Protection should not be forever


IT may be a surprise to many but, since the 1980s, Malaysia has required an approved permit (AP) to import a wide list of stuff, including coffee beans.

And that current practice is driving up cost and crimping the ability of companies to take advantage of lower costs.

“We have to get approval three months before we import,” says a coffee manufacturer in Sarawak.

That AP is for a quantity based on previous usage and is good for a year, but if the company wants to import extra or wants to take advantage when prices drop internationally, they can’t get an additional AP in time.

And the manufacturer couldn’t get an AP for sugar. “The sugar AP protects two major sugar-producing companies,” he claims. “Why can’t local food manufacturers purchase sugar freely and at a much lower international price?”

 

The most controversial and publicised use of APs is by the auto sector. There are two types of APs in the auto sector – franchise and open. Industry executives say open APs are sold for between RM20,000 and RM50,000 per AP after paying the International Trade and Industry Ministry (Miti) RM10,000 for each AP.

The cost of franchise APs are between RM5,000 and RM10,000 per AP with the luxury makes such as Mercedes and BMW incurring the high cost.

The number of APs issued are generally 10% of the total industry volume and the split is normally 30:70 between franchise and open APs. The industry sold about 576,000 passenger cars last year and the value of APs based on about 57,600 issued is roughly in excess of RM1.6bil.

“For Asean, there are no quantitative restrictions. We are monitoring the numbers. The policy will stay until 2015 for open APs and until 2020 for franchise APs,” says Miti secretary-general Datuk Dr Rebecca Fatima Sta Maria.

Back in 2011, after a massive revision by Miti, over half of 10,000 tariff lines subject to licence were abolished.

Datuk Dr Rebecca Fatima Sta Maria 
Sta Maria: 'We want to make it easier to do business.'

“We want to make it easier to do business while ensuring safety and meeting our international commitments,” explains Sta Maria. “The important thing is to ensure we are not putting unnecessary controls and barriers to doing business.”

The APs can be obtained online, she points out. “If you are a manufacturer, you should be able to get an AP. It shouldn’t take time or add to the cost of doing business.”

Federation of Malaysian Manufacturers (FMM) president Datuk Saw Choo Boon reports that during a survey in 2012, members urged that, except for a few products that could have an impact on health, safety, security or the environment, APs in general should be abolished.

 

The cost of protection

Without import permits, manufacturers argued, they could benefit from cheaper raw materials sourced from the international market. Malaysian companies also benefited from lower prices of machinery and equipment when the Government abolished the requirement for import licences for port cranes and heavy machinery (such as bulldozers and road rollers) in 2008, they noted.

It is difficult to estimate the cost of the remaining APs to various industries and consumers. Some of the goods which require APs, such as rice, are bought on a contract basis so the prices are locked in during the contract.

But manufacturers complain that the limited number of suppliers with APs for flour, sugar and dairy products are able to control the prices.

The Food and Agriculture Organisation reports that sugar prices have been falling for the past few months and cereal prices in January this year had dropped 23% from January 2013.

But the prices have not dropped in tandem locally, claims one manufacturer. “The suppliers may reduce the price when international prices drop but it is not transparent and not all the savings are passed on to consumers.”

Sta Maria stresses that reviewing APs is an ongoing process. “If there are certain developments and conditions improve, we will remove the relevant APs,” she says. “If at any time an industry feels cause for concern it can always get back to us.”

Shila Dorai Raj 
Shila: 'APs may be an impediment to competition.'

In fact, APs were introduced for alloy steel products in January this year after the industry claimed that there was a surge in imports of carbon steel from China to which 0.008% of boron had been added – turning it into duty-free alloy steel. This was being used as a substitute for locally made carbon steel.

Under the alloy steel category in China, those exporters can claim rebates of 9% to 13% from the Chinese government, says Datuk Soh Thian Lai, president of the Malaysian Iron and Steel Industry Federation. Those alloy grades of boron-added steel don’t need government approval, testing or duties in China or even coming into Malaysia.

“So until the Malaysian government can impose testing to ensure that it is genuine alloy steel (not just boron-added steel) and that boron-added steel is made dutiable, the APs shouldn’t be abolished,” says the chief executive officer and managing director of Yung Kong Galvanising Industries.

However, when an industry wants to protect against imports and asks for restrictions, it can lead to higher costs – both for the consumer and for other industries using these products.

 

Competition Commission looking at APs

The Malaysia Competition Commission (MyCC) is now calling for a “thorough review of the APs”. CEO Shila Dorai Raj says this should include a competition impact analysis or regulatory impact analysis “to determine its usefulness and necessity.”

MyCC CEO Shila notes that the Competition Act 2010 aims to promote and protect the competition process, which should help consumers as it brings more quality goods at competitive prices.

MyCC encourages more players in a “free market”, she adds. From this angle, APs or any other measures that form barriers to entry “may act as an impediment to competition.”

The CEO acknowledges that APs can bring benefits such as nurturing domestic industries, giving an opportunity to local manufacturers and suppliers to participate in the domestic economy, and dealing with health, safety, national security and poverty.

Shila notes that from the perspective of the government, APs could be considered as activities “in the exercise of governmental authority”, which are not covered by the Competition Act. But they are also “commercial in nature” as they bring revenue to the permit or licence holders.

This raises several relevant questions, she says: “Does Government fall under the definition of ‘enterprise’ when it engages in a commercial activity? For example, a government linked company, although government-owned, is considered an enterprise as it engages in commercial activity.”

And is there a line to define the ‘exercise of governmental authority’ and ‘commercial activity’ in the case of providing APs to permit holders?

APs and other import quotas highlight the intersection of various government policies on trade, industry and competition, and their outcome may or may not be anti-competitive, the CEO notes.

“MyCC could play a role in ensuring the competitive process is protected in such a scenario.”

 

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