. “International tenders are invited only if goods and services are not available locally“, says the WTO. On the other hand, sugar price subsidies have been abolished and those on gasoline have been reduced. Regulation of advertisements, personal data protection, credit sales and consumer redress have strengthened consumer protection.
Malaysia is pushing biotechnology and high-value agriculture, but maintains a relatively open trade regime in agriculture. Average applied agricultural tariffs are only 2.9%, but there are some astronomical peak tariffs to be found. Most of Malaysia’s non-ad valorem duties apply to agriculture and equivalent tariffs can mount to 1,439.2% for alcoholic beverages! Tariff quotas are also used, with profoundly different rates if you don’t make it under the quota. As an example, the applied duty on round cabbages can rise from zero to 90%.
One of Malaysia’s more notorious protected industries is automotive. The government has long played a strong role in backing local production and attracting foreign investment through advantageous financing, direct participation, an excise duty exemption for “national cars” and other means. One of those means is the 17.3% customs duty on imported autos and trucks.
Malaysia was an extraordinarily difficult market for services, such as architecture and engineering, but Kuala Lumpur has loosened many of its restrictions. A major change came in 2012 when rules were relaxed for professional services, communications services, distribution services, educational services, environmental services, and health-related and social services. Foreign investment caps have been removed in banking and insurance and licenses for these industries are being issued on the basis of prudence and the “best interests” of Malaysia.
Malaysia is seeking to promote itself as a centre for Islamic finance, health care, and education services, as well as a transportation hub for both air transport and shipping.
Malaysia’s trade regime is complex – containing much good and much bad – and WTO members reacted by asking more than 500 questions to try to figure out what is going on. The need for greater transparency and predictability was a common theme, as well as the need to step up the fight against corruption. Other countries pressed Kuala Lumpur to simplify its tariff structure by moving more tariff lines to ad valorem duties. Members expressed concern about import licensing requirements, customs valuation, export and import restrictions and prohibitions, export subsidies, excise duties, taxes and incentives, local content conditions, halal certification requirements, intellectual property protection and government procurement requirements.
Malaysia has done a lot, but has much more still to do.