In the lead up to the end-December 2015 deadline for the formation of the Asean Economic Community or AEC, barriers to the intra-Asean movement of motor vehicles will be lifted. But another barrier to trade remains in the form of a discriminatory excise duty regime, seemingly to protect Malaysia’s national car industry. KiniBiz examines the future of the automotive industry under the framework of the AEC.
As the Association of Southeast Asian Nations (Asean) races towards a December 2015 deadline for economic integration and the free movement of goods, does Malaysia have an obligation as an equal partner in Asean to open up the country’s automotive industry?
Or, as before, are there ways around Asean free trade treaties for Malaysia to continue to exercise protectionist policies?
Unfortunately for Malaysians hoping to see some respite from high car prices, the answer is closer to the latter. Protectionist policies are likely to stay, although not in the form of a trade tariff.
For the best part of the last three decades, the ruling government has gone to great lengths to protect Malaysia’s national car industry, erecting high import tariff barriers and slapping excise duties in excess of 75% on non-national cars.
Although Malaysia is not alone in Asean in levying excise duties on motor vehicles, Malaysia’s protectionist policies are perhaps the most severe among Asean member countries.
Listed excise duty rates vary between 75% to 105% for vehicles in the A through F segments, which covers the entire range of compact and sedan-type vehicles in the market.
For M segment or multi-purpose vehicles (MPV) the excise duty applicable ranges from 60% to 105% while for J segment or sport utility vehicles (SUV), the excise duty applicable ranges from 65% to 105%.
But these listed rates are not set in stone. They are known to vary on the amount of local content used in the manufacturing process. Discounts to the listed excise duty rates can be significant.
“At this point in time, reducing excise duty is not something the government is considering. Some car companies are already paying only 40% to 50% (in excise duty) due to the use of local components,” Minister of International Trade and Industry Mustapa Mohamed was quoted by The Sun daily as saying in June.
Excise duties to stay
In the lead up to the formation of the Asean Economic Community (AEC) come 2015, several buzzwords have made an appearance in local parlance. Quite often, and perhaps too often, the AEC has been called a ‘single market’ or an ‘economic union’.
These terms to describe the relationship between Asean members who a decade ago decided to form the AEC come from the language of the European Economic Community or EEC, a far tighter socio-economic union.
In reality the AEC has neither proposed economic union or the creation of a single market for the years beyond 2015. Instead the blueprint of the AEC is more akin to that of an enhanced ‘free trade area’ or ‘trading bloc’, a looser form of economic integration.
The AEC promises only the following: preferential trade with zero tariffs between AEC member nations and a common market with free flow of services, capital, investment and to some extent, labour.
Economic union, on the other hand, would entail the creation of a common market with common economic policies and supranational political and economic institutions, not unlike the EEC. Economic union is the deepest form of economic integration.
As in any free trade agreement, AEC member countries have agreed to eliminate all tariff barriers to trade, such as import duties. But excise duties, deemed a domestic tax, remains a sovereign right.
This concession is not unique to the AEC. Even with close to full economic union, EEC member nations have retained their sovereign right to levy excise duties, albeit with restrictions.
In 2010, Malaysia eliminated import duties for Asean origin cars to comply with Asean Free Trade Area (AFTA) regulations but adjusted excise duties accordingly to compensate for the shortfall in tax income.
In current practice under AFTA, new vehicles originating from Asean member countries, of which Thailand and Indonesia are the largest source locations, are exempted from import duty provided that at least 40% of the vehicle’s parts are sourced within Asean.
Malaysia was the last among Asean member countries to remove this particular tariff barrier, that is, import duties on motor vehicles. But another form of barrier to free trade still remains.
Import quotas to go
The one contentious restriction yet to be lifted fully in the lead up to the 2015 deadline is a long-standing quota on vehicle imports.
While Malaysia no longer levies any form of import tariff on the entry of vehicles manufactured in Asean member countries, restrictions remain on the number of cars that can be brought in.
Malaysia restricts imports of completely built-up (CBU) vehicles, imposing a requirement for an approved permit (AP) to accompany every car that is imported into the country. In turn, the number of APs issued is restricted.
Approximately one-tenth of cars sold locally are brought into the country through the use of an AP.
According to Ministry of International Trade and Industry (MITI) secretary-general Rebecca Sta Maria, import quotas would need to be removed before the 2015 deadline for the formation of the AEC in order to comply with Asean free trade treaties.
“Because of the Asean agreements there are to be no quantitative restrictions (on imports). There will be APs but APs will be freely issued.” said Sta Maria in an interview with KiniBiz.
According to the last National Automotive Policy (NAP) document issued four years ago in 2009, open APs would be scrapped by December 2015 while franchise APs would be phased out by 2020.
The next update of the NAP, to be released on Jan 15 after months of delay would set out clear details to guide the local automotive industry into the 2015 AEC formation deadline and beyond, Sta Maria assured.
Preferential treatment of Proton, Perodua
The year is 2016 and the AEC has been formed. There are no restrictions on importing motor vehicles manufactured in another Asean country into Malaysia.
But imports face a non-tariff barrier once in the country in the form of excise duty, a domestic tax. As before the formation of the AEC, excise duty rates will vary according to the amount of local content.
Malaysia’s preferential treatment of its local car industry can be construed to discriminate against imports from AEC member countries.
If it can be shown that Malaysia’s excise duty policy is a barrier to free trade and is discriminatory then Malaysia could be “in breach of World Trade Organisation (WTO) obligations and possibly AFTA,” said Jason Teoh Choon Hui, senior associate in the dispute resolution division at Skrine.
MITI’s Sta Maria views, however, do not concur with that of Teoh’s. According to Sta Maria, Malaysia’s excise duty structure is not in contravention of any free trade treaties.
“It’s a formula that applies to any car in the county, in that sense it is consistent with WTO and not discriminatory,” she asserted.
Sta Maria cited Thailand’s first-car tax rebate scheme as an example of another AEC member country enacting a policy where local production is seemingly favoured.
Regardless, automotive trade is not at all a large issue within Asean, Sta Maria contends.
Within AFTA and the AEC once it is formed in 2015, dispute resolution is handled bilaterally. The Asean Secretariat in Jakarta has no legal authority to resolve disputes.
The dispute resolution outcome can also take place under the auspices of the WTO, as virtually all members of the AEC are also WTO members.
One thing that is certain beyond the 2015 deadline for the formation of the AEC is a significant change in the production and movement of motor vehicles within Asean owing to excise duty differentials.
“Excise rate differentials will create this incentive to move production and distribution arrangements. This will allow producers to lower production costs and reduce taxable values in the country of intended consumption,” summarised a report by Rob Preece in the World Customs Journal, 2012.
“ As a result, there will likely be an increase in the movement of excisable goods across ASEAN and risks will be associated with this.”
Meantime, while the Asean auto market may become freer by the end of 2015, it will not be completely free, a reflection of the protection that the government continues to give the national cars, Proton and Perodua.
Consequently car prices are not likely to fall significantly.
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