Trade Overview of Malaysia in 2023
Malaysia experienced a significant increase in merchandise exports in 2022, with the total value reaching US$352.5 billion, a significant leap from the US$234.8 billion recorded in 2020 and US$299.4 in 2021. In the same vein, merchandise imports also increased to US$294.4 billion in 2022, resulting in a trade surplus of US$58.1 billion. However, a noticeable deficit in the services balance was recorded, standing at US$10.4 billion in 2022, a decrease from the previous year’s US$14.6 billion.
The Department of Statistics highlighted the driving sectors behind Malaysia’s export growth in 2022. Electronic and electrical (E&E) products remained at the top of the list, followed by agricultural commodities, including palm oil, as well as petroleum, chemicals and chemical products, and rubber. As for the primary export markets, China took the lead, followed by Singapore, the United States, the European Union, Hong Kong, Japan, and Thailand. The import market was also dominated by E&E products, followed by chemicals, petroleum products, machinery, equipment, parts, metal manufactures, and agricultural products. The leading source of these imports was China, trailed by Singapore, the EU, Taiwan, the United States, and Japan.
Internationally, Malaysia actively participates in several global and regional economic frameworks. The country is a member of the WTO and takes part in regional economic initiatives such as ASEAN and the 21-member APEC forum. Bilaterally, Malaysia has active free-trade agreements (FTAs) with several countries including Australia, Chile, India, Japan, New Zealand, Pakistan, and Turkey.
Malaysia is also involved in several multilateral trade arrangements. The ASEAN Free Trade Agreement signed in 1992 and Malaysia’s active role in ASEAN’s FTAs with other countries like Australia, New Zealand, China, Hong Kong, India, Japan, and South Korea stand as testaments to this. In January 2022, the country also became a party to the Regional Comprehensive Economic Partnership (RCEP), which ASEAN had signed with its FTA partners in 2020. This followed the country’s participation in other prominent trade arrangements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which was ratified in September 2022.
In the oil sector, Malaysia cooperates with the OPEC member states to help manage the international oil market. This coordination has been critical since early 2021, with OPEC and its allies (known as OPEC+) gradually easing the output cuts that were agreed upon in 2020 as the global demand recovers from the COVID-19 pandemic’s impacts. This bloc has faced increasing pressure to augment production due to soaring global oil prices, a situation exacerbated by the Russia-Ukraine war that started in February 2022. As of the end of June 2022, OPEC+ agreed to undo the 9.7m-barrel/day cut agreed in early 2020. It is anticipated that OPEC+ will continue to boost production in 2022, albeit with limited output increases.
There have been trade challenges as well, especially with the European Union (EU). FTA negotiations between Malaysia and the EU, which began in 2010, were suspended in 2012 at Malaysia’s request. This situation was worsened after the European Parliament voted in favor of banning the use of palm oil in biofuel production by 2030 due to deforestation concerns in Malaysia and Indonesia, the world’s top palm oil producers. The WTO’s dispute-resolution mechanism agreed in May 2021 to hear Malaysia’s complaint against the EU. Considering that such trade disputes can linger for years, it’s likely that this issue will further delay the resumption of FTA negotiations between Malaysia and the EU.
In response to these trade dynamics, the Malaysian government in October 2021 unveiled a National Trade Blueprint designed to boost the country’s goods exports from 2021 to 2025. A key goal of this plan is to reinstate Malaysia among the world’s top 20 exporters and to compete more closely with regional rivals such as Thailand and Vietnam. The strategies outlined in the blueprint are not radically transformative, but they underscore key objectives. These include increasing exports of small and medium-sized enterprises and multinationals, enhancing exporter access to trade finance, advocating for digitalization and e-commerce, and promoting the “Malaysia brand” to extend awareness beyond just tourism and food.
Import Taxes & Tariff
Malaysia applies the Harmonized Commodity Description and Coding System for the classification of goods. However, trade transactions between Malaysia and the other nine members of the free-trade area under the ASEAN are governed by the ASEAN Harmonized Tariff Nomenclature. Almost all the rates (99% under the Harmonized System) are ad valorem taxes, which are based on the monetary value of the item taxed. The remaining duties are specific, mixed or alternative. The WTO states that the average most favored nation (MFN) rate, applied to other WTO members, was 5.7% in 2020. For agricultural products, 74.7% of the applied MFN rates were duty-free in 2020, and the figure was 65.2% for non-agricultural products.
The highest average MFN tariffs apply to beverages and tobacco (93.3%), transport equipment (12%), and leather footwear (10.3%). The WTO’s Trade Policy Review of Malaysia, last updated in March 2023, suggests that non-ad valorem duties, predominantly applied to agricultural products (1% of all tariff lines), could mask a high level of tariff protection. The ad valorem equivalent of non-ad valorem duties generally ranges from 0.2% (clove cigarettes) to 465% (certain manufactured tobacco). When combined with import duties and excise taxes, beverages, alcohol, and wine can face an effective tariff of up to 500%.
The WTO records that around 84.3% of import tariff lines were bound, meaning they can’t be altered without renegotiating the trade agreement. The WTO’s most recent tariff profile of Malaysia shows an average bound rate of 53.6% for agricultural products and 14.9% for non-agricultural products. Roughly 15% of import tariff lines are unbound, introducing a level of unpredictability as authorities have a significant leeway to raise tariffs. The Ministry of International Trade and Industry’s Special Advisory Committee on Tariffs reviews and assesses applications for tariff review.
Tariff quotas are applicable to 27 tariff lines at the 20-digit level, mainly to accommodate the needs of domestic small-scale producers. These products include poultry and pork meat, liquid milk and cream, and round cabbage. Rates within the quota range from 0% (round cabbages) to 25% (pork), while rates outside the quota vary between 20-90% (round cabbages). Quotas are allocated on a first-come, first-served basis.
Despite being a member of the ASEAN Economic Community, Malaysia still levies excise duties ranging from 75-105% on ASEAN-sourced passenger cars that lack local content and aren’t new-energy vehicles. The majority of vehicles produced in Malaysia are sold domestically, while exports primarily comprise parts and accessories, in value terms.
Manufacturing companies are eligible for duty drawbacks and exemptions for raw materials and components used in the production of goods for export. The same applies for machinery and equipment unavailable in Malaysia but directly employed in the manufacturing process. In response to the increased local demand during the COVID-19 pandemic, the government in 2020 indefinitely suspended import duties and sales tax on face masks and medical and personal protective equipment. As of mid-2022, these levies remained waived.
Export
Export Taxes
Export duties in Malaysia are primarily levied on commodities such as crude oil, palm oil, and wood, with most rates being ad valorem and ranging between 4.5% and 30%. Specific rates are applied to live plants, certain seeds, and rattans, instead of ad valorem rates. These duties serve to dissuade the export of raw materials and to promote domestic processing. Typically, Malaysia does not have a surplus of the products subjected to these duties. Additionally, the export of wildlife is curtailed for the purpose of conservation, and the country does not have regulations concerning minimum export prices. Export duties are also used to fund research and development, promote activities for commodities in downstream and upstream industries, and ensure a sufficient supply of certain goods in the domestic market.
Under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), signed by 11 countries in 2018, Malaysia made commitments to refrain from imposing export taxes on certain products and to avoid increasing export taxes on others. The agreement took effect at the end of 2018 for some member countries. Malaysia is aiming to ratify this agreement by the third quarter of 2022 at the earliest.
Free Commercial Zone (Export Processing)
Malaysia’s free zones are governed by the Free Zones Act of 1990 and the Free Zones Regulations of 1991. These zones are categorized into free commercial zones (FCZs), intended for trading activities such as trading, breaking bulk, grading, packing, re-labelling and transit, and free industrial zones (FIZs), which are designated for manufacturing activities. Under this regulation, a minimum of 80% of the goods manufactured in FIZs should be exported, though authorities may reduce this limit to 60% on a case-by-case basis. Companies in FIZs are also expected to produce products with 40% local content to benefit from import duty exemptions. However, they may still qualify for these exemptions if they demonstrate that the non-originating raw materials used had undergone substantive transformation.
In addition to customs and excise duty exemptions, companies operating in both FCZs and FIZs are eligible for exemptions from sales tax and service tax on raw materials, components, and services directly used in the manufacturing processes and service provision. Free zones apply the same regulations to foreign and domestic enterprises, and no preferential income tax treatment is given to enterprises operating in these zones.
As of mid-2022, there were 21 FCZs and 22 FIZs in Malaysia, primarily along the west coast of Peninsular Malaysia. The Port Klang Free Zone, opened in 2006, was the country’s first fully integrated free commercial and industrial zone. The 2019 budget approved an expansion of the Port Klang free zone, converting 380 acres of nearby land in Pulau Indah into a free-trade zone. The country also permits exporters to establish a licensed manufacturing warehouse, offering similar benefits to operating within a free zone while providing more location flexibility. Amendments to the Free Zones Act, implemented from 2020, introduced new record-keeping requirements, necessitating the preservation of documents related to imports, exports, and manufacturing within free zones for seven years, and increased penalties for certain offences.
Export Restrictions
The Customs (Prohibition of Exports) Order, effective from 2017, places certain export restrictions in Malaysia, with goods listed across three schedules. The first schedule enumerates items that are absolutely prohibited for export, such as poisonous chemicals and substances covered under the Montreal Protocol. The second and third schedules list items that require an export license for exportation, including animals and animal products, plants and plant products, food products such as rice and flour, arms and ammunition, antiquities, toxic and hazardous wastes, pesticides, rough diamonds, and used household appliances.
Under the Strategic Trade Act of 2010, which came into force in 2011 and was last amended in 2017, licenses are required for the export and transshipment of various strategic commodities, including nuclear and chemical products. The Strategic Trade Controller of the Ministry of International Trade and Industry is responsible for issuing licenses for such goods, which are listed in the subsidiary legislation Strategic Trade (Strategic Items) Order 2010.
Temporary export bans are occasionally implemented by the authorities to ensure local supplies or for other reasons. For instance, in June 2022, Malaysia placed a ban on the export of all live poultry, frozen chicken meat, and chicken parts to ensure sufficient domestic supply and stabilize prices in the face of the Russia-Ukraine war, which caused a surge in the prices of fertilizers and grains globally. By mid-June 2022, the export ban had been partially lifted.
Rubber exporters in Malaysia must be members of the Malaysian Rubber Exchange, which imposes different requirements for paid-up capital among non-bumiputera Malaysian companies, bumiputera companies, and foreign companies. (Bumiputera refers to ethnic Malay and indigenous communities.) Non-tariff barriers are also imposed on Malaysian exports in foreign markets, such as pre-shipment inspection, import bans, tropical-timber labelling, and certain anti-dumping and countervailing duties.
Essential export documents include a customs export declaration, commercial invoice, packing list, bill of lading, and certificate of origin. Export declarations can be made online via the website of trade facilitator Dagang Net Technologies by the owner, exporter, consignor, or an agent authorized by the Royal Malaysian Customs Department. Lastly, Malaysia is a signatory to the Washington Treaty, which controls international trade in approximately 1,000 species of animals and plants.
Export Credits & Insurance
The Export-Import Bank of Malaysia (Exim Bank), wholly owned by the Minister of Finance Inc, plays a significant role in providing export insurance and credit under government-backed programmes. This role was assumed by Exim Bank after its merger with Malaysia Export Credit Insurance Berhad in 2005. The Bank’s portfolio includes a wide array of products, offered in both conventional and sharia-compliant formats.
Among Exim Bank’s financial offerings are cross-border financing, trade finance, and guarantees. Its credit takaful facility provides protection against non-payment risk by buyers due to commercial or political uncertainties. Through this facility, Exim Bank can indemnify exporters for up to 95% of loss, enabling them to confidently explore new markets. The short-term takaful trade facility insures against non-payment by overseas or domestic buyers for credit terms of up to 180 days. Medium and long-term versions offer either specific takaful, ensuring payment for supply of capital goods and services by Malaysian contractors or manufacturers, or “overseas investment takaful”, which provides indemnity for investors in overseas projects.
Exim Bank also administers the Working Capital Guarantee Scheme, under which the Bank can guarantee up to 80% of total financing obtained from participating financial institutions. Small and medium-sized enterprises (SMEs) that are at least 51% Malaysian-owned can access up to M$10m in loans for working capital or capital expenditure through this scheme.
Additionally, Exim Bank provides access to the financing program offered by the Saudi Arabia-based Islamic Development Bank (IDB). This program grants a minimum of either US$100,000 or US$200,000 in financing to Malaysian exporters who export goods to IDB member countries, or importers of Malaysian goods that are subsequently exported to the Bank’s members.
Exim Bank’s extensive list of insurance, finance, and guarantee products, along with their descriptions and application forms, can be found on the Exim Bank’s website.
Meanwhile, Bank Negara Malaysia (BNM, the central bank) offers financing programs for micro, small, and medium-sized enterprises under its Fund for SMEs. Under its automation and digitalisation facility, SMEs that automate their processes to improve productivity can borrow up to M$3m, repayable over as long as ten years at an interest rate of 4% per year, inclusive of the guarantee fee. Applications can be made through participating financial institutions.
Lastly, the Malaysia External Trade Development Corporation (MATRADE) offers a Market Development Grant facility. This scheme provides financial support of up to M$20,000 per company to SMEs, enabling them to participate in international trade fairs, trade and investment missions, and conferences. MATRADE’s Service Export Fund provides reimbursable grants (from M$50,000 to M$350,000 per company) and soft loans (up to M$5m per borrower) to Malaysian service providers up to end-2025. Eligible firms must be at least 60% Malaysian-owned.
