Review of Malaysia Study Report 2009


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Agenda Item: IV

Individual Action Plan (IAP) Peer Review of Malaysia

Study Report 2009

Purpose: Consideration

Submitted by: APEC Secretariat

First Senior Officials’ Meeting – Plenary Session


16 February 2009

Table of Contents

1. Introduction


2. General Issues


Economic and trade performance


Economic policy


Policy developments during the review period


Malaysia and APEC


3. Assessment of Malaysia’s IAP by Chapter

3.1 Tariffs


3.2 Non-tariff measures


3.3 Services


3.4 Investment


3.5 Standards and Conformance


3.6 Customs Procedures


3.7 Intellectual Property


3.8 Competition Policy


3.9 Government Procurement


3.10 Deregulation/regulatory review


3.11 Implementation of WTO obligations/Rules of origin


3.12 Dispute mediation


3.13 Mobility of business people


3.14 RTAs and FTAs


3.15 Trade facilitation


3.16 The APEC Food System


3.17 Transparency


Acronyms and abbreviations




4. Annexes

1. Malaysian agencies interviewed by experts for Review


2. The Peer Review Team


3. Questions from experts and comments from Malaysia


1. Introduction
In the last three years, Malaysia has made considerable progress toward achieving the Asia-Pacific Economic Cooperation (APEC) Bogor Goals as outlined in the Osaka Action Agenda (OAA).

Several developments are of particular significance. Progressive liberalisation of services has taken on a new focus as part of the government’s broader economic policy. Plans to develop the sector and improve its international competitiveness are underway. Efforts to remove and reduce various restrictions, particularly in the financial services sector, have been evident. Free Trade Agreements (FTAs) and Regional Trade Agreements (RTAs) have also taken on an increasingly important role for Malaysia to advance liberalisation as World Trade Organisation (WTO) negotiations have waned and trading partners have concluded agreements.

The government has also recognised the need for further improvements in the business environment affecting trade and investment. Action has been taken to enhance transparency and improve the regulatory environment for business. Malaysia has consistently sought to engage the private sector at a high level on strategies for economic growth, consistent with the OAA.
While the economy is generally open and progress is welcome, it has not been uniform. Several measures continue to impact on trade where further progress is warranted, including tariffs, licensing arrangements, government procurement (GP) policies, restrictions on foreign investment and intellectual property rights (IPRs) protection.
Nevertheless, Malaysia has embarked on efforts to address these with a view to achieving the APEC Bogor goals. Its current economic policy framework should provide a solid basis for doing so in future.
Malaysia has made unilateral advances to liberalise tariff protection during the review period and specific actions are programmed to continue with this in future. In the 2009 Budget, Malaysia announced that import duties on 494 tariff lines are to be reduced, eliminated or suspended.
It will be important for Malaysia to continue the process of progressively reducing its tariffs. This will help foster Malaysia’s regional and global integration in the Asia Pacific region, reduce the costs of doing business and lower the prices for consumers. Further steps could also benefit the trade and investment environment.
Non-tariff Measures

Malaysia continues to apply discretionary import licensing, approved permits, and discretionary export licensing in some sectors. The most significant non-tariff measure (NTM) used by Malaysia for protective purposes is import licensing. Around 27 percent of Malaysia’s tariff lines are subject to import licensing.

Some advances have been evident in the last three years, though much further progress remains necessary. In 2008, Malaysia removed import licensing requirements on 48 tariff lines for machinery and equipment, electrical and electronic products.
Progress to open the market to foreign competition has been evident in financial services, particularly in Islamic banking, insurance and the capital market. Numerous initiatives are being implemented or considered in other services sectors. Domestic reform efforts have been conducted in tandem with progressive liberalisation in bilateral and regional FTAs, some of which build on liberalisation efforts undertaken in the WTO.
Despite recent progress, restrictions remain across most service sectors which continue to impact on trade, including telecommunications, distributive services and professional services. Progress on market opening, while still in its early stages, has been slow.
Improving the international competitiveness of the service sector will be important for Malaysia’s future growth. Consistent with its strategic economic policy objectives, Malaysia could consider furthering progressive liberalisation across a broader range of services and fast tracking those efforts already in place, both at home and in its FTAs.
Malaysia maintains a liberal investment policy in the manufacturing sector and is taking steps to liberalise the non-manufacturing sector to increase competition. One hundred percent foreign equity is permitted in investments in several related sectors.

This has been supported by a renewed policy focus on enhancing the attractiveness of foreign investment in the services sector and on improving the operating environment for investors across the economy. PEMUDAH, the Special Taskforce to Facilitate Business established in 2007, has assumed a key role.

In achieving this, Malaysia may want to focus more closely on the competiveness pressures for foreign direct investment (FDI) resulting from existing restrictions and their impact on the economic operating environment.
Standards and Conformance
Malaysia has made steady progress towards achieving the OAA objectives on standards and conformance. Since 2005, it has continued to align domestic standards with international standards. Malaysia has participated actively in international standardisation activities and has undertaken efforts to achieve mutual recognition of conformity assessment.
This has been supported by ongoing action to simplify the regulatory framework and improve interagency cooperation, thereby helping to promote good regulatory practice for the adoption and application of standards and enhance transparency and information dissemination.
Customs Procedures
During the review period, Malaysia has continued with efforts to streamline customs administration in order to increase efficiency in collecting revenues, detect and resolve cases of smuggling and fraud, and improve response time to the needs of the trading community.
Customs procedures have been simplified and paperless trading has been implemented. The use of information and communication technology has been advanced and the use of risk management tools have been improved and expanded.
Intellectual Property
Malaysia understands the gravity of IPRs violations and its effects on the economy. During the review period, Malaysia has implemented action to protect IPRs, improved its legal framework and developed awareness programmes.

Measures have been taken to reduce counterfeiting in the market. Malaysia also launched its National Intellectual Property Policy in April 2007, which aims to maximise the contribution of intellectual property in national socio-economic and technological development.

In order to improve the enforcement of intellectual property protection, in July 2007, Malaysia established a specialised Intellectual Property Court. Malaysia’s enforcement efforts to protect the intellectual property also include a large number of raids, investigations of cases related to copyright infringements and seizing counterfeit goods.
Competition Policy
Currently, Malaysia does not have a comprehensive competition policy and law, but elements of competition regulations exist in sectoral specific legislation such as in the Communications and Multimedia Act and the Energy Commission Act.
A new competition law, the Fair Trade Practices Act, has been under consideration since October 2005. The proposed law will regulate business conduct and provide protection for consumers by addressing anti-competitive practices and including disciplines for unfair trade practices.
Government Procurement
Malaysia uses government procurement policy as a tool for nation building and to achieve its socio-economic goals. Malaysia intends to continue with its current policies and practices and will review the policy when the targets set under the National Development Plan are achieved.
It is important that Malaysia fully implements and extends its eProcurement initiative and intensifies its awareness programmes and campaigns to educate and train agencies and suppliers to work with e-Procurement, as this will further enhance transparency.
Deregulation/regulatory review

Alhtough the Malaysian economy has undergone substantial deregulation since the mid-1980s, the Government recognises there is generally a need for structural reform in the economy, in particular in the services sector. It is committed to moving progressively in that direction. Consistent with this, several measures have been implemented during the review period. Reform of partially state-owned firms, or government linked companies (GLCs) has continued since 2004.

Much still remains to be done before these companies operate fully as market driven entities. Malaysia plans to continue with further reforms aimed at improving competition and efficiency in the market.
Implementation of WTO obligations/Rules of origin
Malaysia is in full compliance with international harmonised rules of origin. These are prepared and applied in an impartial, transparent and neutral manner. Malaysia has no national law governing rules of origin for imports and exports and applies non-preferential Rules of Origin in accordance with WTO Agreement on Rules of Origin.
Dispute mediation
Recently, Malaysia has sought to incorporate enforceable provisions for dispute settlement in all its bilateral free trade agreements. This contrasts with earlier trade agreements, where disputes were subject to negotiation and consultation through diplomatic channels without reference to international tribunals.
Dispute settlement in Malaysia’s judicial system suffers from some broader challenges associated with large case volumes, lengthy resolution procedures and lack of specialised legal professionals. Malaysia has taken steps during the review period to address this, including consideration of greater use of mediation.
Targeted capacity building programmes may also be useful in assisting Malaysia to improve the settlement of trade disputes among both government and private actors in accordance with the OAA.
Mobility of business people
Initiatives have been taken to enhance short term business entry and business temporary residency through streamlined visa arrangements and extended access for expatriate executives and non-executive personnel. Malaysia has made commitments for movement of natural persons in its recent FTAs. The use of information and communication technologies (ICT) has been advanced.

Despite this, restrictions exist on the number and duration of expatriate posts. Several issues associated with the visa processing process continue to affect foreign business persons seeking temporary entry.

There is a shortage of workers in some areas of the economy. Limiting the entry of foreign workers may constrain the capacity of business to cope with changing operational environments that require speedy and necessary transfer of technology and applications.

RTAs and FTAs
In the last three years, Malaysia has intensified its pursuit of regional and bilateral trading arrangements to complement multilateral trade liberalisation in the WTO. Generally agreements are consistent with WTO requirements and in some cases provide for deeper liberalisation.
Malaysia’s interests in progressively liberalising the service and investment sectors would be well served through comprehensive FTAs which extend market opening commitments beyond the status quo and WTO commitments.
Trade facilitation
PEMUDAH has made effective advances in removing and reducing unnecessary impediments in the business environment affecting business licensing, tax and stamp duty, land and immigration matters, as well as local government.
Malaysia is also currently implementing the National Single Window (NSW) for trade facilitation; an electronic system which aims to serve as a “one-stop” trade exchange portal, equipped with online services for the exchange of trade documents, customs declarations, ports, transportation and logistics related industries.
The APEC Food System
Malaysia has liberalised almost all its import tariffs on fruits, vegetables and fish. Duty on imported food from ASEAN members has been liberalised in accordance with commitments under the ASEAN Free Trade Area.
To facilitate trade in fresh and perishable food, Royal Malaysian Customs (RMC) has established a direct release system. However, permit and approval is required from various government agencies, such as the Agriculture Department.


Malaysia generally maintains an open and transparent system for laws, regulations and administrative procedures which affect the flows of goods, services and capital and which contribute to a predictable trade and investment environment in the APEC region.
Malaysia has made progress in improving transparency through greater information sharing with industry and the public through greater use of ICT and electronic systems. Particular improvements have been made in the financial and capital markets. These are positive developments and should be continued.

2. General Issues
Malaysia’s progress towards APEC’s OAA during the review period must be considered in the broader context of its economic performance and the strategic focus of the government’s economic policy objectives.
Economic and Trade Performance
Malaysia’s economy was valued at US$156.1 billion in 2007. It has grown strongly during the Individual Action Plan (IAP) review period (the review period), by 6.3 per cent in 2007, up from 5.0 and 5.9 per cent in 2005 and 2006, respectively. This is similar to growth rates1 for ASEAN, but below growth rates of around 9 per cent2 for Asia (excluding Japan). In November 2008, Malaysia forecast the economy to grow by between 5.7 per cent in 2008 and 3.5 per cent in 2009 considering the uncertainties and deteriorating external environment.

The services sector comprises over half of the Malaysian economy. The largest sectors are the wholesale and retail trade and finance and insurance sectors, each comprising over 10 per cent of total gross domestic product (GDP). Between 2003 and 2007, the service sectors grew by an average of 6.8 per cent per annum, above the 6 per cent for the economy as a whole. Moreover, the Central Bank of Malaysia (Bank Negara – BNM) reported that services trade growth has been broad based. The manufacturing sector contributed around 30 per cent of GDP in recent years, while mining and quarrying, agriculture and construction were less than 10 per cent each.

Figure 1: Malaysia’s GDP Composition by sector, 2007

Source: Treasury Malaysia, 2008, Economic Report 2008/2009: Economic Performance and Prospects

Standards of living have been rising in Malaysia. Malaysia’s per capita income has risen by around 25 per cent since 2005 to around RM 24,000.3 Its per capita income is above that of many South-East Asian economies including Thailand, The Philippines, Indonesia and Viet Nam. Malaysia also has a very low unemployment rate of around 3.5 per cent.
Between 2005 and 2007, Malaysia ranked as the 19th largest merchandise trade exporter by the WTO. During this period, exports and imports have grown strongly. According to the WTO (measured in US dollars), Malaysia’s merchandise exports grew by 14.0 and 9.7 per cent in 2006 and 2007, respectively. While impressive, this is a little lower than growth for ASEAN and Asia.4 Malaysia’s merchandise imports grew by 14.0 and 12.1 per cent in 2006 and 2007, respectively, similar to ASEAN but again a little lower than for Asia.5
In 2007, Malaysia reported its tenth consecutive annual trade surplus. In 2006 and 2007, exports increased by 10.3 and 2.7 percent, respectively. Imports during both years similarly rose 10.8 and 5.0 per cent.

The manufacturing sector dominates Malaysia’s merchandise exports (around 75 per cent) led by the electrical and electronic products sector. This sector alone accounted for almost 45 per cent of total merchandise exports in 2006 and 2007. Mining and agricultural exports are also important.6 Other significant export sectors include chemical and chemical products, crude petroleum and palm oil.

Over the period agricultural exports grew strongly,7 including palm oil. Mining exports also rose.8 There was slower growth in manufacturing exports.9 The electrical and electronic equipment sector rose by 6.2 per cent in 2006 but fell by 5.2 per cent in 2007. The growth in imports was led by intermediate and capital goods which comprise close to 85 per cent of Malaysia’s total imports.

See Figure 2 below.

Figure 2: Malaysia’s growth in exports by sector, 2004 -2007

Source: MITI, 2006a, International Trade and Industry Report 2005; MITI, 2007, International Trade and

Industry Report 2006; MITI, 2008, International Trade and Industry Report 2007
Malaysia’s service exports were much smaller compared with merchandise exports.10 Service exports recorded a surplus of RM1.4 billion for the first time in 2007.
Malaysia’s top export destinations between 2005 and 2007 were the United States (US), Singapore, Japan, the People’s Republic of China and Thailand. These economies and Chinese Taipei were also the top import sources during that period. Over the same period Malaysia’s trade deficits with China and Japan fell while trade surpluses with the US and Thailand decreased.
Foreign direct investment (FDI)

Foreign direct investment inflows into Malaysia have grown rapidly in recent years. FDI inflows are estimated to have increased by over 50 per cent a year between 2005 and 2007 from around US$4 billion to US$9.4 billion.11 In 2007 most FDI inflows were to the manufacturing sectors, particularly the electrical and electronics industry.

See Figure 3 below.

Figure 3: Inflows of Foreign Direct Investment in Malaysia, 2004 – 2005

Source: MITI, 2008

Economic Policy
Malaysian government policies are guided by the National Mission, an overarching framework for Malaysia to become a developed economy by 2020. This framework is currently being implemented through the Ninth Malaysia Plan 2006-2010 (9MP), a five year programme aimed at strengthening the economy and improving socio-economic disparities.
The 9MP contains five thrusts, that is, to; move the economy up the value chain; raise the capacity for knowledge and innovation; address socio-economic inequalities; improve the standard and sustainability of quality of life, and; strengthen institutional capacity. Key strategies relating to the economy12 include enhancing the high-technology and higher value added electrical and electronics sector; developing and promoting all service sub-sectors; and revitalising the agriculture sector. Improving technology, fostering job creation, enhancing the role of the private sector; and the business environment also form an important part.

The Third Industrial Master Plan 2006-2020 (IMP3) outlines the strategies, specific to the manufacturing, service and agricultural sectors. The IMP3 lists sub-sectors targeted for growth. There is a clear focus on developing the service sector while promoting the manufacturing sector. Strategies include business support and promotion; technology and knowledge upgrading; promotion of international trade and investment; review of government laws, regulations and procedures, as well as enhancing opportunities for Bumiputera through equity and capacity development.

Malaysia's economy is relatively open to trade and foreign investment, particularly in the manufacturing sector.13 Consistent with APEC Bogor goals, Malaysia supports progressive liberalisation of its trade and investment regime, aimed at structuring liberalisation to minimise adjustment costs and adverse impacts on the economy. Policy instruments are used to achieve development and equity objectives.

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