USTR - 1996 National Trade Estimate-Malaysia
Office of the United States Trade Representative


1996 National Trade Estimate-Malaysia

In 1995, the U.S. trade deficit with Malaysia was $8.7 billion, or $1.7 billion greater than in 1994. U.S. merchandise exports to Malaysia were $8.8 billion, up $1.9 billion or 26.6 percent from 1994. Malaysia was the United States' seventeenth largest export market in 1995. U.S. imports from Malaysia totaled $17.5 billion in 1995, a 25.1 percent increase over those in 1994.

The U.S. stock of foreign direct investment was $2.4 billion in 1994, nearly 20 percent higher than that in 1993. U.S. direct investment in Malaysia is concentrated largely in electronics manufacturing, petroleum and finance.



In general, Malaysia continues to reduce its import barriers, particularly tariffs. The 1995 federal budget reduced or eliminated tariffs on over 2600 additional items, and implemented Malaysia's commitments under the ASEAN free trade agreement (AFTA) and the GATT Uruguay Round trade negotiations. These included tariff reductions or outright elimination on industrial raw materials; 600 food items, including certain fruits, nuts, dairy products and meat; automobiles, though the top rate is still high 200 percent; textiles; and consumer durables. On August 21, 1995 the Malaysian customs and excise department revised import duties for a wide variety of food and beverage products. This included a 55 percent reduction in import duties for still wines and vermouth, while duties for Brazil, areca, and cashew nuts, and a variety of fresh berries, including strawberries, were also cut in half to 5 percent ad valorem. Other food items which now enjoy slightly lower duties include frozen fruits such as pears, peaches, strawberries and apricots. Malaysia's budget, released in October 1995, cut duties on over 710 items and abolished duties and sales tax on another 800 raw materials and equipment items of particular interest include medical equipment and computers.

Malaysia has taken other actions to raise tariffs on items of interest to U.S. exporters. This included a decision in April 1994 to raise the duties on kraft liner board (used in making corrugated boxes) and several other kraft products to between 20 and 30 percent for a period of up to five years. The value of annual U.S. exports to Malaysia affected by the tariff increase was estimated at $28 million in 1994. Although the import duties on certain categories of paper and paperboard were abolished in the 1996 Malaysian budget, they did not include the products that were the subject of increases in April 1994.

Malaysia's tariffs of 30 percent on high pressure laminates and solid surface panels and 40 percent on particle board, medium density fibreboard, synthetic balancing backers and solid wood components restrict the full export potential of U.S. wood products to Malaysia. In addition, in December 1993, tariffs were increased for a five year period to 30 percent ad valorem (from a rate of 2 percent) on the plastic resins polyethylene and polypropylene. Malaysia also instituted an import licensing system for such plastic resins, to provide an additional level of protection to its domestic industry. The import licensing scheme was dropped in early 1995, but the duties remain in effect in December 1994. Malaysia also increased its duties on titanium dioxide to 15 percent ad valorem for a two year period.

Duties on tobacco and tobacco products also remain very high to protect domestic producers. As a result, the price paid for tobacco by Malaysian cigarette manufacturers is one of the highest in the world.

Malaysia operates a national car program designed to promote the establishment of a domestic car industry. This program encourages local production and discourages imports and foreign content in domestically- produced autos through a variety of mechanisms. Locally produced cars benefit from a 50 percent discount in excise taxes. A license is required for built-up imports which are limited to 6 percent of the Malaysian auto market in 1995 and 5 percent in 1996. Passenger cars are also subjected to specified local-content requirements, though cars manufactured under the national vehicle program are exempt from these requirements.

Sales Tax

In its 1987 and 1988 budgets, Malaysia withdrew a five percent sales tax exemption for several agricultural and industrial products. The sales tax is a single stage tax collected at the port of entry for imports and at the factory for domestic products. However, the nature of local production of fruits and other agricultural products subject to the tax makes collection impossible. As a result, the sales tax acts as an additional de facto duty on imported products. The sales tax on food and beverage products ranges from 5 percent for most of the food items to 15 percent for wines and other alcoholic drinks. The duty is applied to many consumer oriented food products imported from the U.S. including fruits and vegetables, wine, dairy products, and food and beverage preparations. U.S. consumer-oriented food exports to Malaysia were $78 million in 1994 and $84 million in 1995.

While acknowledging that the tax is difficult to collect on domestic production, Malaysian officials defended the tax as a revenue measure not intended to have a trade effect. Since 1994, the Malaysian government has stepped up efforts to fine Malaysian producers who evade the tax.

Quantitative restrictions and import licensing

Malaysia maintains a short list of prohibited manufactured imports designed to protect its pioneer industries. There is a system of licensing that is used to implement quantitative restrictions on built up automobiles as well. With the successful conclusion of the GATT Uruguay Round, the list is expected to be eliminated eventually. The Malaysian government strictly controls imports of whole chickens and chicken parts through an import licensing system. Although permits are required, Malaysia has now opened this previously closed market with the establishment of a modest tariff quota. U.S. exporters should benefit from this liberalization.


Contracts less than RM5 million ($2 million) are restricted to Malaysians. Foreign firms are allowed to bid on large infrastructure projects in joint venture with local partners. Joint-venture bids must have at least 30-percent bumiputra (indigenous Malaysian) participation.


Malaysia has made significant progress in recent years in protecting intellectual property rights.

Nevertheless, some concerns remain.


Pharmaceuticals may be patented in Malaysia, but the term of patent is short (15 years from application). The Government of Malaysia has the legal authority to grant a compulsory license for a pharmaceutical where there is no local manufacturer, which is inconsistent with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs). Malaysia has not, however, exercised its authority to grant such licenses. Under Malaysia's patent law, importation of a pharmaceutical product does not fulfill the working requirement, which is also inconsistent with the TRIPs agreement.

Malaysia's Patents Act conforms with the requirement of the Paris Convention, of which Malaysia is a member. In 1993, the Act was amended to introduce modified substantive examination, i.e., usage of search report from foreign granted patent for local patent examination, and was subsequently enforced at the end of 1995.


In 1990, following five years of bilateral consultations with the United States, Malaysia amended its copyright law and acceded to the Berne Convention for the Protection of Literary and Artistic Works (Paris Act). These steps addressed the principal U.S. concerns regarding the copyright law in Malaysia.

Since 1991, the Government of Malaysia has made significant efforts to reduce copyright piracy, conducting for example, a substantial number of enforcement raids and seizing hundreds of thousands of tapes. A backlog of court cases in 1994 prompted greater cooperation between Malaysian officials and the U.S. video industry. High fines (up to $24,000) have been imposed in some of these cases and court cases are now scheduled to be heard. Malaysia has also made efforts to combat software piracy, though piracy rates are still estimated to be very high (over 85 percent), and there have been few successful prosecutions of software pirates.



Foreign direct insurers cannot establish branches or subsidiaries in Malaysia. Moreover, no new insurance companies are being licensed. Equity participation by foreign companies in existing insurance companies is limited to a minority share, normally 30 percent, although the central bank sometimes grants exceptions. (Those with more than 30 percent equity face government calls to divest over time insurance for ships, aircraft and property must be placed with Malaysian registered insurers.)

Malaysian tax law ensures that insurance companies incorporated in Malaysia receive a marketing advantage over other firms in providing marine cargo coverage. Importers to Malaysia, irrespective of their residence,

may claim a double deduction for marine cargo premiums provided they insure with a Malaysian incorporated company. This tax provision diverts from otherwise competitive U.S. firms approximately $2 million in premium income.


Under the banking and financial institutions act of 1989, all foreign banks were required to incorporate locally by the end of September 1994. The Malaysian Government implemented a new two-tiered banking regulatory system on December 1994, separating the institutions based largely on local net worth. Banks in tier 1 are allowed more autonomy than banks in tier 2 in offering financial products. In 1995, three commercial banks including Citibank and Standard Chartered Bank stepped up to tier 1. On January 1, 1996, two local merchant banks were designated for tier 1.

Currently the Malaysian Central Bank is not permitting new banks to open in Malaysia and is not allowing existing foreign banks to open additional branch offices. The Central Bank considers automated teller machines (ATMs) to be bank branches, so foreign banks are not permitted to set up ATMs separate from their existing branches. They also are not permitted to join local ATM networks.

Sixty percent of all domestic credit facilities to any foreign-controlled company in Malaysia must be provided by Malaysian owned banks, limiting business opportunities for foreign banks.

Securities brokering services: Entry is limited to equity participation in existing stockbroking companies or establishment of joint-venture companies with a local partner. In the latter case, an economic needs test is applied and foreign equity is limited to a maximum of 30 percent, unless special authorization is obtained for equity participation up to a maximum of 49 percent. In September 1995, the Deputy Prime Minister announced that foreigners may hold 100 percent equity in fund management companies in Malaysia if they manage only foreign funds. If Malaysian capital is involved, a foreign firm may hold up to 70 percent equity.

Legal Services

Legal services are subject to local equity restrictions (not more than 30 percent of equity may be held by foreigners), requiring the selection of a local partner. Foreign professionals are not permitted to work in Malaysia as foreign legal consultants. They cannot affiliate with local firms, form joint ventures, or use their international firm's name.


Foreign film footage in television advertising is restricted. Currently, Malaysia actors must be used. The Government of Malaysia has an informal and vague guideline that television commercials cannot "promote a foreign lifestyle." In 1993, the broadcast of a commercial for U.S.-produced apples was delayed under the guideline.

Advertising of alcoholic beverages on television and radio is banned. Advertising of all types of hard liquor including wines will be prohibited in the print media and billboards under a new regulation. Tobacco advertising is also restricted; however, cigarette manufacturers manage to work around the regulations by advertising such things as clothing, travel agencies, and restaurants which use the brand names of their popular selling cigarettes.

Professional Services

Foreign architects and engineers must establish affiliations and joint ventures, respectively, with Malaysian firms and must receive "temporary licensing." The license is granted on a project-by-project basis, subject to an economic needs test and subject to criteria imposed by the licensing board. In the 1996 budget, Malaysia relaxed conditions for the recruitment of foreign engineers and scientists for the silicon wafer industry, but promised to tighten guidelines on foreign consultants working on infrastructure projects.

Television and Radio Broadcasts

Asian government restrictions limit the import broadcast quotas for television (30 percent local, 70 percent imported content) and radio (60 percent local, 40 percent imported content). The restrictions appeared to have relaxed with two new television channels which broadcast almost entirely imported programs in 1995.


The Malaysian Government welcomes foreign investment in manufacturing. Its policy specifically encourages joint-ventures projects between Malaysian and foreigners. In 1986, Malaysia relaxed conditions for foreign equity and expatriate staff. Currently no equity conditions are imposed on projects which export 80 percent or more of their output except for certain products which have a maximum limit of foreign equity.

Projects which export between 20 percent and 50 percent of their output are allowed up to 51 percent foreign equity. Projects which export less than 20 percent of their output are allowed a maximum of 30 foreign ownership.

In the services sectors, investors face substantial restrictions, including, in most cases, a 30 percent limit on foreign equity.

Negotiations for a bilateral tax treaty with Malaysia, which had been stalled since 1987, were reopened in 1993, and continue.

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