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2. Exchange Rate Policy
While the value of the Malaysian currency, the ringgit (RM), is considered to be market determined, the Malaysian government has intervened to offset significant upward pressure on the currency when such pressure was perceived as a sign of excessive foreign exchange speculation.
In late 1993, following a prolonged period of strong capital inflows (and upward pressure on the ringgit which was resisted), the government of Malaysia intervened aggressively in the market, bringing the value of the ringgit down nearly six percent against the U.S. dollar in just a few weeks.
By mid-January 1994, the policy of aggressive intervention was abandoned and the set of controls were soon abandoned as well, and the currency was allowed to gradually return to its early December 1993 value against the U.S. dollar. The cur. rent monetary authorities believe the controls introduced distortions that were not desirable in the longer term.
Payments, including repatriation of capital and remittance of profits, are freely permitted. Payments to countries outside Malaysia may be made in any foreign currency other than the currency of Israel. No permission is required for payments in foreign currency up to RM10,000 (approximately $3,818). Individual foreign exchange transactions above RM10,000 required an exchange control license. For transactions up to RM10 million ($3.8 million), a license is issued by any commercial bank upon request without reference to the controller of foreign exchange (part of Bank Negara). An individual transaction in excess of RM 10 million requires approval of the controller. Individuals and companies may now șold foreign currency accounts in resident commercial banks, but only the first tier banks can offer such accounts. 3. Structural Policies
Pricing Policies: Most prices in Malaysia's economy are market-determined but the government controls prices of some key goods, notably fuel, public utilities, motor vehicles, rice, flour, sugar and tobacco. Citing concerns about inslation, it added 25 items temporarily to the price control list on October 16, 1994. Those price controls are slated to be lifted as of June 10, 1995. Overall tariffs average about 10 percent on a trade-weighted basis and import licenses are required for a small range of goods, e.g., poultry, tobacco and plastic resins. In the 1993 budget, the fed. eral government lowered or eliminated tariffs on over 600 items in an attempt to defuse domestic inflation, and took similar action for the same reason on over 500 items in the 1994 budget. On October 28, 1994 the government announced it would reduce import tariffs on another 2,600 items in the 1995 budget, largely to meet its commitments in the Uruguay Round and the Association of South Ěast Asian Na tions (ASEAN) Free Trade Agreement (AFTA).
The agricultural sector, however, does contain some restrictive tariffs and non tariff barriers which distort trade. For example, the government fixes farm-gatı prices for rice and tobacco at levels above world prices to encourage domestic pro duction and to boost depressed rural incomes. It also sets the selling price for rici below the farm-gate price, but still above market levels. Despite this price incentive local rice production does not meet demand and the government imports large quan tities of rice. It uses profits from sales of cheaper imported rice to offset the sub sidies for rice producers. In the case of tobacco, the government presses cigarett manufacturers to use high proportion of locally grown tobacco. Imports of tobacc are restrained by high import duties and controlled through import licenses.
Tax Policies: Income taxes, both corporate and individual, are the largest sing! source of revenue for the government, accounting for about 40 percent of govert ment revenue. Indirect taxes, comprising export and import duties, excise taxe: sales taxes, service taxes and other taxes account for about 35 percent of goveri ment revenue. The remainder of government revenue comes largely from profits ! state-owned enterprises and petroleum taxes. In 1994, the government reduced th income tax rate on petroleum companies from 45 to 40 percent, and lowered the e port tax on crude oil from 25 to 20 percent. Sales taxes on imported food product are uniformly collected at the port of entry while competing domestic goods can e cape the equivalent tax rates. However, the government has stepped up efforts ! fine domestic manufacturers that evade sales taxes.
Regulatory Policies: The Government encourages foreign and local private inves ment. Currently, a foreign investor can hold 100 percent of the equity in a Mala sian subsidiary if it exports at least half of its output, has at least 50 percent valu added domestically (or, failing that, has RM50 million about $19 million-in fc eign-funded assets), and does not produce items that compete with those now beij made for the local market.
For companies exporting less than 50 percent of output, foreign equity is generally limited to a 51 percent share. Since the mid-1980s foreign investors have been able to buy a maximum of 30 percent equity in firms in the insurance and banking sectors. However, some existing firms have been allowed to retain their equity positions, including 100 percent foreign ownership. 4. Debt Management Policies
Malaysia has strong credit ratings in international financial markets and its pub. lic and private companies have no difficulty accessing funds. Malaysia's medium and long-term foreign debt is expected to stand at $24.0 billion at the end of 1994, about 20 percent of GDP. Malaysia's debt service ratio declined from a peak of 18.9 percent of gross export earnings in 1986 to 5.7 percent in 1993. 5. Significant Barriers To U.S. Exports
Import Tariffs on Tobacco: To encourage greater use of local tobacco in cigarettes and to maintain high domestic leaf prices, the government levies heavy import tariffs. The present import duty for unmanufactured tobacco is RM50 ($20) per kilogram, plus five percent ad valorem. While this policy reduces leaf imports, the greatest impact appears to affect the cheaper, lower quality leaf from suppliers other than the United States. Since the duty on imported leaf tobacco does not vary by quality, it is more economical to import high-grade U.S. leaf to blend with domestic tobacco. In 1992, the government first proposed an import quota for flue-cured tobacco. Although, Malaysia manages the quota rather liberally, cigarette manusacturers are forced to buy up all the locally produced tobacco which is generally considered to be very low quality. Cigarettes are taxed at a rate of RM162 ($64.8) per kilogram.
Duties On High Value Food Products: Duties for processed and high value products, such as canned fruit, snack-foods, and many other processed foods, range between 20 and 30 percent. In the 1994 budget, import duties on most fresh fruit and food items were reduced to between 10 and 30 percent. The abolition or reduction in duties for numerous other food products announced in the 1995 budget should have a positive impact on imports of items such as tree nuts, citrus fruit, dairy, live. stock and poultry products.
Plastic Resins: In December 1993, tariffs were increased for a five year period from 2 to 30 percent (for non-ASEAN countries) and from 1 to 15 percent (for ASEAN countries) on plastic resins. In 1994, when tariff protection alone did not provide the amount of protection desired, the government instituted a licensing system for plastic resins to give protection to the domestic industry for a five year period. U.S. firms utilizing resins in their manufacturing process have complained the system limits their ability to source the products they want and has resulted in significant price hikes. U.S. manufacturers of resins say their ability to sell to Malaysia has been sharply curbed. The government says it has implemented a transparent form of protection for a specific period of time and will review the situation regularly.
Protective Tariffs for Kraftpaper: In April 1994 the government raised tariffs on imported kraftpaper (used in making cardboard boxes) to between 20 and 30 percent, depending on the category. These tariff increases are to be phased out over a maximum of five years and are subject to review every two years. Following this action local manufacturers have raised prices three times, affecting U.S. firms using cardboard boxes for packing their export products. U.S. suppliers of kraftpaper to Malaysia have complained that they are losing sales.
High Import Duties On Alcoholic Beverages: For the first time in many years the tariffs on all alcoholic beverages remain unchanged in both the 1994 and 1995 budg. ets. Duties of wine and beer remain at RM228 ($91.2) per decaliter and RM74 ($29.6) per decaliter respectively.
Ban on Imports of Chicken Parts: In 1983, the government effectively closed Pe. ninsular Malaysia to imports of chicken parts by ceasing to issue veterinary import permits. The ban was implemented because the European Economic Community al. legedly was dumping chicken parts into the Malaysian market. Until January of 1991, the East Malaysian states of Sabah and Sarawak maintained separate import regimes for poultry products which permitted the import of U.S. chicken. Now, however, similar bans have been implemented in those states as well. Since the implementation of the ban, a significant domestic poultry industry has developed and Malaysia now exports relatively large quantities of live poultry and poultry meat to countries such as Singapore and Japan. Although import licenses are still required, import duties for poultry and poultry products were abolished in the 1995 budget and Malaysia has committed to opening its market to a modest import quota under the Uruguay Round of the GATT.
Rice Import Policy: Because subsidized local production satisfies only part of domestic demand, the National Rice Authority (Lembaga Padi Negara or LPN), as the sole legal importer, brings in substantial quantities of rice. Purchases generally are made on a government-to-government basis, which places private U.S. suppliers at a considerable disadvantage. A proposal to "corporatize" LPN is still being considered after years of debate.
Import Licenses: Malaysia makes limited use of import licensing. In the few sectors subject to licenses, i.e., requiring approved permits, U.S. exports have not been significantly impaired. Some technical licenses (e.g., for electrical products and telephone equipment) exist, but they are administered fairly and do not appear to constitute nontariff barriers.
Service Barriers: Malaysia protects most service sectors. Foreign lawyers, architects, etc., are generally not allowed to practice in Malaysia. Television advertisements must be largely produced in Malaysia with Malaysian performers unless an exception is obtained. Wholly-owned U.S. travel agencies, air courier services, motion picture and record distribution companies are permitted.
Financial Services: Banking, insurance and stockbroking are all subject to government regulation which limits foreign participation. No new banking licenses are being granted for either local or foreign corporations in the onshore market. Foreign-controlled companies are required to obtain 60 percent of their local credit from local banks. Under the terms of the 1987 Banking and Finance Act, all foreign-controlled banks were required to convert their Malaysian branch offices to locally incorporated subsidiaries by September 31, 1994. Foreign shareholdings in insurance companies are limited to 30 percent without government approval. However, there are ten insurance companies which are 100 percent foreign owned (one U.S.) and another eight have foreign equity in excess of 50 percent. Foreigners may hold in aggregate up to 49 percent of the equity in a stockbroking firm. Currently there are 11 stockbroking firms which have foreign ownership and 20 representative offices of foreign brokerage firms.
Standards: Malaysia has extensive standards and labeling requirements, but these appear to be implemented in an objective, nondiscriminatory fashion. Food product labels must provide ingredients, expiry dates and, if imported, the name of the importer. Electrical equipment must be approved by the Ministry of International Trade and Industry, telecommunications equipment must be "type approved" by the Department of Telecommunications and aviation equipment must be approved by the Department of Civil Aviation, Pharmaceuticals must be registered with the Ministry of Health. In addition, the Standards and Industrial Research Institute of Malaysia (SIRIM) provides quality and other standards approvals.
Government Procurement: Malaysian government policy requires countertrade provisions on government tenders above RM1 million. Below RM1 million, countertrade is welcomed and even encouraged, but not required. (Most government tenders require that countertrade be offered as an alternative.) Incentives exist for local procurement. Many smaller civil construction projects (RM50 million or less) are restricted to local firms. 6. Export Subsidy Policies
Malaysia offers several export allowances. The most important is the Export Credit Refinancing (ECR) scheme operated by the Central Bank. Under the ECR, com. mercial banks and other lenders provide financing to exporters at an interest rate of seven percent for both post-shipment and pre-shipment credit.
Malaysia also provides tax incentives to exporters, including double deduction of expenses for: overseas advertising and travel; supply of free samples abroad; promotion of exports; maintaining sales office overseas; and export market research. 7. Protection of U.S. Intellectual Property
Malaysia is a member of the World Intellectual Property Organization (WIPO) and, as of October 1, 1990, the Berne Convention for the protection of literary and artistic works, and the Paris Convention.
The Trade Description Act of 1976, the Patent Act of 1983, the Copyright Act of 1987, and the Copyright (Amendment) Act of 1990 have greatly strengthened protection for intellectual property in Malaysia. Under the Copyright (Amendment) Act of 1990, and the accompanying accession to the Berne Convention, Malaysia now provides copyright protection to all works (inter alia video tapes, audio material, and computer software) published in countries that are members of the Berne Convention regardless of when the works are first published in Malaysia. Police and legal authorities have been responsive to requests from U.S. firms for investigation and prosecution of copyright infringement cases, though illegal videotapes continue to be widely available.
Patents registered in Malaysia generally have a duration of 15 years but may have a longer duration under certain circumstances. A person who has neither his domicile nor residence in Malaysia may not appear before the patent registration office or institute a suit except through a local patent agent. With regard to trademarks, "where any person has registered or applied for protection of any trademark in any foreign state designated by the Malaysian Government, such person shall be entitled to registration of this trademark in Malaysia provided that application for registration is made within six months from the date of registration in the foreign state concerned.” Trademark infringement has not been a problem in Malaysia for U.S. companies. Patent protection is also good. 8. Worker Rights
a. The Right to Organize and Bargain Collectively.—Unions may organize workplaces, bargain collectively with an employer, form federations, and join inter. national organizations. There were 519 vnions registered in Malaysia as of June 30, 1994, of which 60 percent are enterprise-level unions, and twelve percent of the work' force are members of trade unions. The Trade Unions Act's definition of a trade union restricts it to representing workers in a “particular trade, occupation, or industry or within any similar trades, occupations, or industries." A trade union for which registration has been refused, withdrawn or cancelled is considered an unlawful association. Strikes are legal and relatively few (18 strikes in 1993). Govern. ment policy limits the formation of unions in the electronics sector to in-house unions.
Collective bargaining is the norm in Malaysian industries where workers are or. ganized. Malaysia's system of conciliation and arbitration seeks to promote negotiation and settlement of issues without industrial action. Malaysian law, especially the Industrial Relations Act, effectively restricts collective bargaining rights through compulsory arbitration. There are 1,600 collective bargaining agreements and 90 percent of approximately 550 trade disputes referred to the Industrial Court are setiled annually. Through legislative amendment, the government is eliminating an exemption for firms granted “pioneer” status which protected them from union demands for terms of employment exceeding those specified in the Employment Act of 1955.
b. Prohibition of Forced or Compulsory Labor.-There is no evidence that forced or compulsory labor occurs in Malaysia, for either Malaysian or foreign workers. In theory, certain Malaysian laws, which date to pre-independence, allow the use of imprisonment with compulsory labor as a punishment for persons expressing views opposed to the established order or who participate in strikes. The government maintains that the constitutional prohibition on forced or compulsory labor renders these laws without effect.
c. Minimum Age of Employment of Children.-Employment of children is covered by the Children and Young Persons (Employment) Act of 1966, which stipulates that no child under the age of 14 may be engaged in any employment except light work in a family enterprise or in public entertainment, work performed by the govern. ment in a school or training institution, or employment as an approved apprentice. The Ministry of Human Resources maintains a staff to enforce regulations prohibiting children from working more than 6 hours per day, more than 6 days per week, or at night. However, according to non-governmental organizations, there may be as many as 75,000 children between the ages of 10-14 working full-time, mostly on plantations.
d. Acceptable Conditions of Work.—The Employment Act of 1955 sets working conditions, most of which are at least on a par with standards in industrialized coun. tries. The new Occupational Safety and Health Act was promulgated in February 1994 and covers all sectors of the economy except the maritime sector and the mili. tary. Other laws provide for retirement programs and disability, and workman's compensation benefits. No comprehensive national minimum wage legislation exists, but certain classes of workers are covered by minimum wage laws. Plantation and construction work is increasingly being done by contract foreign workers. Working conditions for contract workers often are significantly below those of direct hire workers. In addition, many of the immigrant workers, particularly illegal ones, may not have access to Malaysia's system of labor adjudication. The government has implemented programs to provide plantations with legal foreign workers, largely to prevent the exploitation of illegal workers.
e. Rights in Sectors with U.Š. Investment.—The largest U.S. investment in Malay. sia is in the petroleum sector. One U.S. company has two subsidiaries operating in Malaysia. One subsidiary, which is 100 percent owned by its U.S. parent, handles offshore oil and gas production. The other subsidiary, which is 65 percent owned by the U.S. parent and 35 percent by a range of Malaysian individuals and institutions, refines and markets oil products in Malaysia. Employees at both companies are represented by the National Union of Petroleum and Chemical Industry Workers (NUPCIW), which has negotiated collective agreements with management. Some employees, however, have broken away from the NUPCIW and formed a separate in-house union. Pay and benefits at both companies are considered excellent.
The second largest concentration of U.S. investment in Malaysia is in the electronics sector, especially the manufacture of components, such as semiconductor chips and various discrete devices. (Electronic components are Malaysia's largest single manufactured export.) Wages and benefits are among the best in Malaysian manufacturing. Twenty U.S. electronic components manufacturers operate 25 plants in Malaysia, employing more than 52,000 Malaysian workers.
Although there is no legal prohibition against organizing unions in the electronics industry, government policy effectively discouraged any unionization in this sector until 1988. The Director General of Trade Unions ruled in the 1970s that the Electrical Industry Workers Union (EIWU) could not organize workers in the electronics sector, as the two industries are different. Other attempts to organize a national union for the electronics industry failed on similar grounds during the 1980s. The Government registered several company (or enterprise-level) unions in the electronics sector during the late 1980s and early 1990s. At present, workers at seven electronics companies are represented by enterprise-level unions. Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993
(Millions of U.S. dollars)