Proton and the Malaysian Dilemma - Case Study

International Investment & Economic Development

Case Study - Proton and the Malaysian dilemma

Question 5 - Assuming the finalisation of an Australia-Malaysia Free Trade Agreement, what are the potential threats and benefits from the bilateral FTA for Australian carmakers?

I actually thought this was a hypothetical question. Until I did some research and found out that Australia and Malaysia are in negotiations on a bilateral FTA, which would become MAFTA, Malaysia Australia Free Trade Agreement

So for those of you who, like myself, weren't aware of it, I'll give you some quick background info.

MAFTA - Background/update

 In April last year Prime Minister John Howard and Malaysian Prime Minister Abdullah Badawi agreed to launch negotiations on a bilateral Free Trade Agreement.

 The first round of negotiations on the FTA were held in May in Kuala Lumpur.

 The second round of negotiations took place in August last year, also in KL.

 There have been several inter-sessional discussion since last year but the next full negotiating round was scheduled to be held in Canberra from 13 March 2006.

 Negotiations will probably be concluded at the end of this year with implementation of the FTA in 2007.

Other important Malaysian FTA's to look at in regards to tariff's on imported cars are the Japan-Malaysia FTA which was signed in December last year, and AFTA, the Asean Free Trade Area, which includes the CEPT (Common Effective Preferential Tariff).

FTA's to look at involving Australia and automotive tariffs include AUSFTA, and TAFTA.

Current Policy

A review of Malaysia's current tariffs show that many of Australia's major exports to Malaysia enter at zero or low tariffs. However, there are a number of areas where tariff and non-tariff barriers could affect Australia's trade considerably and where significant gains could be made from improved access.

For example Transport equipment (which includes automotive products), the average tariff is almost 37 per cent, but some tariffs are much higher and additional protection is conferred through a range of non-tariff barriers. There are many products where import duties are still high enough to exclude all but small quantities of imports. An example of this is motor vehicles. From January 1st 2005, completely built-up vehicles with engines of 3000 cc or larger face a tariff of 50 per cent, plus an excise of 250 per cent - which is partially rebated for Malaysian-made cars only. An example of an australian built car with an engine of 3000 cc or larger is the Holden Commodore, which is sold as the Chevrolet Lumina. When Holden started exporting these cars it was planned to move relatively small volumes of several hundred units a year. This is understandable when you calculate how much a malaysian would have to pay for one. Work it out, lets say $30,000 * 300% = $90,000 dollars for a commodore! (http://www.dfat.gov.au/geo/malaysia/fta/factsheets/manufacturing.html)

Threats

In Australia's case, applied tariff barriers are low. Most tariff lines are zero or 5 per cent, with the simple average applied tariff only 4.3 per cent. Because Australia offers Malaysia tariff preferences on all tariff lines except Passenger motor vehicles and TCF items, the average applied tariff applicable to Malaysia is a little lower at 3.9 per cent.

One sector where Malaysia faces tariffs of higher than 5 per cent is in the passenger motor vehicle sector, where applied tariffs on motor vehicles are 10 per cent (since January 2005).

If an FTA manages to eliminate import tariffs on Malaysian cars such as Proton, this could be seen as a threat to the Australian-made small car market and perhaps the utility & commercial car market with Proton's version of a Ute, the Jumbuck.

Whether this would pose a real threat to Aussie car makers is debatable, The Build quality of a Proton isn't great when compared to Australian made cars, but being in the sub-$20,000 market helps to capture buyers on a budget. Having no import tariff on the Proton would make them even cheaper, and perhaps help increase sales from