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Malaysia FTA hits roadblock over cars

Daily Yomiuri, Japan

Malaysia FTA hits roadblock over cars

Takashi Kikuchi and Hiroyuki Kato / Yomiuri Shimbun Correspondents

6 April 2005

Negotiations over a free trade agreement between Japan and Malaysia have hit a speed bump over cars, a focal point of the talks, due to Kuala Lumpur’s determination to continue protecting its local industry.

Malaysia’s persistence with its policy shows a clear contrast with Thailand, which is actively seeking foreign investment, including from members of the Association of Southeast Asian Nations.

Although Japan and Malaysia plan to push ahead with the negotiations with the aim of reaching a basic agreement by May, the two countries remain far apart.

Former Malaysian Prime Minister Mahathir Mohamad spearheaded the country’s "national car project" in the 1980s to foster domestic automakers, aiming to make the car industry a key sector of the economy.

While the nation’s automakers are required to procure most of their parts within the country, they receive favorable tax treatment. The policy is aimed at protecting the Malaysian car market from imported cars or locally made foreign vehicles.

Kuala Lumpur has offered up to a 50 percent tax rebate to domestic automakers since 2004, although it applies in principle an equal rate of sales tax on both domestic and imported vehicles.

There are two national car manufacturers in the country—Proton and Produa. There have, however, been links with Japanese automakers.

Mahathir initially said, "We need to gain technologies from foreign countries." In 1983, Proton was established in alliance with Mitsubishi Motors Corp.

Produa, the second national car manufacturer, which mainly focuses on the production of compact cars, was born in 1993 with financial and technological assistance from Japanese automaker Daihatsu Motor Co.


History of high tariffs

The Malaysian government has traditionally levied high tariffs on imported cars to protect its domestic industry.

Up until 2003, a tariff of up to 300 percent was levied on cars with engines bigger than 3 liters. This increased the cost of importing such vehicles fourfold.

In 1993, ASEAN members agreed to cut tariffs on imported cars to 5 percent or less in principle, but Malaysia won an exception, being allowed to cut the tariff rate to 20 percent in 2005 and to between zero and 5 percent in 2008.

Although the country has been gradually slashing tariffs since 1994, it introduced a sales tax on imported vehicles instead.

Malaysia still taxes cars imported from outside the ASEAN region by up to 300 percent.


Local cars lagging competitors

Malaysian cars have been overwhelmed recently by locally made U.S. and European vehicles.

In 2004, car sales in the country hit a record high 487,600 units, but market share of the two Malaysian makers fell from about 80 percent to 60 percent.

Foreign carmakers have been driving down the Malaysian makers’ market share by aggressively selling locally made cars.

Protons and Produas also suffer by comparison with foreign vehicles in terms of both price and performance.

Proton’s flagship 1.6-liter Waja sedan is priced at 1.6 million yen to 1.8 million yen. The price appears reasonable, but not when its poor performance is taken into consideration.

Foreign carmakers have been expanding their production in Malaysia.

Honda Motor Co.’s 1.7-liter Civic, which it makes in Malaysia, costs as much as 3 million yen when tariffs and sales taxes are added.

But despite the price difference, more and more Malaysians are choosing foreign cars, placing priority on brand and performance.

In the FTA negotiations with Malaysia, the government has called on Kuala Lumpur to eliminate tariffs and review its favorable tax treatment for domestic cars. However, the Malaysian government appears unwilling to change its policy, saying only, "We’d like to liberalize (the market) gradually."

Kuala Lumpur apparently is reluctant to go against the wishes of Mahathir, who is an adviser to Proton.

A senior Foreign Ministry official said the Japanese government considered Malaysia’s policy to protect its automakers as "the main difficulty" in reaching an economic agreement with the country, with an FTA as its pillar.

Countries that undertake FTAs are required to make mutual tariff reductions. As a result, it would be meaningless if the government granted an exception over cars—one of Japan’s major exports—and allowed Malaysia to continue its protective measures, which are contrary to trade liberalization.

Tokyo, however, is looking for ways to break the deadlock in the FTA negotiations.

The government may call on Malaysia to cut tariffs on larger engine cars, offer favorable treatment to Japanese firms that enter the Malaysian market, or seek the elimination of tariffs after a certain period, according to the official.