“An Enquiry into the Trade and Finance of Malaysia”

Submitted to
MAHBUBA LIMA
Lecturer
Department of Finance
University of Dhaka
Dhaka

Submitted by
Sl.
no
Name ID
01.
Farzana Nasreen 15-004
02.
Sumaiya Akter 15-018
03.
Pramita Saha 15-030
04.
Mohammad Nayem 15-086
Uddin
05.
Fahmina Tasmin 15-144
Munia
06.
Shanaz parveen 15-134

Department Of Finance
B.B.A.( 15TH Batch),Section-B
University Of Dhaka

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 “An Enquiry into the Trade and Finance of Malaysia”

Letter of Transmittal

MAHBUBA LIMA
Lecturer
Department of Finance
University of Dhaka
Dhaka

Dear Madam,

It gives us immense pleasure to submit our report on “An enquiry into the trade and
finance of Malaysia”. This report was assigned to us as a partial requirement of the
International Trade and Finance (F-208) course in fourth semester.

While making the report we come across many hurdles and pleasant experiences. But the
valuable experiences we have gained during the period will undoubtedly benefit us in the
years ahead. This report gave us an opportunity to apply our theoretical expertise,
sharpen our views, ideas, and communication skills, and bridge them with the real world
of practical experience, which will be a good head start for our future professional career.

We hope you would find the report in appropriate manner. We appreciate your
cooperation and we hope you will call upon us with any queries occasioned by this
report.

We have tried sincerely to comprehend and translate our knowledge in writing this report.
We enjoyed this project work and gladly attend any of your calls to clarify on our point,
if necessary.

Sincerely yours,
_____________

Farzana Nasreen
Section-B, 15th Batch
On behalf group members

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 “An Enquiry into the Trade and Finance of Malaysia”

Acknowledgement

We are thankful and grateful to almighty Allah who has given us the strength and ability
to complete the report on “An enquiry into the trade and finance of Malaysia”. We
are also grateful to our Course Instructor Mahbuba Lima to prepare this very important
report. She has given all sorts of help required to complete this. We are also grateful to
those who have given us suggestion and interaction.

The presentation of this report is of a great expectation in our BBA program and we are
quite happy to submit it on time and work on such an interesting topic. Theoretical
knowledge should be valued when it is successfully applied in practical field. In this
respect, we found this report a great opportunity to deal with the use of theory of Trade
and Finance in the real world.
So lastly, we express special thanks from the bottom of our heart to all who help us
directly & indirectly to complete this term paper.

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 “An Enquiry into the Trade and Finance of Malaysia”

Table of Contents
Economy of Malaysia at a Glance..................................................................................................................7
.............................................................................................................................................................14
Malaysian Trade with the U.S.............................................................................................................14
Malaysia’s Top Exports to America....................................................................................................15
Fastest-Growing Malaysian Exports to the U.S..................................................................................15
Malaysia’s Top Imports from America...............................................................................................16
Fastest-Growing Malaysian Imports from the U.S.............................................................................16

Comparative Trade Advantages..........................................................................................................16

Advantages of Fixed Foreign Exchange Rate:...............................................................................................47
Floating Foreign Exchange Rate:...................................................................................................................47
Advantages of Floating Foreign Exchange Rate:...........................................................................................47
Disadvantages of Floating Foreign Exchange Rate:.......................................................................................48

Chapter 3

 Factors affecting International Trade Flows………………….

 Inflation

 Government Restriction

 National Income

 Exchange Rates

 Foreign Direct Investment ………………………………………

 Methods

 Forms

 FDI in Malaysia

 Determination of Foreign Exchange Rate…………………………

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“An Enquiry into the Trade and Finance of Malaysia”

Chapter 1

Introduction to
Malaysia

Economic
performance of
Malaysia at a Glance

Transformation of
Malaysia’s Economy

Export and Import of

Malaysia

Commodity

Partners

Statistics

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 “An Enquiry into the Trade and Finance of Malaysia”

INTRODUCTION TO MALAYSIA

Malaysia is a federal constitutional monarchy in Southeast Asia. It consists

of thirteen states and three federal territories and has a total landmass of
329,847 square kilometers (127,350 sq mi). The country is separated by the South
China Sea into two regions, Peninsular Malaysia and Malaysian Borneo (also
known as West and East Malaysia respectively). Malaysia shares land borders
with Thailand, Indonesia, and Brunei, and also has maritime boundaries with
Singapore, Vietnam, and the Philippines. The capital city is Kuala Lumpur,
while Putrajaya is the seat of the federal government. The population as of 2009
stood at over 28 million.

Malaysia has its origins in the Malay Kingdoms present in the area which, from the
18th century, became subject to the British Empire. The first British territories
were known as the Straits Settlements. Peninsular Malaysia, then known as Malaya,
was first unified under the commonwealth in 1946, before becoming the Federation
of Malaya in 1948. In 1963, Malaya united with Sabah, Sarawak, and Singapore to
form modern Malaysia. In 1965, Singapore was expelled from the federation, and
became an independent city state. Since its independence, Malaysia has had one of
the best economic records in Asia, with GDP growing an average 6.5% for the first
50 years of independence. The economy of the country has, traditionally, been
fuelled by its natural resources, but is now also expanding in the sectors of science,
tourism, commerce and medical tourist.

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 “An Enquiry into the Trade and Finance of Malaysia”

Economy of Malaysia at a Glance

Fixed Exchange Rates: 1Ringgit=100sen
Fiscal year: Calendar year
Trade Organization: APEC, ASEAN, WTO

Statistics:
GDP: $381.1 billion (2009 est.)
GDP growth: -2.2% (2009 est.)
GDP per Capita: $ 14800 (2009 est.)

GDP by sector:
Agriculture: 10.1%, industry: 42.3%, service 46.7%
Inflation: 0.4%
Population below poverty line: 3.5%
Labor Force by Occupation: agriculture: 13%, industry: 36%, service 51%
Unemployment: 5%
Main Industries: Peninsular Malaysia-rubber and palm oil processing and
manufacturing, light manufacturing industry, electronics,
tin mining and smelting, logging and processing timber,
petroleum production and refining, tourism, logging
Ease of doing Business Rank: 2 1st

External
Export: $156.4 billion
Export Goods: electronic equipment, petroleum and liquefied natural gas,
wood and wood products, palm oil, rubber, textiles,
chemicals
Main Export Partners: Singapore 13.9%, China 12.2%, United States 10.9%,
Japan 9.8%, Thailand5.4%, Hong Kong 5.2% (2009 est.)
Import: $119.5 billion (2009 est.)
Import Goods: electronics, machinery, petroleum products, plastics,
vehicles, iron and steel products, chemicals

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 “An Enquiry into the Trade and Finance of Malaysia”

Main Import Partners: China 13.9%, Japan 12.5%, Singapore 11.1%, Thailand
6%, Indonesia 5.3%, South Korea 4.6%, Taiwan 4.2%,
Germany 4.2% (2009 est.)
Gross External Debt: N/A

Public Finances
Revenues: $61.6 billion (2009 est.)
Expenses: $60.72 billion (2009 est.)
Economic Aid: $31.6 million (2005)
Foreign Reserves: $98.02 billion (31 December 2009 est.

Transformation of Malaysia’s Economy

Malaysia is an economy on the move. The average income of Malaysians today is two
and a half times higher than it was 15 years ago. Malaysia’s impressive economic
performance has pushed poverty down to levels lower than many economies in the
region. Unemployment and inflation also are low, even by developed country standards.
Some structural issues need addressing but, on balance, Malaysia’s economic
performance is a ‘good news’ story.

From Agriculture to Electronics:

The transformation began more than three decades ago, when the Malaysian Government
embarked on a campaign to industrialize Malaysia. At Independence in 1957, Malaysia
was reliant on tin, rubber and palm oil for its foreign exchange earnings. While palm oil
earnings remain significant – Malaysia is the largest exporter of palm oil in the world –
elaborately transformed manufactures in the shape of electronics and electrical products
now dominate Malaysia’s exports. In 2002,
Malaysia was the world’s fifth-largest exporter
of semi-conductors. Large inflows of foreign
direct investment have spurred the development
of Malaysia’s manufacturing sector.

Growt h and development:

Economic growth and social development have

gone hand-in-hand. Unemployment has been

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 “An Enquiry into the Trade and Finance of Malaysia”

low and most Malaysians who want a job can find one. Inflation has been contained,
ensuring Malaysian purchasing power has not been eroded. Per capita income in 2003
was more than two and a half times larger than the level 15 years ago; real per capita
income was 70 per cent larger over the same period. Where nearly one third of
Malaysians were living in poverty in 1980, only five per cent were doing so in 2002.
Hardcore poverty – defined as half the poverty line income – is down to one per cent.
Students are staying at school longer, more are pursuing tertiary education and, as a
result, literacy rates have risen appreciably. Most of the country has access to basic
services such as water, electricity and roads. Fixed line phone coverage is somewhat
limited, but Malaysians have compensated for this by voraciously adopting mobile phone
technology.

Government’s Effort:

Malaysia now is a high middle-income, export-oriented economy. The underlying

resilience in the economy and timely responses from government, Malaysia coped with
the Asian financial crisis better than most other economies in the region. The
Government maintains strong links with many listed companies, in several cases owning
majority shareholdings. Greater private domestic investment would raise productivity
and contribute to further increases in per capita income.
The focus of macroeconomic management is on low and stable inflation, an adequate
level of national savings, a balance of payments surplus, a stable exchange rate, debt
sustainability, fiscal prudence and strong and unencumbered external reserves.

International Trade:

The exchange of goods and services between two or more countries is known as
international trade. In other words, when trade exceeds political boundary of a country it
is known as international trade.
Main reason of international trade is the existence of price differences between countries.
Price difference occurs from:
• Different supply conditions

• Different demand conditions

• Different demand and supply conditions

Factors of different supply conditions:

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 “An Enquiry into the Trade and Finance of Malaysia”

 Natural endowment of economic resources

 Degree of efficiency with which these factors are employed

 Level of technology

 Labor skill

 Factor abundance

Factors of different demand conditions:

 Income level

 Taste pattern

Malaysia is well-endowed with natural resources in areas such as:

• Agriculture

• Forestry

• Minerals

It is an exporter of natural and agricultural resources, the most valuable exported resource
being petroleum. At one time, it was the largest producer of tin, rubber and palm oil in
the world. In terms of agriculture, Malaysia is one of the top exporters of
natural rubber and palm oil, which together with sawn logs and sawn
timber, cocoa, pepper, pineapple and tobacco dominate the growth of the sector. Palm oil
is also a major generator of foreign exchange.
Regarding forestry resources, it is noted that logging only began to make a substantial
contribution to the economy during the nineteenth century. Today, an estimated 59% of
Malaysia remains forested. The rapid expansion of the timber industry, particularly after
the 1960s, has brought about a serious erosion problem in the country's forest resources.
However, in line with the Government's commitment to protect the environment and the
ecological system, forestry resources are being managed on a sustainable basis and
accordingly the rate of tree felling has been on the decline.
In addition, substantial areas are being silviculturally treated and reforestation of
degraded forest land is also being carried out. The Malaysian government provide plans
for the enrichment of some 312.30 square kilometres (120.5 sq mi) of land
with rattan under natural forest conditions and in rubber plantations as an inter crop. To
further enrich forest resources, fast-growing timber species such as meranti
tembaga, merawan and sesenduk are also being planted. At the same time, the cultivation
of high-value trees like teak and other trees for pulp and paper are also encouraged.

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 “An Enquiry into the Trade and Finance of Malaysia”

Rubber, once the mainstay of the Malaysian economy, has been largely replaced by palm
oil as Malaysia's leading agricultural export.
Tin and petroleum are the two main mineral resources that are of major significance in
the Malaysian economy. Malaysia was once the world's largest producer of tin until the
collapse of the tin market in the early 1980s. In the 19th and 20th century, tin played a
predominant role in the Malaysian economy. It was only in 1972 that petroleum
and natural gas took over from tin as the mainstay of the mineral extraction sector.
Meanwhile, the contribution by tin has declined. Petroleum and natural gas discoveries
in oil fields off Sabah, Sarawak and Terengganu have contributed much to the Malaysian
economy. Oil and gas resources are managed by PETRONAS, the state controlled oil
company which forms production sharing contracts with other players like Exxon-
Mobil and Royal Dutch Shell to explore oil fields in Malaysia. Other minerals of some
importance or significance include copper, bauxite, iron-ore and coal together with
industrial minerals like clay, kaolin, silica, limestone, barite, phosphates and dimension
stones such as granite as well as marble blocks and slabs. Small quantities of gold are
produced.
In an effort to diversify the economy and make Malaysia’s economy less dependent on
exported goods, the government has pushed to increase tourism in Malaysia. As a result
tourism has become Malaysia’s third largest source of income from foreign exchange,
although it is threatened by the negative effects of the growing industrial economy, with
large amounts of air and water pollution along with deforestation affecting tourism. The
majority of Malaysia's tourists come from its bordering country, Singapore. In 1999,
Malaysia launched a worldwide marketing campaign called “Malaysia, Truly Asia”
which was largely successful in bringing in over 7.4 million tourists.

Export and import of Malaysia

Now we can look into the export and import statistics of Malaysia:

Export of Malaysia:

Commodities: electronic equipment, petroleum and liquefied natural gas, wood and
wood products, palm oil, rubber, textiles, chemicals

Partners: Singapore 14.94%, US 12.4%, China 10.19%, Japan 9.13%, Thailand 4.93%,
Hong Kong 4.75% (2009)

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 “An Enquiry into the Trade and Finance of Malaysia”

Source: CIA World Fact book - Unless otherwise noted, information is accurate as of
2010

Numerical Presentation:
Total exports: $157.6 billion (2009 est.)
$199.7 billion (2008 est.)

Year Exports Rank Percent Change Date of Information

2003 $95,200,000,000 19 2002 est.
2004 $98,400,000,000 20 3.36 % 2003 est.
2005 $123,500,000,000 19 25.51 % 2004 est.
2006 $147,100,000,000 20 19.11 % 2005 est.
2007 $158,700,000,000 21 7.89 % 2006 est.
2008 $176,400,000,000 21 11.15 % 2007 est.
2009 $198,900,000,000 21 12.76 % 2008 est.
2010 $157,600,000,000 23 -20.76 % 2009 est.
This entry provides the total US dollar amount of merchandise exports on an f.o.b. (free
on board) basis. These figures are calculated on an exchange rate basis, i.e., not in
purchasing power parity (PPP) terms.

Source: CIA World Fact book - Unless otherwise noted, information is accurate as of
2010

Import of Malaysia:

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 “An Enquiry into the Trade and Finance of Malaysia”

Commodities: electronics, machinery, petroleum products, plastics, vehicles, iron and

steel products, chemicals.

Partners: china, USA, Singapore, Thailand, South Africa, Germany, Taiwan.

Source: CIA World Fact book - Unless otherwise noted, information is accurate as of
2010

Numerical Presentation
Total imports: $119.3 billion (2009 est.)
$148.5 billion (2008 est.)

Year Imports Rank Percent Change Date of Information

2003 $76,800,000,000 18 2002 est.
2004 $74,400,000,000 22 -3.13 % 2003 est.
2005 $99,300,000,000 19 33.47 % 2004 est.
2006 $118,700,000,000 21 19.54 % 2005 est.
2007 $127,300,000,000 23 7.25 % 2006 est.
2008 $139,100,000,000 25 9.27 % 2007 est.
2009 $154,700,000,000 27 11.21 % 2008 est.
2010 $119,300,000,000 27 -22.88 % 2009 est.

This entry provides the total US dollar amount of merchandise imports on a c.i.f. (cost,
insurance, and freight) or f.o.b. (free on board) basis. These figures are calculated on an
exchange rate basis, i.e., not in purchasing power parity (PPP) terms.

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 “An Enquiry into the Trade and Finance of Malaysia”

Comparative advantage

Since 2000, Malaysian-manufactured exports performance has been declining. The

downturn of the global electronic industry and the rise of China's economy are the two
major causes of this decline. To improve export performance, Malaysia participates in
multilateral, regional, and bilateral trade liberalization. The competitiveness of Malaysian
manufactured exports can be improved by examining the pattern of revealed comparative
advantage (RCA). Within the non-resource-based manufactured exports, Malaysia still
has comparative advantage for electrical and electronic goods and machinery (its largest
export item), even though it has been on a decline. Malaysia's export strength has also
gradually shifted from non-resource-based to resource-based manufactured exports. The
RCA estimates also suggest that trade liberalization must not only lower or eliminate
tariffs on final products, but also reduce import duties if exports were to increase their
competitiveness.

Malaysian Trade with the U.S.

Last year, Malaysian exports to America fell 5.8% to $30.7 billion. Over that same
period, Malaysia bought $12.9 billion worth of U.S. imports – an increase of 10.9%.

After subtracting imports from exports, one can quickly calculate Malaysia’s trade
surplus with the U.S. to equal a healthy $17.8 billion in 2008.

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The lists below present the top 10 exports and imports that American and Malaysian
enterprises exchanged in 2008. The fastest-growing trade product categories are also
listed.

Malaysia’s Top Exports to America

Malaysia’s top 3 exports were hi-tech products that represented 51.8% of Malaysian
exports to the U.S. last year. In total, the following 10 Malaysian exports generated
77.1% of the total value of shipments from Malaysia to America in 2008.

1. Computers … US$6.7 billion, down 17.2% from 2007 (21.9% of US imports

from Malaysia)
2. Computer accessories and parts … $4.8 billion, down 14.4% (15.6%)
3. Telecommunications equipment … $4.4 billion, down 1.2% (14.3%)
4. Semiconductors … $2.9 billion, up 2% (9.6%)
5. Food oils and oilseeds … $1.2 billion, up 76.7% (3.9%)
6. Other household goods including clocks … $964.8 million, down 21.8% (3.1%)
7. Other scientific, medical and hospital equipment … $899.5 million, up 19.4%
(2.9%)
8. Household items including baskets and furniture … $710.5 million, down 8.2%
(2.3%)
9. Stereo equipment including radios … $566.1 million, down 6.3% (1.8%)
10. Video equipment (DVD players, VCRs, TV receivers) … $516.6 million, up
12.3% (1.7%).

Fastest-Growing Malaysian Exports to the U.S.

Malaysian exported tin had the most dramatic increase in sales to the U.S., while 7 other
product categories showed impressive triple-digit gains.

1. Tin … US$34.9 million, up 1,881% from 2007

2. Oilfield and drilling equipment … $14.1 million, up 990.4%
3. Feedstuff and food grains … $21.2 million, up 183.3%
4. Crude oil… $63.2 million, up 169.8%
5. Synthetics (cork, gums, resins, rubber, wood)… $6.8 million, up 162.4%
6. Vegetables and preparations … $6.4 million, up 153.4%
7. Paper and paper products … $9.7 million, up 137%
8. Miscellaneous non-ferrous metals … $12.6 million, up 121.6%
9. Agricultural machinery and equipment … $2.7 million, up 91.4%
10. Fertilizers and pesticides … $43.2 million, up 87.1%.

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Malaysia’s Top Imports from America

Semiconductors, steelmaking and plastic materials illustrate the fact that many of
America’s exports to Malaysia are source inputs for Malaysian manufacturers. The
following top 10 exports from America to Malaysia accounted for 74.6% of Malaysia
overall imports from the U.S.

1. Semiconductors … US$6.1 billion, up 21.7% from 2007 (47.3% of US exports to

Malaysia)
2. Computer accessories … $586.7 million, up 7.4% (4.5%)
3. Steelmaking materials … $525.6 million, up 45.4% (4.1%)
4. Other industrial machines … $421.8 million, down 20.3% (3.3%)
5. Electric apparatus … $421 million, down 8.5% (3.3%)
6. Telecommunications equipment… $416.7 million, down 13.2% (3.2%)
7. Measuring, testing and control instruments … $369.8 million, up 29.9% (2.9%)
8. Civilian aircraft… $346.8 million, down 31.6% (2.7%)
9. Generators and accessories … $245.5 million, up 98.6% (1.9%)
10. Plastic materials … $163.5 million, up 5.7% (1.3%).

Fastest-Growing Malaysian Imports from the U.S.

The top 10 list of Malaysian growth imports were for relatively small dollar amounts.
Three of these import categories were up by triple-digits while the remaining 7 product
categories had double-digit gains.

1. Artillery, guns, missiles and tanks … US$28.6 million, up 653.1% from 2007
2. Food oils and oilseeds … $8.4 million, up 553.9%
3. Other iron and steel products … $27.3 million, up 111.7%
4. Generators and accessories … $245.5 million, up 98.6%
5. Chemical fertilizers… $22 million, up 97.3%
6. Marine engines and parts … $34.1 million, up 84.7%
7. Trucks, buses and special purpose vehicles … $2.3 million, up 79.3%
8. Textile and sewing machines … $6.3 million, up 69.2%
9. Unmanufactured agriculture industry products … $27.1 million, up 67.4%
10. Unmanufactured tobacco … $20.9 million, up 66%.

Comparative Trade Advantages

During 2008, Malaysia exported $11.5 billion worth of computers and accessories to the
U.S. while importing $715 million of those same product categories from America.

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These Malaysian-American trade statistics show that Malaysia has a comparative

advantage over the U.S. in the trade of computers and accessories between the 2 nations.

On the other hand, America exported $6.1 billion worth of corn to Malaysia in 2008
compared with $2.9 billion in Malaysian semiconductors imported into the U.S.

That the U.S. shipped to Malaysia over twice the value of imported Malaysian
semiconductors clearly shows that America has a comparative advantage in trading
semiconductors with Malaysia.

The cheaper labor is also another important cause behind Malaysia’s comparative
advantage over USA.

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“An Enquiry into the Trade and Finance of Malaysia”

Chapter 2

Tariff

Causes of Imposing
Tariff

Tariff Policy Of
Malaysia

Custom Unions

ASEAN

APEC

OIC

Balance of Payment

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 “An Enquiry into the Trade and Finance of Malaysia”

Tariff

Tariff is a commercial policy instrument which can be expressed in absolute or

relative term and is imposed upon import or export for the purpose of increasing
revenue or protecting domestic industries.

Arguments for Imposing Tariff:

There are some arguments why a government goes for imposing tariff; although
export and import are the vital elements to strengthen a country’s economy. The
arguments are quoted below:

1. Reserving home market or expansion of home market

2. Keeping money at home

3. Counteracting foreign low wages

4. Defense or national security

5. National self-sufficiency

6. Protecting high wages or standard of living

7. Full employment

8. Industrialization or diversification of industries

9. Protecting infant industries

10. Retaliation

11. Balance of Payment

Tariff policy of Malaysia

The Malaysian economy is relatively open to both trade in goods and foreign
investment, although rice and automotive products are notable exceptions (World

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Trade Organization,2001).More than half of all tariff lines are duty free and less than
one per cent attract non-ad valorem rates.

Malaysia’s longstanding commitment to maintaining a relatively open trade and

investment regime has largely been maintained, although various measures were
introduced after the Asian financial crisis. There was an increase in the degree of
dispersion of tariff rates because of high tariff peaks relating to a few product lines,
increased reliance on non-automatic licensing to regulate some imports that directly
compete with domestic production by public sector enterprises, and delays in
meeting commitments under the General Agreement on Trade in Services (GATS)
(Athukorala, 2002).
In January 2004, the Malaysian Government reduced tariffs on cars sourced
within the ASEAN region as part of their requirements under the ASEAN free
trade agreement. However, the Government then increased the excise tax on all cars
- both domestic and international – but gave a 50 percent rebate to domestically
produced vehicles (Far Eastern Economic Review, ‘Proton on a slippery slope’),
In effect, higher excise duties replaced the reduced import tariffs to maintain
protection of domestic manufacturers, reducing the incentive for Proton and other
local car makers to improve efficiency.

Malaysia has a wide range of non-tariff measures across many different products
and sectors, although they differ in terms of trade restrictiveness. Import licenses
cover 60 different products ranging from poultry, billets of iron or steel and
magnetic tape webs for video and sound recording (Ministry of International Trade
and Industry, 2004a).Some import licenses are restricted to a few importers with
specific quotas, such as in sugar and rice. Other licenses are easily obtainable, such
as those for meat.
The 50 per cent rebate on domestically produced motor vehicles also is a substantial
non-tariff measure.

Barriers to services in the Malaysian market vary. Restrictions on commercial

presence are a general impediment which applies to a number of areas. For example,
Malaysia is the only market in South East Asia that totally excludes Australian law
firms and lawyers. Foreign education institutions must have each course individually
approved, rather than having an institution-based accreditation. Australian architecture
and engineering firms have difficulty exporting their services to Malaysia.

Malaysia’s GATS Schedule tends to leave commercial presence unbound and notes
that foreign acquisition of a Malaysian corporation requires approval.
There also are restrictions on the movement of services providers into Malaysia.

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 “An Enquiry into the Trade and Finance of Malaysia”

Malaysia has generally left this mode of delivery unbound in the GATS, although
companies are allowed to bring in senior managers and two professionals, with
additional experts subject to a market test and training Malaysians.

Malaysian tariffs falling

Tariff Structure of Malaysia, per cent, 1988-2001

1988 1993 1997 2001

Number of tariff lines 12 183 11 875 10 372 10 368
Bound tariff lines 0.8 0.8 63.7 63.5
Duty-free tariff lines 10.3 13.4 58.6 58.3
Specific and mixed tariffs 22.2 12 4.5 0.7

Tariffs with no ad 7.4 5.9 4.5 0.7

valorem equivalent
Simple average applied 17.5 15.2 8.1 9.2
rate
Agriculture (HS01-24) 7.7 7.3 4.8 3.5
Industrial products 14.8 14.7 8.5 9.9
(HS25-93)
Simple average tariff by stage of processing
Raw materials 14.6 14.3 1.0 0.9
Agricultural products 16.9 16.5 0.6 0.5
Mining products 3.6 3.8 1.0 1.0

Manufactured products 5.9 5.8 3.2 3.0

Semi-processed products 18.3 15.3 7.0 7.7

Fully processed products 18.1 15.4 11.9 13.6

From analyzing the above table, we can see –

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• Through 1988 to 2001 Malaysia has changed its view towards

international business by reducing tariff policy chronologically.
• As tariff is a barrier to open trade, through reducing it Malaysia has
stepped towards open trade.
• Tariff on agricultural products is less than industrial product.
• Tariff on finished products is more than other materials and
products.
• Duty free tariff line is more than other segments.

Custom Unions

Customs Unions: Trade Integration by Malaysia with other countries

As we know, Customs Union is a union in which members remove all barriers to trade
among themselves and adopt a common set of external barriers thereby eliminating the
need for customs inspection at internal borders.
Malaysia has entered into some Customs Unions in collaboration with other countries for
the purpose of facilitating trade. The major Customs Unions Malaysia entered into are:
1. ASEAN

2. APEC

3. OIC

The net effects of trade creation and trade diversion by Malaysia with other countries in
each of the Customs Unions and the policy of each of the Customs Unions affecting
Malaysia’s trade and economy will be described and explained in this part of the report.

Trade Impact of entering into ASEAN by Malaysia

ASEAN stands for The Association of Southeast Asian Nations. ASEAN was preceded
by an organization called the Association of Southeast Asia, commonly called ASA, an
alliance consisting of the Philippines, Malaysia and Thailand that was formed in 1961.
The bloc itself, however, was established on 8 August 1967, when foreign ministers of
five countries– Indonesia, Malaysia, the Philippines, Singapore, and Thailand– met at the

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Thai Department of Foreign Affairs building in Bangkok and signed the ASEAN
Declaration, more commonly known as the Bangkok Declaration.
The association now consists of 10 member states, as successively Brunei Darussalam
(1984), Vietnam (1995), Laos (1997), Myanmar (1997) and Cambodia (1999).

Intra-ASEAN trade integration by Malaysia:

The measure of integration success can be expressed in following relation:

Integration success =Potential Trade/Actual Trade

If the success ratio is higher than 1, intra-ASEAN trade integration would be mentioned
to be successful. If the measure is at unity, they have just reached the success level, and
otherwise, ASEAN is yet to reach the level of success.
The potential trade is projected by applying equation to Singapore, Malaysia, Indonesia
and Thailand for the period of 2003 to 2008. Potential trade is estimated from two points
of view.
One is for the impact of regional integration and the other is for the impact of currency
union, by varying the value of currency union dummy.
Here is the information about actual and potential trade between Malaysia and three
selected ASEAN member countries:

23
 “An Enquiry into the Trade and Finance of Malaysia”

Source: Bank Negara Malaysia (Central Bank of Malaysia)

Micro-level observation of country pairs from the above figure provide detailed idea
about the pattern of success in the trade integration process. Trade patternBetween
Singapore – Malaysia, and Malaysia – Thailand look similar.Difference between actual
trade and potential trade for all three country pairs are quite high in 2003, which increase
over time. Difference between actual and potential trade is found quite low for Indonesia
– Malaysia pair during 2003-2004, which increases at a high rate afterward. These
observations are summarized in the following table:

Malaysia and Singapore Malaysia and Indonesia Malaysia and Thailand

Actual Potential Actual Potential Actual Potential

trade(in bn trade(in bn trade(in trade(in bn trade(in bn trade(in bn
in USD) in USD) bn in in USD) in USD) in USD)
USD)
44600 7302 3500 2244 8600 1861

51350 8226 390 2671 11600 2021

58460 9325 4600 2289 12000 2000

66390 10443 6350 2899 14980 2518

72280 12350 10320 3546 16325 3086

78000 13929 14460 4460 17900 3517

Table: Integration success = Actual trade / Potential trade

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 “An Enquiry into the Trade and Finance of Malaysia”

Period Malaysia- Malaysia- Malaysia-

Singapore Indonesia Thailand

2003 6.07 1.56 4.62

2004 6.20 1.46 5.74

2005 6.22 2.01 6.00

2006 6.32 2.19 5.95

5.83 2.91 5.29

2007

2008 5.60 3.27 5.09

The above stated Figure presents the potential trade with regional integration, potential
trade with currency union and actual trade of Malaysia with three selected ASEAN
members. From these figures, three major findings are significant.
Firstly, actual bilateral trade among these four members is higher than the estimated
potential trade throughout the period.
Secondly, for all selected country pairs, increasing rate of actual trade is much higher
than the increasing rate of potential trade.
Thirdly, impact of currency union on potential trade is insignificant.

From ASEAN towards AFTA:

One of the most important RTA (regional trade agreements) in Asia and the Pacific is the
Association of South-East Asian Nations (ASEAN) Free Trade Area, also referred to as
AFTA. AFTA was established in 1992 and currently has a membership of 10 countries. It
was expected to become a full free trade area by the year 2008. This should result in
supporting economic cooperation between member countries.

This agreement was aimed at eliminating tariff barriers among member countries and
creating regional market of 500 million people. The Agreement on the Common

25
 “An Enquiry into the Trade and Finance of Malaysia”

Effective Preferential Tariff (CEPT) scheme required that tariff levied on a wide range of
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Brunei D. 3.78 2.64 2.54 2.02 1.61 1.37 1.55 1.26 1.17 0.96 1.04

Indonesia 17.27 17.27 15.22 10.39 8.53 7.06 5.36 4.76 4.27 3.69 2.17

Malaysia 10.79 10 9.21 4.56 4.12 3.46 3.2 3.32 2.71 2.62 1.95

Philippine 12.45 11.37 10.45 9.55 9.22 7.22 7.34 5.18 4.48 4.13 3.82

Singapore 0.01 0.01 0.01 0.01 0 0 0 0 0 0 0

Thailand 19.85 19.84 18.16 14.21 12.91 10.24 9.58 6.12 5.67 4.97 4.63

ASEAN6 11.44 10.97 10 7.15 6.38 5.22 4.79 3.64 3.22 2.89 2.39

Cambodia 10.3 10.39 8.8 7.94

9 9
Lao PDR 5 7.54 7.07 7.08 6.7 5.86
2
Myanmar 2.39 4.45 4.43 4.57 4.7 4.61
2
Vietnam 0.92 4.59 3.95 7.11 7.25 6.75 6.9 6.43
2
ASEAN10 7.03 6.32 4.91 5.01 4.43 4.11 3.8 3.33
4
products traded within the region be reduced to no more than five percent. It applied to
all products from ASEAN member countries defined as those that had at least 40%
ASEAN content.

More than 99 percent of the products in the CEPT Inclusion List (IL) of ASEAN-6,
comprising Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and
Thailand, have now been brought down to the 0-5 percent tariff range. ASEAN new
members including Cambodia, Lao PDR, Myanmar and Vietnam have also implemented
their commitment on the CEPT scheme with 80 percent of their products having been
moved into their CEPT Inclusion List.
Table 1. Average CEPT Rates, By Country, 1993-2003 Country

26
 “An Enquiry into the Trade and Finance of Malaysia”

Although the ASEAN Secretariat claims that AFTA is now virtually established, this
statement might somewhat disguise the truth. Rice, considered as a highly sensitive
product for the region, is still excluded from the AFTA agreement.

Moreover, several members are still very unresponsive when they have to lower tariffs on
certain other critical product groups. Malaysia refused to comply with the AFTA
deadlines and kept on levying tariffs on completely built up (CBUs) and completely
knocked down (CKDs) automotive units. By doing so, Malaysia undoubtedly wanted to
protect its state-controlled carmaker Proton. Only very recently, automotive CBUs and
CKDs have finally been transferred to Malaysia’s Inclusion List.

Trade Impact of entering into APEC by Malaysia:

APEC is the acronym for the regional grouping Asia-Pacific Economic Cooperation.
Among the 21 member countries Malaysia is one. APEC was established in November
1989. Since 1989, the member countries of the Asia Pacific Economic Cooperation
(APEC) forum have been meeting regularly to discuss measures for greater economic
cooperation. This forum which now has eighteen members from around the Pacific has
been argued to be a potentially important vehicle for significant trade reform in the
region.
Malaysia joined APEC on 6th November, 1989.

The economy-wide impacts of APEC’s free trade

Commitment on Malaysia’s economy:

The extent of gains from APEC depends on the size of the liberalization, the linkage
between sectors within economies, the extent to which goods from certain sectors are
demanded by other economies whose income rise, the reaction of macroeconomic
policies and a range of other channels which are captures through empirical relationships
in the model.

Liberalization:
The economy-wide and broad sectoral impacts of APEC trade liberalisation, covering all
sectors including services and implemented on a non- discriminatory basis are very
important in case of Malaysia.
A key benefit of non-discriminatory trade liberalisation is the opportunity to make use of
the cheapest imports from the best sources, allowing some existing resources in import-
competing industries to be reallocated to better uses domestically. In addition to these

27
 “An Enquiry into the Trade and Finance of Malaysia”

traditional static allocative efficiency gains, the current model allows for additional gains
from increased international specialisation. The gains from specialization tend to magnify
the overall effects of trade liberalization.

Welfare and sectoral implications of APEC liberalization in case of Malaysia:

Welfare effects:

Real income 3.8

Real GDP 4.9

Effects of full liberalization:

The first scenario is non discriminatory reduction in trade barriers by APEC economies.
It is assumed that each industrialized economy in APEC cuts protection on goods
beginning in 1995. The cuts in each period are gradually phased in such that their
measures of protection are equal to zero by 2010.

For developing economies like Malaysia, it is assumed the same linear reduction but with
a terminal date of 2020. The size of cuts depends on the initial levels of tariffs. These are
shown in the following table and are based on the WTO/World Bank database.

This table shows that there are significant differences in the level of protection across
sectors within Malaysia. This asymmetry in the cuts suggests that relative price changes
within economies will be important in the adjustment process and therefore a sectoral
disaggregation is important for analyzing APEC trade policy.

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 “An Enquiry into the Trade and Finance of Malaysia”

Consequences of Full APEC Liberalizations on Malaysia’s economy:

(% deviation from baseline)

1995 2000 2005 2010

-0.0 0.4 0.6 0.8

Real GDP
Consequence
s
Real -0.5 1.9 4.1 6.2
Consumption
Consequence
s

Real 0.2 1.2 1.9 2.5

Investment
Consequence
s
Real Export 0.0 2.3 5.3 8.4
Consequence
s

Current 0.2 -0.1 -0.3 -0.6

Account
Consequence
s

Source: Simulations from AP-Gcubed Model

From the chart stated above, we can conclude that GDP, Investment, consumption and
export have increased and only balance of Current account has decreased in case of
Malaysia due to Full APEC Liberalization.

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 “An Enquiry into the Trade and Finance of Malaysia”

Effects of preferential liberalization:

The second policy is the same as the first except that the cuts are made on a preferential
basis (APEC free trade area). Thus the tariff rates remain unchanged for trade with non
APEC members but are reduced the same as in scenario 1 for APEC members only.

Consequences of preferential APEC Liberalizations on Malaysia’s economy:

(% deviation from baseline)

1995 2000 2005 2010

-0.0 0.4 0.6 0.7
Real GDP
Consequences
Real -0.1 1.8 3.5 4.9
Consumption
Consequences

Real 0.6 1.2 1.8 2.1

Investment
Consequences

Real Export -0.2 1.8 4.4 7.2

Consequences

Current -0.1 -0.2 -0.3- -0.4

Account
Consequences

Source: Simulations from AP-Gcubed Model

30
 “An Enquiry into the Trade and Finance of Malaysia”

It is clear from these figures that full APEC liberalization is better for Malaysia shown
that the other alternatives. It is also clear that the consumption gains are larger and more
evenly spread that the production gains.

This is not surprising given that the production reallocations follow the improvements in
resource allocation in different sectors in different economies, whereas the consumption
gains accrue to the owners of factors of production wherever they are located.

OIC: Malaysia perspective

According to Al-Hayat newspaper, the Islamic Development Bank has signed an

agreement with a Malaysian company on the establishment of a joint subsidiary with the
task of establishing a common database for member countries of the Organization of
Islamic Countries (OIC). The Organization was established in Rabat, Kingdom of
Morocco, on 25 September 1969.

The Organization of the Islamic Conference (OIC), the largest Muslim international
organization, is curiously understudied in international relations literature. Between 2003
and 2007, Malaysia was the chair of this Organization.

Malaysia’s participation in the OIC has not been in singular search for self-benefit. In as
much as the Administration has displayed a clear sympathy for other Third World and
developing countries, in its economic aspiration it has also attempted to promote “South-
South” co-operation as a significant component of its foreign policy agenda, expressing
similar concerns within the OIC.

THE MALAYSIAN ECONOMIC EXPERIENCE AND ITS

RELEVANCE FOR THE OIC MEMBER COUNTRIES:
Malaysia’s economic track record in development is extremely impressive by any
standards. The economy has made quantum leaps in just over three decades. It is
noteworthy that rapid economic growth has been accompanied by more equitable income
redistribution without significant inflationary overtones.

31
 “An Enquiry into the Trade and Finance of Malaysia”

Trade represents the life-blood of the Malaysian economy with foreign direct investments
playing a pivotal role in the industrialisation process. Economic openness has brought
prosperity as well as vulnerability. To be sure, the Malaysian economy has been fairly
resilient until it was caught in a major currency turmoil that began in mid- 1997.
However, the origins of the current crisis are not entirely external. Domestic policies too
have inadvertently contributed to the economic woes of the country.

Nevertheless, the economy rests on solid foundations built since independence in 1957.
The current problems are viewed as no more than a passing phase. However, there is a
need to recognise policy failures, identify structural flaws in the system and set the house
in order. OIC member countries can find useful lessons, both positive and negative,
especially in the real of economic governance in Malaysia’s development experience.

Sectoral Share of Malaysian Exports to OIC members:

Source: Economic Reports, Ministry of Finance, Malaysia
Sector 1970 1980 1990 2000 2008 2009

Agriculture 62.1 74.4 48.5 22.3 13.1 11.1

Mining 18 5.2 26.4 18.3 5.8 6.4

Manufacturing 3.4 11.1 20.6 58.8 79.6 80.6

Others 10.37 9.3 4.5 0.6 1.5 1.9

Here, we can conclude that Malaysian exports of agricultural products to OIC members
have decreased gradually while export of manufacturing products to those countries have
increased gradually. Again, export of mining and other products to OIC member
countries finally decreased over the passing of time.

Gross Imports of Goods by Economic Function from OIC members:

32
 “An Enquiry into the Trade and Finance of Malaysia”

Activity 1970 1980 1990 2000 2008 2009

Consumption 22.2 31.7 20.3 16.4 14.2 14.6

Goods Share
(%)
Investment 31.7 52.7 31.1 37.5 40.5 40.0
Goods Share
(%)
Intermediate 41.3 87.4 47.7 45.4 44.7 45.2
Goods Share
(%)
Total Imports 8.53 13.45 30.44 79.12 194.34 197.31
(RM billion)
Source: Economic Reports, Ministry of Finance, Malaysia

The link between investment and trade is far more powerful than usually assumed, and
this is particularly pronounced in the case of Malaysia’s trade with industrialised and
newly industrialising economies.
Intra-industry trade in general and intra-firm trade in particular is intimately related to
foreign direct investments in Malaysia’s manufacturing sector. An important policy
implication is that Malaysia has little choice in the direction of its external trade in
manufactures, given the structure of FDI in the country. It would then follow that
Malaysia’s trade policy is heavily influenced by, or dependent on, its foreign investment
policy and not the other way around. Malaysia does not trade much with other OIC
members. This is so mainly because its investment links with them are either weak or
totally absent.

Sectoral and Regional Aggregation

In this study, the world economy was modeled to comprise the individual D-8 members,
Rest of OIC (ROIC), and Rest-of-the-World (ROW) aggregate while 8 major economic
sectors were considered.

Regional and Sectoral Aggregation:

Regions Code Sectors

Malaysia RAWAG Primary agriculture

33
 “An Enquiry into the Trade and Finance of Malaysia”

Indonesia MINERAL Natural resources,

extractive & related
industries

Turkey FOOD Processed food

Iran MANU Manufacturing products

Pakistan VEGOIL Vegetable oil products

Egypt F&FISH Forest and fisheries product

Nigeria ANIMAL Animal product

Bangladesh TEXT Textile and wearing apparel

ROIC (Rest of SVCS Service

OIC)

Exports
For Malaysia, total export to D-8 constitutes only 3.3 percent of total trade to the world.
Commodity-wise, only VEGOIL, TEXT and FOOD have made quite substantial inroads
into the D-8 markets at 15, 10, and 9 percent, respectively. All other exports to D-8 have
been rather minute (1-4 percent) of total trade for each commodity. Of total trade to D-8,
the MANU sector constitutes the largest share at 47 percent and followed by VEGO (25
percent).

Decomposition of Exports by Partner Countries and Sector (percentage):

Total Export of Malaysia:

(in 2009)

D-8 ROIC RO Total

W
RawA 0.04 0.04 0.91
g 3 4 3 1

34
 “An Enquiry into the Trade and Finance of Malaysia”

Animal 0.02 0.05 0.91

6 5 9 1

F&Fish 0.01 0.00 0.98

3 5 2 1

Food 0.09 0.05 0.85

0 7 2 1
Text 0.10 0.03 0.86
2 3 5 1
Manu 0.02 0.02 0.95
5 5 0 1
Svcs 0.02 0.03 0.94
0 3 7 1
Mineral 0.04 0.00 0.95
1 0 8 1
Vegoil 0.15 0.16 0.68
0 1 9 1

Total 0.03 0.03 0.93

3 1 6 1

Source: GTAP database V 7

From the chart stated above, it is obvious that Malaysia has exported vegetable oil to the
largest extent to the D-8 countries and also to the rest of he OIC member countries while
she has exported forest and fisheries product to the largest extent to the rest of the world
countries.

Imports
The decomposition of imports by partner countries and sectors are depicted in the
following Table. The D-8 has been Malaysia’s source of imports for 28 percent of
RAWAG, 36 percent F&FISH, 18 percent MINERAL, 12 percent TEXT and 51 percent
VEGOIL. Overall imports from D-8 represent 4.2 percent of Malaysia’s total imports.
Decomposition of Import by Partner Country and Sector:

Total Import of Malaysia:

(In 2009)
D-8 ROIC ROW Total
Raw Ag 0.149 0.0058 0.8451 1
Animal 0.0073 0.0144 0.9783 1

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 “An Enquiry into the Trade and Finance of Malaysia”

Fish 0.3567 0.0044 0.6389 1

Food 0.0693 0.004 0.9268 1

Text 0.1156 0.0049 0.8794 1

Manu 0.0297 0.0136 0.9566 1

Svcs 0.026 0.0286 0.9453 1

Mineral 0.1784 0.4055 0.416 1

Vegoil 0.514 0.0065 0.4796 1

Total 0.042 0.0226 0.9354 1

Source: GTAP database V 7

Malaysia has imported vegetable oil most from the D-8 countries and mineral products
from the rest of the OIC member countries while Malaysian largest extent imports from
the countries other than OIC members constitute animal products.

Decomposition of Import and Export Taxes/Subsidies:

The following tables depict the baseline levels of trade policies among D-8, ROIC and
ROW economies. Table 8 shows import taxes instituted on FOOD especially to D-8
markets have been the heaviest in each country. Malaysia levied the highest FOOD
import levy (64 percent). The RAWAG sector in Malaysia is the second most protected
sector, followed by TEXT. For export subsidies, generally they have been very low
across countries and commodities.
Import Taxes by Malaysia:
(In 2009)
D-8 ROIC ROW Total

RawAg 18.56 10.69 12.65 41.90

Animal 0.62 0.36 0.62 1.60

F&Fish 1.69 1.11 1.00 3.8

0
Food 64.38 42.77 23.67 130.8
1
Text 8.01 15.35 14.87 38.22

Manu 2.15 8.78 4.99 15.9

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 “An Enquiry into the Trade and Finance of Malaysia”

Svcs 0.00 0.00 0.00 0.00

Mineral 0.91 2.22 0.68 3.82

Vegoil 0.91 0.14 0.92 1.3

1

Total 96.58 81.41 59.39 237.3

8

Source: GTAP database V 7

The highest import taxes imposed by Malaysia on the imports from D-8 countries, rest of
the OIC member countries and from countries other than OIC members are on the food
products.

Export Subsidy by Malaysia:

(In 2009)
D8 ROIC ROW Total
RawAg 0.00 0.00 0.00 0.00
Animal 0.00 0.00 0.00 0.00
F&Fish 0.00 0.00 0.00 0.00
Food 0.00 0.00 -0.77 0.00
Text 0.0 0.00 -0.77 -0.77
Manu 0.00 0.00 0.00 0.00
Svcs 0.00 0.00 0.0 0.00
Mineral 1.26 -1.33 0.45 -0.52

Vegoil 0.00 0.00 0.00 0.00

Total 1.26 -1.33 -1.21 -
1.29

Source: GTAP database V 7

In 2009, Malaysia has imposed export subsidy on the export of mineral products to D-8
member countries while she has imposed charge on the export of mineral products to the

37
 “An Enquiry into the Trade and Finance of Malaysia”

rest of the OIC member countries. Malaysia has imposed charge on the export of food,
textile and mineral products to the countries other than OIC members.

Effects on Trade Balance:

Overall, the trade balance for Malaysia moves in a positive direction, in complete
contrast to that of ROIC and ROW. In Malaysia, VEGOIL, TEXT and RAWAG are not
capable of covering the negative trade balance from MANU and SCVS sector.

Changes in Trade Balance by Sector (Million USD):

(In 2009)
Categories Amount(Million USD)
RawAg 188.73
Animal 69.02
F&Fish -20.85
Food 171.6
5

Text 491.69
Manu -1629.
1

Svcs -414.02
Mineral 18.1
7

Vegoil 972.01
Total -110.51

Source: Simulation results

Impacts on Welfare:

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 “An Enquiry into the Trade and Finance of Malaysia”

The effect of a change in trade policies on the welfare of a region depends on the impacts
of changes in world prices on the welfare of the trading country and the efficiency gains
associated with output changes.

The welfare measure in the analysis employs the equivalent variation (EV) criterion, a
measure of absolute welfare gains for each regional household, expressed in millions of
USD. The EV can be interpreted as the change in regional household income at constant
prices that is equivalent to the proposed changes. Because the EV uses initial period
prices as its base, welfare results from any given simulation can be compared directly.
Changes in welfare as a result of trade liberalization could be due to changes in terms of
trade, better use of resources (allocative efficiency) and others, i.e. less costly imports
and scale effects.

Impact on Regional Welfare (EV, Million USD):

Decomposition of Welfare Change:

Allocative Terms of Othe
Efficiency trade r

647.3 413.462 -91.69

687 5 1

The Table stated above suggests that improvement in effectiveness of use of resources,
followed by increases in terms of trade contribute to the increase in Malaysian societal
welfare that includes poverty alleviation. Aggregate effects of other factors seem to have
a small negative effect on social welfare. The increase in Malaysian GDP results in the
decline of dead welfare loss and this implies that Malaysian aggregate supply before
trade liberalization has been inefficient.

Balance of Payment
Balance of Payment can be simply defined as the difference between the inflow and outflow of
foreign currency. Positive balance of payment refers to surplus of foreign currency while
negative balance of payment refers to deficiency of foreign currency. Generally income and
borrowings are credited while spending and lending are debited. So positive balance always
does not show favourable condition of a country, especially when that has been achieved
through borrowing.

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 “An Enquiry into the Trade and Finance of Malaysia”

Balance of Payments is a statistical statement that summarizes transactions between

residents and nonresidents during a period. The balance of payments comprises the
current account, the capital account, and the financial account.
Balance of Payment can be used as an indicator of economic and political stability. For
e.g. if a country has a consistently positive BOP, it would mean that there is significant
foreign investment within that country. It also includes the trade balance, foreign
investments and investments by foreigners.

Balance of Payments in Malaysia from 2005 to 2009 is as follows:

Balance of Payments
Ringgit Malaysia in 2005 2006 2007 2008 2009
Million (RM in
Million)
Goods (net) 128,892 134,558 127,673 170,116 108,10
3
Services and income -33,555 -24,202 -11,520 -23,131 -11,474
(net)
Current account balance 78,367 93,504 100,410 129,936 80,003

Capital and financial -36,991 -43,488 -37,710 -123,596 -

account balance
Overall balance 13,550 25,158 45,296 -18,250 -
Central Bank international 265,240 290,399 335,695 317,445 -
Reserves
Months of retained 7.7 7.8 8.4 7.6 -
imports

From the above table we can observe the following matters:

 Balance of Trade is consecutively positive of Malaysia (that means export
is more than import of goods).

 Service balance is consecutively negative of Malaysia (that means export

is less than import of services).

40
 “An Enquiry into the Trade and Finance of Malaysia”

 Current account balance is positive consistently which refers to

summation of export of goods and services and transfer received is greater
than import of goods and services and transfer paid.

 Capital balance is negative consistently which refers their huge

investment in foreign countries.

 Overall balance is the summation of current and capital balances.

 Central Bank‘s international reserve shows their reserve of foreign

currency.

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“An Enquiry into the Trade and Finance of Malaysia”

Chapter 3

Factors affecting
International Trade Flows

Inflation

Government Restriction

National Income

Exchange Rates

Foreign Direct Investment

Methods

Forms

FDI in Malaysia

Determination of Foreign
Exchange Rate

42
 “An Enquiry into the Trade and Finance of Malaysia”

Finance Policy of Malaysia

Factors affecting International Trade Flows:

As international trade can significantly affect a country’s economy, it is important to

identify and monitor the factors that influence it. The most influential factors are:
• Inflation

• National Income

• Government Restrictions

• Exchange Rates

Inflation:
Malaysian
inflation since
the 1970s
compares
favorably to
other economies
in the region.
Inflation is well
under control in
Malaysia, having
been below two
per cent in each of the last four years to 2003 (Bank Negara Malaysia, 2004b). Prudent
macro-economic policies, low imported inflation, stability of the exchange rate peg and
excess capacity in some sectors of the economy helped achieve low and stable
inflation (International Monetary Fund, 2004). The Malaysian Government has price
controls on selected goods, including petrol, but the number of goods they cover is
small.

National Income:

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 “An Enquiry into the Trade and Finance of Malaysia”

Household spending was buoyed by a strong labor market, a hefty (7.5–42%) increase in
public sector salaries from July 2007, low interest rates, and the wealth effect felt by
individuals from stock market gains. Rural incomes benefited from high global prices for
agricultural commodities. Public consumption also grew, by 6.4%.Gross fixed capital
formation increased robustly by 10.2% last year, the highest rate since 2000, supported
by both stronger public and private investment.
The former was bolstered by development projects implemented under the Ninth
Malaysian Plan 2006–2010, and the latter by the solid economic growth, low interest
rates, and improvements to the investment climate.
Among policy changes in 2007 that helped private investment, the Government cut the
corporate tax rate by 2 percentage points over 2 years to 26%; approved a 10-year tax
exemption for venture capital; and eased foreign exchange restrictions somewhat. In
addition, investment incentives were introduced for domestic and foreign investors in the
Iskander Development Region, one of three economic development regions being
developed under the Ninth Plan.

Government Restrictions:

Government policy during this early post-independence period is perhaps best described
as a “holding” program, designed to suppress simmering inter-communal rivalries. The
policy thrust was to continue with the colonial open-door approach relating to trade and
industry policy, while addressing ethnic and regional economic imbalances through rural
development schemes and the provision of social and physical infrastructure. Like in
many other developing countries, import-substitution industrialization was on the policy
agenda in Malaysia during this period. However, unlike in other countries, attempts were
not made to achieve “forced” industrialization through direct import restrictions and the
establishment of state-owned industrial enterprises. The industrialization strategy of the
Malaysian government at the time was largely a “promotional effort, geared to the
provision of an investment climate favorable to private enterprise, especially to foreign
private enterprise” (Wheelwright, 1993).
Very few industries enjoyed nominal tariffs of more than 30% and non-tariff barriers
were almost non-existent Low average tariffs, modest inter-industry tariff dispersion and
limited incidence of non-tariff barriers characterize Malaysia’s trade regime and have
assisted Malaysia’s industrial development. Malaysia is the fourth most open economy in
the world, measured by trade as a share of GDP. In the economy of Malaysia exports
have played a crucial role in sustaining rapid economic growth.

Exchange Rates:
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 “An Enquiry into the Trade and Finance of Malaysia”

The only legal tender in Malaysia is the Malaysian Ringgit. As of 20 March 2008, the
Ringgit is traded at MYR 3.18 at the US dollar. The Ringgit was not internationalized
since September 1998, an effect due to the 1997 Asian Financial Crisis in which the
central bank impose capital controls on the currency.
As a part of series of capital controls, the currency was pegged between September 1998
to 21 July 2005 at MYR 3.80 to the dollar. In recent years, Bank Negara
Malaysia beginning to relax certain rules to the capital controls although the currency
itself is still not traded internationally yet.

Foreign Direct Investment

Foreign Direct Investment (FDI) is a measure of foreign ownership of productive assets,

such as factories, mines and land. Increasing foreign investment can be used as one
measure of growing economic globalization.

Methods:
The foreign direct investor may acquire voting power of an enterprise in an economy
through any of the following methods:

• by incorporating a wholly owned subsidiary or company

• by acquiring shares in an associated enterprise
• through a merger or an acquisition of an unrelated enterprise
• participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:

• low corporate tax and income tax rates

• tax holidays
• other types of tax concessions
• preferential tariffs
• special economic zones
• EPZ - Export Processing Zones
• Bonded Warehouses
• investment financial subsidies
• soft loan or loan guarantees
• free land or land subsidies
• relocation & expatriation subsidies

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• job training & employment subsidies

• infrastructure subsidies
• R&D support
• derogation from regulations (usually for very large projects)

The counterpart to a liberal trade regime was a receptive environment for foreign direct
investment (FDI). Even in the 1950s and 1960s, when distrust of FDI and multinational
corporations held strong sway in the developing world, Malaysia had a relatively open
and welcoming policy (Athukorala and Menon, 1995). Nevertheless, even in the non-FDI
sphere, Malaysia’s policy regime throughout the post-war period was much more liberal
than in most other developing countries (Williamson and Mahar, 1998). In terms of
monetary policy, this period was typical of the general approach taken by the Central
Bank, the Bank Negara Malaysia (BNM), which is one of minimal intervention. For the
most part, BNM has been mainly focused on ensuring stable interest rates and has not
often used its instruments to conduct counter-cyclical policy (Ariff, 1991).
By the late 1960s, there was growing recognition that the so-called easy stage of import
substitution industrialization was coming to an end, and that future prospects for
industrial development would require the expansion of export-oriented industries.
Through the enactment of the Investment Incentives Act in 1968, policy shifted to
promoting export-oriented activities, especially through FDI.
Foreign direct investment (FDI) net inflows rose by 54.4% to $9.4 billion in 2007, with
manufacturing, particularly the electrical and electronics subsector, attracting more than
half the total in Malaysia. Gross fixed capital formation added 2.3 percentage points to
GDP growth (although this was more than offset by a decline in inventories). On the
external front, real exports and imports each grew by about 4%, the weakest performance
for several years, largely reflecting soft global demand for electrical products, and net
exports did not make a significant contribution to GDP growth.
Malaysia received RM46.1 billion foreign direct investment (FDI), which was all time
high, for the whole of 2008. The foreign investments accounted for 73.4 percent of the
total investments of RM62.8 billion approved for 2008.The Minister of International
Trade and Industry, Datuk Mustapa Mohamed announced that there was a sharp
reduction in FDI and Malaysia only received RM4.2 billion FDI, about 78% reduction,
for the first five months of 2009.

Determination of Foreign Exchange Rate

Prior to the 1997 Asian Financial Crisis, the Malaysian ringgit was an internationalized
currency, which was freely traded around the world. Just before the crisis, the Ringgit

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was traded RM2.50 at the dollar. Due to speculative activities, the Ringgit fell as much as
RM4.10 to the dollar in matter of weeks. Bank Negara Malaysia, the nation's central
banks decided to impose capital controls to prevent the outflow of the Ringgit in the open
market. The Ringgit is not traded internationally, a traveler needs to declare to the central
bank if taking out more than RM10,000 out of the country and the Ringgit itself was
pegged at RM3.80 to the US dollar.
The fixed change rate was abandoned to floating exchange rate in July 2005; hours
after People's Republic of China announced the same move. At this point, the Ringgit is
still not internationalized. The Ringgit continues to strengthen to 3.18 to the dollar in
March 2008. Meanwhile, many aspect of the capital control has been slowly relaxed
by Bank Negara Malaysia. However, the government continues to not internationalize the
Ringgit. The government stated that the Ringgit will be internationalized once it is ready.
To realize the reason of accepting floating exchange rate in place of fixed exchange rate,
we have to gain clear understanding of these concepts.

Fixed foreign exchange rate is an exchange rate which is fixed by government. In a fixed
foreign exchange rate exchange rates are either held constant or allowed to fluctuate only
within very narrow boundaries.

Advantages of Fixed Foreign Exchange Rate:

1. The risk of international traders is reduced as the rate won’t fluctuate further.
2. Arbiters cannot be benefited by moving demand and supply curve artificially.
3. It is easy to make any decision based on exchange rate.
Disadvantages of Fixed Foreign Exchange Rate:

1. Government can devalue or revalue its currency as their own interest.

2. This system may make each country more vulnerable to economic conditions in other
countries.

Floating Foreign Exchange Rate:

Floating foreign exchange rate is one in which exchange rate values are determined by
market forces without intervention by governments. This exchange rate adjusts on a
continual basis in response to demand and supply conditions for the currency.

Advantages of Floating Foreign Exchange Rate:

1. Government can reduces own burdens by adopting floating foreign exchange rates.
2. Macro problem of a country won’t affect another country.

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Disadvantages of Floating Foreign Exchange Rate:

Speculator group can create artificial demand and supply.

Findings:
The impact of international trade and FDI on Malaysia’s economy is very much
important being Malaysia as a country of multi-racial society comprises of many ethnic
groups.
Here are some findings regarding Malaysia’s economy and the factors affecting
Malaysia’s economy:
 Malaysia now is a high middle-income, export-oriented economy
underlying resilience in the economy and timely responses
from government, Malaysia coped with the Asian financial crisis
better than most other economies in the region.

 Malaysia’s GDP and overall economy have improved at a faster

rate during the courses of time.

 Malaysia’s impressive economic performance has pushed

poverty down to levels lower than many economies in the
region. Unemployment and inflation also are low, even by
developed country standards.

 Large inflows of foreign direct investment have spurred the

development of Malaysia’s manufacturing sector.

 International relation between Malaysia and other countries

entered into different customs unions with Malaysia with
possibility of establishing a virtual but powerful network have
brought mutual benefit to all participating countries.

 The economy of the country has, traditionally, been fuelled by its

natural resources, but is now also expanding in the sectors of
science, tourism, commerce and medical tourism.

Some structural issues need addressing but, on balance,

Malaysia’s economic performance is a ‘good news’ story.

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 “An Enquiry into the Trade and Finance of Malaysia”

Bibliography

• International financial management

By Jeff Madura

• International trade
By H. G. Manure

• CIA factbook
• www.wikipedia.com

• Asian Development Bank

• GTAP database V7

• Yahoo Finance

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