ASEAN: AFTA and other Free Trade Agreements - Development and Impact on the International Automotive Industry

Diploma Thesis, 2005

115 Pages, Grade: 2,0



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This thesis tackles the topic of AFTA and its impact on the automotive world for ASEAN and Non-ASEAN member countries. It also emphasizes the importance of the growing economic regionalism in Asia. The first section set the basics by explaining what is ASEAN and the ASEAN free trade area. The second section describes the automotive background of AFTA member countries and their automotive tariff structure, before and after AFTA was implemented. The third section handles free trade agreements of ASEAN or bilateral ones with ASEAN members. The fourth and final section draws a picture of the future, in forecasting scenarios based on information in previous chapters. The paper concludes with an outline of ASEAN free trade agreement’s outcomes and future prospects for the automotive industry.

AFTA may just be a steppingstone to wider automotive markets but that is likely to go beyond ASEAN intra-regional trade. This is relevant as it is becoming intertwined with the world’s economy and affecting it in the upcoming years.


Problem Case

ASEAN Free Trade Area (AFTA) is actually not a new established free trade area and ASEAN is by now a well-known region as well, so why so much talk and trouble about it? An unexpected buzz has recently sprung up in Asia with the implementation of AFTA and its tariff reductions. A wind with huge consequences is moving the world’s economy. The world’s eyes are on Asia, especially on ASEAN and its neighbouring countries. Its regionalism and fast development impresses the audience, so that almost everyone wants to be a part to it.

AFTA brought a new trend into life. Considerable free trade agreements are one of the results of AFTA and many countries do not want to be left out. Some free trade agreements have been already sealed, others are following and not without consequence.

The intention of this paper is the attempt to answer the following questions: How big could the impact be? How affected automotive manufacturers could be? What is the probable forecast for the future?

Scope of studies

The purpose of this thesis is to find out how far the automobile industry will be affected; negatively or positively and what is coming up in the near future. On one hand, reduced or eliminated tariff barriers within ASEAN countries are playing an important role, considering the impact on imports and exports and on the other hand, specific free trade agreements are having tremendous consequences on the manufacturers’ world. It is so far interesting because many observers doubted ASEAN free trade agreements fully implementation in the year 2003. They were extremely sceptical for not to say expecting it not to work properly or at all. Now they all hurry to figure out what the impact is on their business.

The automotive industry is experiencing a new era within Asia and the impact of AFTA will certainly go over the borders of Southeast Asian countries and affect a lot of automobile manufacturers and their economies of scale. Therefore they need to reposition themselves on the market to take advantages out of AFTA and improve their trading strategies.

Good understanding of the automotive background and the economy of each ASEAN country leads to a better understanding to the impacts of AFTA on the automotive sector. This thesis will give an adequate overview of what already happened and a glimpse into the future of what might happen.

Course of action

Basic information will open the thesis. The following questions will be clarified: What is the regional block ASEAN? What is AFTA and how does it work?

Afterwards the ASEAN automotive sector under the influence of AFTA will be picked to pieces. The tariff scheme before and after AFTA went into force; these last two years will be taken under detailed consideration. The reader has then a better visualisation and understanding of the impact of tariff reductions on the automotive industry, first among ASEAN and then its spreading to further markets and continents. Since there were no specifications about the development of duties and taxes from the year 2000 until now, it is quite a challenge to find out the data and check on its authenticity, especially for the irregular Malaysia.

Then all significant free trade agreements (FTAs) with an impact on the automotive industry will be illustrated for a precise comprehension of upcoming assumptions for the forecast. The last step will be the elaboration of a forecast in the form of two or three scenarios for the future.

Regarding the actuality of this theme, FTAs and forecast scenarios, based on recent information will be elaborated upon at the end of this thesis, since it is continuously under the influence of constant changes.

To put it in a nutshell, AFTA and its background will be defined and illustrated. It will be followed by the description of the automotive sector before and after AFTA under different aspects. Once the basic information is set, the free trade areas will be enumerated and illustrated as consequences of AFTA and the final section is the forecast. Prophesy or let’s be less dramatic, prediction is the expected outcome of this paper work, which is based on precise research and analysis and to be proven later whether how right or wrong. Conclusion will be the final word of this thesis.

Chapter 1 ASEAN Free Trade Agreement (AFTA)

1.1 Free Trade Agreement Definition

It is all in the definition. Wikipedia.Org defines it as follows: ‘Free Trade between countries means the unhindered flow of goods and services between them, and is a name given to economic policies and parties supporting increases in such trade’ or ‘Free trade is an economic concept referring to the selling of products between countries without tariffs or other trade barriers. Free trade is the absence of artificial (government-imposed) barriers to trade among individuals and firms in different nations. International trade is often constricted by different national taxes, other fees imposed on exported and imported goods, as well as non-tariff regulations on imported goods; theoretically, free trade is against all these restrictions’. defines it as ‘an arrangement, which establishes unimpeded exchange and flow of goods and services between trading partners regardless of national barriers’.

To put it in a nutshell, when two or more countries agree to establish a free trade agreement, it means that these countries agreed to reduce or eliminate tariff rates and barriers to facilitate trade and enhance economic integration. Other well-known Organisations of Free Trade are NAFTA, EU, FTAA, MERCOSUR, SAFTA and SAPTA.

1.2 ASEAN Free Trade Agreement

1.2.1 Association of Southeast Asian Nations (ASEAN) – What is ASEAN?

“The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in Bangkok by the five original member countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July 1995, Laos and Myanmar on 23 July 1997, and Cambodia on 30 April 1999.” ( Indonesia, Malaysia, Philippines, Singapore and Thailand are often called ASEAN6, the original and first ASEAN members, then followed Brunei Darussalam, Vietnam, Laos and Myanmar and they became ASEAN10, whereat the last joining four countries are also often called CLMV (the first letter of every country all put together).

The ASEAN region has a population of about 500 million, a total area of 4.5 million square km, a combined gross domestic product of US$737 billion, and a total trade of US$ 720 billion. ASEAN investment area opened up by 2003 to ASEAN investors.

ASEAN is actually a trading bloc looking for active co-operation and promoting mutual assistance in economic, social and cultural fields, leading to peace and stability. Political issues are left out. ASEAN is an

expression of Asian economic regionalization and a vision for an economic cooperation. Economic integration within the region is an important aim of ASEAN by enhancing competitiveness in the Southeast Asian area with a free flow of goods, services and investment, which implies the abolition of tariff barriers; import duties or excise taxes for goods and services (as for motor vehicles), produced locally or imported from elsewhere. (Professor Sijbren Cnossen, “The Role and Rationale of Excise Taxes in the ASEAN Countries”, Faculty of Economics and Business Administration, University of Maastricht, p. 1)

The secretary-general of the United Nations; Kofi Annan said on February 16, 2000 following: "Today, ASEAN is not only a well-functioning, indispensable reality in the region. It is a real force to be reckoned with far beyond the region. It is also a trusted partner of the United Nations in the field of development…” (, 2005-06-23)

In “ASEAN Trade and Development” following statement was made regarding ASEAN development and vision of the future: “ASEAN shall have, by the year 2020, established a peaceful and stable Southeast Asia where each nation is at peace with itself and where the causes for conflict have been eliminated, through abiding respect for justice and the rule of law and through the strengthening of national and regional resilience”.

(“ASEAN Trade & Development” A Publication for the Southeast Asian Nations – Established 1976, Section ‘ASEAN Vision 2020’, p. 40)

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Figure 1: Map of ASEAN Countries with ASEAN Flag

ASEAN Member Countries Economic Data

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Table 1:

Economic Data of ASEAN original six member countries

[Source:, The Economist Intelligence Unit, 2005-06-20]

1.2.2 ASEAN in the WTO

The final outcome of the negotiations held in Uruguay was the replacement of General Agreements on Tariffs and Trade (GATT) by the World Trade Organization (WTO). Up to this point (1995.01.01), WTO joined the International Monetary Fund (IMF) and the World Bank as one of the famous international organizations as guardians of the global economy.

According to ASEAN in the WTO, Challenges and Development, the membership of the WTO stood at 100 in 1995, now it is at 140 countries. Another 30 countries were seeking membership; including China, which is a member by now, Taiwan and Russia. Vietnam is now seeking membership too.

ASEAN had in the 1990’s a positive impact on Singapore, it supported its high growth rates into the World Bank’s high income economies with per capita income exceeding that of many countries of the Organization for Economic Cooperation and Development (OECD) and it also gave Thailand and Malaysia the opportunity to join the ranks of the newly industrialized economies (NIE).

1.2.3 What is AFTA?

ASEAN Free Trade Agreement (AFTA) was established in 1992 at the sixth ASEAN summit in December, 1998, all members agreed that AFTA would become effective in 2002. It went into effect in 2003 for the automotive sector though. The targeted tariff rates were zero to five percent rather than zero tariffs; in the case of ASEAN6 (old members) and 98 percent of the total items were included in the liberalization list. The objectives of AFTA are to increase competitiveness among AFTA member countries as a springboard or stepping stone for the world market. The liberalization of trade is the most important factor of AFTA. Reducing or eliminating tariffs for ASEAN members should be a benefit for all of them.

The idea of AFTA is to expand the intra-regional trade, so that the consumers of ASEAN have plenty of choice in products of better quality. The 10-member Association of Southeast Asian Nations is willing to reduce then to eliminate tariff barriers. The original six members have to reach this goal first by 2007 and now by 2010, whereas the actual plan was for the year 2010 and the new members, Cambodia, Laos, Myanmar and Vietnam (CLMV) have time until 2014 and now it has been wiped out by 2015.

ASEAN is now setting a new deadline for the complete realization of AFTA. The deadline is now three years earlier than intended, 2007 is targeted. (“ASEAN Trade & Development”, a Publication for the Southeast Asian Nations – Established 1976, AFTA, p. 54)

One important aspect, which needs to be explained of the AFTA, is the Common Effective Preferential Tariff Agreement (CEPT), according to ‘CAS Discussion Paper No 6’ with the title ‘From ASEAN to AFTA’ says that CEPT is the main instrument to arrive to AFTA. This agreement for AFTA requires that tariff rates levied on a wide range of products traded within the region are reduced to zero to five percent. Quantitative restrictions and other non-tariff barriers are to be eliminated. Although originally scheduled to be realized by 2008, the target of free trade area in ASEAN was continuously moved forward.

( - 2005-02-15)

The average CEPT in the year 2002 was of 3.2 percent for all goods, 5.3 percent on auto parts and 8.4 percent on vehicles. In 2002, 73 percent of auto items on the inclusion list were reduced to zero to five percent and then 100 percent by 2003, although 218 auto items of Malaysia still are on the temporary inclusion list until the end of this year.

“Rules of origin defines the minimum local content or value addition for manufactured goods to enjoy the duty benefits of a free trade agreement” (Source: Economic Times) -

(, 2005-07-13)

The preferential ASEAN market of low or eliminated duties came into effect on 1 January 2005.Various product (almost all) are categorized in a product list with HS codes in chapters from 9 to 97 in a Harmonised System. The HS is a system, which classifies and describes products based on various criteria (i.e. a nomenclature).

This system was created as an attempt to standardize the description of the products across countries so as to facilitate international trade (, Harmonisation of Tariff Nomenclature, Customs Valuation and Procedures). They are subject to qualification and can enjoy the new non-tariff barriers. The eight – digit level has been implemented in 2002 for the standardisation of the tariff lines.

Products covered under the CEPT Agreement:

In principle, the free trade area covers all manufactured and agricultural products, although the timetables for reducing tariffs and removing quantitative restrictions and other non-tariff barriers differ.

The Inclusion, Temporary Exclusion and General Exception List are the only ones, which matter here. The list, which is not going to be mentioned, is the sensitive list because this list handles unprocessed agricultural products of the AFTA, which is not much of relevance in this dissertation.

Inclusion List: Products in the inclusion list are those that have to

Under go immediate liberalisation through reduction in intra-regional (CEPT) tariff rates, removal of quantitative restrictions and other non-tariff barriers.

Tariffs on these products was supposed be down to a maximum of 20 percent by the year 1998 and to zero to five percent by the year 2002. The new members of ASEAN (CLMV) had up to 2006 (Vietnam), 2008 (Laos and Myanmar) and 2010 (Cambodia) to meet this deadline. ( - 2005-02-15)

Temporary Exclusion List (TEL): Products in the Temporary Exclusion List can be shielded from trade liberalisation only for a temporary period of time. However, all these products would have to be transferred into the Inclusion List and begin a process of tariff reduction so that tariffs would come down to zero to five percent. Starting on January 1, 1996, annual instalments of products from the TEL have been transferred into the Inclusion List. ( - 2005-02-15)

General Exception (GE) List: These products are permanently excluded from the free trade area for reasons of protection of national security, public morals, human, animal or plant life and health and articles of artistic, and historic and archaeological value.

( , 2005-02-15)

At the beginning AFTA planed on a minimum of 90 percent of the first six ASEAN countries (ASEAN6) total tariff lines to drop to zero to five percent. Each country was supposed to commit in 2000. The same expectation was for the year 2001. Then each country was supposed to achieve a minimum of 90 percent of the inclusion list in the tariff range of zero to five percent. In 2002, the expectation was to meet the tariff range zero to five percent of items in the inclusion list.

Separately, a “normal track scheme” was designed to bring the other product groups under the CEPT. Tariff rates for these products of more than 20 percent have to be reduced to 20 percent during a period of eight years and subsequently reduced with five percent every two years, to reach according to the original frame of 15 years, to maximum five percent by 2008.

According to the same original timeframe, tariffs of 20 percent or less have to be brought to max five percent in 10 years (CEPT, art. 4.1)

An ASEAN country can refuse to apply the CEPT preferences to specific imports of another ASEAN country, if the former has excluded the said products form the CEPT.

The AFTA agreement allows member countries to exclude particular, so called sensitive products, from tariff reduction under the “normal track” or “fast track scheme”. Excluded products have to be identified at the HS 8/9 digit level. The exclusion lists will be in force during eight years and at the end of this period it will be decided which products remain excluded from the CEPT (CEPT, art. 2.3)

Tariff reductions only apply to products of ASEAN origin. ASEAN origin is obtained if at least 40 percent of the value of a product originated in ASEAN countries (“ASEAN content requirement”, CEPT, art. 2.4).

The CEPT agreement also envisions the elimination of quantitative import restrictions on CEPT products, as well as the gradual abolishment of the other non-tariff barriers, during a period of five years. These provisions, however, are conditional: abolishment has to take place “upon enjoyment of the concessions applicable to those products” (CEPT, art. 5. A)

The purpose of AFTA is a definite trade facilitation, which means the purpose still is the reduction of tariffs to five to zero percent by 2005 for ASEAN6. In the year 2002, 96 percent of the inclusion list was reduced to zero to five percent of ASEAN6. In 2003, 100 percent of the inclusion list was reduced to zero to five percent and all import duties should be removed for ASEAN6 by 2010 and for VLMC by 2015.

Internal trade liberalization originating from huge gaps in the economic levels of the AFTA member countries was and still is for some members an issue and the countries’ high dependence on foreign markets is another issue of AFTA, which has to be considered. Benefits have been seen though, since AFTA is an integrated trading area and market as progress has been made in several sectors as investment, technology and services.


AFTA so far

ASEAN members have been diligent in lowering their intra-regional tariffs through the CEPT scheme. ASEAN6 lowered its tariffs to zero to five percent for almost all CEPT Inclusion List products. AFTA agreed to give the 4 left colleagues CLMV time to catch up but these are not that far behind the implementation. About 60 percent of their CEPT products with a tariff line from zero to five percent. The inclusion list products will come down to a five percent tariff range in 2006 for Vietnam, 2008 for Laos and Myanmar and 2010 for Cambodia.

The implementation of import duties elimination could not be realized as assumed on 30 January 2003 but at least 60 percent of ASEAN6 CEPT products on the inclusion list went down in the same year.

The implementation of the CEPT and its rules play an important role in the well functioning of AFTA. So in order to increase investment and trade, the CEPT; its rules of origin and its Operational Certification Producers have been revised and implemented since January 2004.This

revision comprises inter alias a simplified method to calculate the ASEAN

local content (LC). (“ASEAN Trade & Development”, a Publication for the Southeast Asian Nations – Established 1976, pp. 53/54)

Chapter 2 Automotive Industry with Regard to AFTA

2.1 International Automotive Background - Overview

Three ASEAN member countries are not WTO - members, these are Cambodia, Laos and Vietnam. However, Vietnam is seeking to become a member and is on the way to becoming one. Just two ASEAN member countries have free trade agreements besides ASEAN.

Thailand and Singapore are compared to the others rich in free trade agreements (FTA) and regional trade agreements (RTA); the remaining member countries are negotiating for a couple of free trade agreements. Cambodia, Laos and Brunei are still out of this play. They are occupied to levy their economy, work out their automotive market until 2010/2015 to get competitive and follow the rules of AFTA.

ASEAN as a regional market and production base has a lack of vehicles for the whole population, so that just 136 passenger cars are available for 1000 persons with a driving licence. The potential market is about 2.2 million annually. The following figure shows the forecast of passenger car growth per country from this year on until 2009:

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Figure 2: Passenger car stock (2005-2009)

(“Automotive and components market in Asia”, KPMG Report, March 2005, p. 6 – sited in EIU, “Executive Briefing” 2005)

This number shows clearly how important AFTA is for the automotive industry is. ASEAN free trade agreement’s competitor; China has 1.2 billion population with even larger lack of vehicles on the market (15 passenger cars for 1000 persons), which is likely to be a threat to AFTA. Not to forget that China has a perception of a faster pace of reform than ASEAN.

Until 2003, the tariffs of the international automotive industry were as follows: for Australia 15 percent on passenger motor vehicles (PMV) and components (to fall to ten percent in 2005); five percent on light commercial vehicles (LCV). Germany has tariffs of ten percent on vehicles and 3.5 to 4.5 percent on components; Japan has no tariffs on vehicles or components; the US has 2.5 percent on passenger motor vehicles and components; Korea has eight percent on vehicles and 10 to 13 percent on components; Malaysia has 140 to 300 percent on passenger vehicles and 60 to 200 percent on 4WDs and finally Thailand has 60 to 80 percent on vehicles and 10 to 46 percent on components.

(The Allen Consulting-Deloitte Touche Tohmatsu summary of the international automotive policy environment, Table D.4)

In this following figure illustrates passenger car sales from 2003 to 2008 in Asia Pacific countries:

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Figure 3: Sales of passenger cars by country (2003-2008)

(“Automotive and components market in Asia”, KPMG Report, March 2005, p. 7 – sited in EIU, “World automotive Outlook”, 2004)

Note: ‘ Others ’ includes Malaysia, Indonesia, The Philippines, Taiwan and Vietnam

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Figure 4: Sales of passenger cars by country (2003-2008)

(“Automotive and components market in Asia”, KPMG Report, March 2005, p. 7 – sited in EIU, “World automotive Outlook”, 2004)

2.2 Automotive background and market of AFTA members

Only seven ASEAN nations are going to be mentioned in this chapter, except for Vietnam, Laos, Myanmar and Cambodia will be left out. Only active member countries in the automotive industry are relevant.

2.1.1 Malaysia

“The automotive industry can be broadly classified into two major sectors: assembly of motor vehicles and components parts manufacturing. There are 15 motor vehicle assembly and manufacturing plants in Malaysia, including two national car projects, ‘ Proton ’ and ‘ Perodua ’, which dominate the national auto market – they represented in 1998, 90 percent of the market share, the other ten percent were left to the competitive remaining 25 other manufacturers. Other car plants include Nissan, Toyota and KIA.

Fiscal and monetary policies in previous years enhanced the car demand in the country. It was the way Malaysia recovered from the recession in 1998. In 1999, the passenger car curve was high (by 90 percent) and maintained this course until the year 2003. The Malaysian automotive market performed better than other ASEAN neighbour countries. Malaysia has by the way the second-largest car industry in South East Asia. The domestic market was performing so well thanks to the government’s protection but its AFTA membership is threatening its domestic producers.

The Malaysian vehicle industry began in mid- 1960s, first as assembler for European and Japanese cars. But then in 1983 Malaysia established Perusahaan Otomobil Nasional (Proton); the first national car project with Japanese’ help (from Mitsubishi). 1992 a second national car project came into life, Perusahaan Otomobil Kedua (Perodua). These two Malaysian brands are proudly dominating in the country.

“The market for passenger cars is essentially a duo-play with two dominant national manufacturers, Proton and Perodua” (, The Economist Intelligence Unit, Malaysia: Automotive Background, 2005-06-28)

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Figure 5: Market share, Malaysia (September 2004)

“Automotive and components market in Asia”, KPMG Report, March 2005, p. 27 – sited in EIU, “Executive Briefing”, 2005; KPMG analysis

Both car companies work together with other national companies, Inokom and Hicom MTB (Inokom being the third national car manufacturer and Hicom MTB the fourth one) and all together score about 80 percent of car sales. Proton had three-fifth of car sales and more than half of the production in 2002, which gave the company the status of the leading one, while Perodua accounted for 32 percent of car sales.

“The company (Perodua) sold a 41% stake to Daihatsu (Japan) in January 2002 in a bid to use the production and management skills of the Japanese company Daihatsu is majority owned by Toyota (Japan)”. (, The Economist Intelligence Unit, Malaysia: Automotive Background, 2005-06-28).

As a new member of AFTA, Malaysia was compelled to reduce its import duties for ASEAN members of AFTA in 2003 in the automotive industry. Malaysia was looking for a way to avoid its duty of reducing tariffs following the agreement. But then, surprisingly, the government announced at the end of the year 2003 a tariff reduction for Non-ASEAN countries for CBU from 140 – 300% to 70 – 190% but compensated with an excise tax of 60 to 100 percent (for its falling revenue) on imported passenger cars. Proton and Perodua are also subject to an excise tax but they enjoy a 50 percent rebate. AFTA put Malaysia under pressure for a significant tariff reduction. Malaysia was then obliged to reduce import duties on CBU to 80 from 200 percent and 35 percent for CKD (from 25 percent). It is hardly believable that Malaysia will reduce its tariffs to zero to five percent by the end of this year, giving up that easily. With 34 percent vehicle sales in the region in 2002 is Malaysia the biggest car market in ASEAN.

The impact of a recovering economy was noticeable in 2002 in Malaysia. Salary increase for the working class with tax cuts and low interest sales led to an increase of about ten percent in new vehicle sales in 2002. But in 2003, the local industry suffered a bit despite the constant growing economy. Consumers waited for the government to reduce import duties on vehicles before purchasing them. It obviously led to a decrease in new car registrations in 2003 by nearly ten percent. “Around 95% of Malaysian car production is sold domestically,” (, The Economist Intelligence Unit, Malaysia: Automotive background, 2005-06-28), which means car exports is not one of Malaysia’s strengths, compared to other ASEAN colleagues like Thailand. It was even declining in the last few years.

In Malaysia, the local content (LC) for Proton and Perodua is quite high (around 80 percent), for other car assemblers is around 30 to 40 percent. In the past years, the Malaysian government prohibited car assemblers to import specific automotive parts. The total capacity of automotive assemblers in Malaysia is around 600,000 units a year. “Assemblers include Asia Automobile Industries (Mercedes, Mazda, and Kia), Toyota Assembly Services, Associated Motor Industries (BMW, Ford and others) and Volvo Car Malaysia” (, The Economist Intelligence Unit, Malaysia: Automotive background, 2005-06-28).

The implementation of AFTA in the automotive sector is supposed to represent a chance to enhance domestic demand for automotive parts. But the question is: how competitive are those manufacturers on the international level?

Four produce Motorcycles only, seven produce passenger and commercial vehicles, and two produce solely commercial vehicles. Proton manufactures passenger cars, while Perodua produces passenger and commercial cars.

The total installed capacity (based on a single shift) of the industry is over 300,000 motorcycles and more than 260,000 passenger and commercial vehicles per year. Existing government policies do not permit the establishment of 100 percent foreign –owned manufacturing plants to supply to local market. The government is encouraging local content. ( - For Australian Exporters – Export assistance, grants, and help. – 2005-05-03)

Tariffs are the regulators of importation of goods in Malaysia. The average applied MFN rate is about 9.29 percent but several lines, e.g. automobiles have rates that easily cross 100 percent (high level of tariff protection).

The import duty for auto parts and components ranged from 5 – 30 percent, and is tied to local content regulations. The import duty for national cars (Proton and Perodua) CKD was 13 percent. There is also a 45 percent excise tax on MPV and 4WD vehicles.

No excise tax for commercial vehicles and 50 percent reduction in the excise tax for national cars. A 10 percent sales tax on all vehicles is assessed.

The required local content on passenger vehicles is measured by the engine size of the vehicle in cubic centimetres (cc) and the LC is up to1,850cc, which represents 60 percent, 45 percent on 1,851 to 2,850cc passenger cars and passenger cars above 2,850cc need a localization of mandatory parts (items only). Local content requirements for non-Proton assemblers include 30 mandatory items. Foreign investors may retain up to 100 percent equity if the firm either exports 50 percent of its output or employs 350 Malaysians full-time. Malaysian companies must be 30 percent Bumipatra (native Malay) owned. ( , 2005-03-15)

Seventeen percent of Malaysia’s tariff lines (principally amongst others in motor vehicle sectors) are also subject to non-automatic import licensing designed to protect import-sensitive or strategic industries. Import restrictions on motor vehicles: Malaysia has long relied on high tariffs and an import quota and licensing system on imported motor vehicle parts to protect its automobile manufacturing industry.

The government phased-out one element of these protectionist measures on January 1, 2004, when it completely eliminated local content requirements that were inconsistent with its obligations under the WTO Agreement on Trade-Related Investment Measures (TRIMS). The government announced a reduction in import duties on autos and auto kits beginning January 1, 2004. However, an expanded auto excise tax program went into effect at the same time, which has kept the tax burden on automobiles, on average, unchanged.

The tax regime continues to protect two domestic producers: Malaysian automobile manufacturers Proton and Perodua receive a 50 percent rebate on excise taxes that is not made available to any other car makers. The import duty/excise tax schedule is complex; with the tax level applied varying according to engine capacity. The tariffs on CBU are 70 to 200 percent and the excise tax from 60 to 100 percent.

In general, the current applied import tariffs and excises tax rates for CBU and CKD vehicles. The government has said the automotive tax regime will be amended again in 2005 so that Malaysia can meet commitments under the AFTA.

The import duty rate for vehicles with at least 40 percent ASEAN content should fall to 20 percent in 2005 and to 5 percent in 2008. The Malaysian government has not determined whether the excise duty will be adjusted at that time.

( - 2004-06-20)

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Figure 6: Passenger car sales, Malaysia (2002-2008 )

(“Automotive and components market in Asia”, KPMG Report, March 2005, p. 27 – sited in EIU, “Executive Briefing”, 2005; KPMG analysis)

In 2004, Malaysia registered vehicle sales of 490,000 vehicles and almost ¾ of it were passenger cars. This is partly due to introductions of new models at acceptable prices, lower rates and longer time for repayment. Malaysia is actually one the few ASEAN members with national manufacturers, Proton and Perodua. They dominate the automotive market since high tariff barriers, from 42 to 100 percent making imports nearly impossible. But as part of its commitment to AFTA, Malaysia had to lower its tariff barriers on vehicles, which happened (to 20 percent). Malaysia has been given a deadline to lower its tariffs from zero to five percent until 2008 at the latest. One thing is for sure, the domestic automotive market will suffer even more under this reduction. They are already under pressure as the production for assemblers increased just by five percent in 2004 compared to the 28 percent for the other vehicle brands in Malaysia. Also the market share of Proton fell from 60 to 44 percent last year.


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ASEAN: AFTA and other Free Trade Agreements - Development and Impact on the International Automotive Industry
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FH Diplom Wirtschaftssinologin Meriem Cheritel (Author), 2005, ASEAN: AFTA and other Free Trade Agreements - Development and Impact on the International Automotive Industry, Munich, GRIN Verlag,


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