Information Technology Industry Council

The Information Technology Industry Council (ITI) welcomes the opportunity to provide comments on the US- Malaysia Free Trade Agreement (FTA) negotiations, as announced in the Federal Register on, March 22, 2006 (Volume 71, Number 55); page 14558.

ITI represents the leading providers of information technology products and services. ITI’s members span the IT industry: infrastructure, computer hardware, software, IT services, consumer electronics, e-commerce and Internet services. Our companies operate globally and are heavily invested in ensuring open international trade, as in most instances, over 60% of their total revenues come from foreign sales.

ITI’s mission is to shape policies and actions that open markets, promote free and open competition, rely on market-based solutions, protect intellectual property, and develop and advance the use of voluntary standards. International trade initiatives, particularly those aimed at opening foreign markets and expanding trade in IT products and services, as well as e-commerce, are high priorities for ITI.

Malaysia is the United States’ largest trading partner in South East Asia and our 10th largest trading partner in the world. The U.S. had more than $44 billion in two-way trade with Malaysia in 2005, 60 percent more than our trade with India and about a quarter of our trade with Japan. Malaysia’s economy has grown an average of 5 percent a year for the past ten years, and offers much opportunity for U.S. high-tech goods and services providers.

A comprehensive and high-standard U.S.-Malaysian FTA will allow U.S. companies to increase their efficiency, diversify their production base in East Asia, and lower their costs to compete more effectively in Asia and other markets. It also offers the opportunity to eliminate tariff and non-tariff barriers to greater trade and investment that will improve and help grow that relationship. A strong FTA will also strengthen the broader U.S.-Malaysian relationship and facilitate broader U.S. national interests in Asia.

ITI's comments are divided into the subject areas used in previous FTAs and that are relevant to our industry:

Tariff and Tax Treatment
Malaysia is a member of the World Trade Organization (WTO) Information Technology Agreement (ITA) and as a result has eliminated duties on ITA covered goods. However, many IT products are not covered by the ITA.

Below are some examples of general duty rates assessed on high-tech / IT/ ICT goods upon importation into Malaysia:

U.S. trade negotiators should seek the immediate elimination of all duties, without exception, on all HS Subheading of Chapters 84, 85, and 90, as well as specific HS Headings of importance to the sector, including: 3215, 3705, 3707, 3818, 7017, 7020, 9207, 9405, 9504, and 9612.

Should immediate elimination of duties not be deemed appropriate for certain sensitive products of the high-tech sector, U.S. negotiators are strongly urged to seek the shortest staging of benefits.

Achieving consensus to eliminate tariffs on all aforementioned HS Chapters and Headings at the bilateral level should be used as building block for support in favor of (1) further liberalizing trade in the sector among the member countries of Association of Southeast Asian Nations or ASEAN; and/or (2) a multilateral agreement to eliminate duties establish and promote a comprehensive electronics/ electrical goods sectoral.

Applicable Sales Tax
In addition to the applicable duty rates, Malaysia maintains three sales tax rates: 5, 10, and 15 percent. While there are some product exemptions (e.g., printers and LCD monitors of HS Heading No. 8471) most goods of the sector are assessed 10 percent sales tax including, but not limited to: fax machines, power supplies, and plasma, LCD, and DMD based displays). ). As Malaysia seeks to promote technology penetration in the market, these taxes represent a deterrent to IT uptake. We recommend these items go to the lowest sales tax rate – or be tax free.

Elimination of the Broadcast Quota
Broadcast stations are required, through a licensing agreement, to devote 70 to 80% of airtime to local Malaysian programming. Broadcast stations are also banned from broadcasting foreign programming during prime time, between 8:30 pm and 9:30 pm. Such restrictions significantly limit the expansion of the television sector, and should be left to the market to determine programming allocations.

Removal of Foreign Ownership Restrictions
Foreign investment in terrestrial broadcast networks is strictly prohibited. The government also imposes a 20% limit on foreign investment in cable and satellite operations, through licensing agreements. Such restrictions stifle competition and impede expansion of the television industry.

Elimination of Labeling Requirements
In January 2003, the Ministry of Domestic Trade and Consumer Affairs extended provisions of the Trade Practices Act to the sale of audio, audiovisual, and other optical media by requiring the affixation of "originality stickers" on all such product distributed in Malaysia. However, the trial period was not effective and the law is currently being reviewed. The procedure for obtaining and affixing the stickers prior to importation is burdensome. Cost of the hologram program and its overall effectiveness remain outstanding issues.

No Made-in-Malaysia Advertising Requirements
Malaysia has a "made in Malaysia" requirement for all ads shown on content broadcast in Malaysia. This means that if the ad on a foreign programming network is not made in Malaysia, it has to be blocked out. No such requirement exists in the US, and should be removed.

True Ups for Adjusted Value
No provision currently exists within Malaysian customs law for post-importation valuation reconciliation. In Malaysia, importers of goods may devise an individual reconciliation program with Malaysian customs, but the process is subject to special conditions stipulated by the Director General of Malaysian Customs.

In contrast, US regulations have specifically allowed post importation true-ups for adjusted value since October 1, 1998. At that time, US Customs introduced the Automated Commercial System Reconciliation Program. This program reflects US Custom’s acknowledgement that the correct value of imports may not be known at the time goods are imported into the US. For example, goods being imported may be priced under a volume pricing agreement between a manufacturer and the importer of record, who is the manufacturer’s customer. As volumes sold under the agreement increase, the unit price of the goods decreases. In the US the importer has 21 months to true-up the corrected value of the goods, and re-declare the corrected value to US Customs. Subsequently, the importer will receive a refund on duties or administrative fees which were initially overpaid. This is only one example of many business circumstances in which the correct value of imported goods is not known at the time they enter the commerce of the US.

A similar provision does not exist within Malaysian law, although it may be negotiated in special circumstances. ITI feels that not formally including a true-up provision in Malaysian customs regulations places a potentially undue burden on importers of record for goods being imported into Malaysia. It is possible to overpay duties and administrative fees in Malaysia because the correct value of the goods is not known when the goods enter Malaysia. There is no guarantee under law of redress in these instances.

ITI requests that the US Interagency Trade Policy Staff Committee considers including the formal addition of post importation true-up capability in Malaysian customs regulations, as one of its negotiating objectives in the upcoming free trade discussions.

Implementation of Harmonized System Nomenclature
As of 1 January 2007 the high-tech chapters 84, 85, and 90 of the HS will undergo significant changes. U.S. trade negotiators are urged to ensure that there is a mechanism in place to guarantee that market access benefits achieved through FTA negotiations are not impacted by the transition from the HS2002 to the HS2007.

Import License/ Permit Requirements
A number of IT / ICT goods are subject to import licenses, such as communications equipment. Importers need to obtain an import permit to bring communications products into Malaysia. These permits are issued by the Standard and Industrial Research Institute of Malaysia (SIRIM) on behalf of Customs. U.S. trade negotiators are encouraged to work with Malaysian counterparts to reduce/ eliminate this burden for goods of the sector. A complete listing of goods subject to import license requirements can be found by accessing the Customs Prohibition of Imports Order 1998.

Refurbished Goods
As normal business practice, the tech sector often uses refurbished components to fulfill warranty obligations on computers. This is an efficient and accepted means of business in the industry, consistent with US practice. Refurbished goods and components go through manufacturing and refurbishment processes similar to new goods. Unfortunately, refurbished computer goods are sometimes confused with ‘used’ goods and therefore discriminated against in trade. In a review of Malaysia’s laws, we find that in fact there are no restrictions specifically placed on the manufacture of refurbished goods. There is, however, an e-waste restriction that may be impacting refurbished goods.

Since Malaysia is a member of the Basel Convention on Transboundary Movement of Waste, there are certain restrictions imposed with regard to the importation of discarded computer/electronic components. The tech sector often works with governments to help address environmental concerns, such as proper disposal of computers. We continue to support these efforts.

The rules in Malaysia, however, may be having an unintended impact on refurbished computer components. There have been various aspects of e-waste covered in different stages of regulation since 1998. The newest list of scheduled wastes are reflected in Environmental Quality (Scheduled Wastes) Regulations 2005 and address electronic and computer issues more specifically. Electronic wastes have been clearly identified in the regulations under item SW110 as “Waste from electrical and electronic assemblies containing components such as accumulators, mercury-switches, glass from cathode-ray tubes and other activated glass or polychlorinated biphenyl-capacitors, or contaminated with cadmium, mercury, lead, nickel, chromium, copper, lithium, silver, manganese or polychlorinated biphenyl.” In the past, importation of items considered waste required a license from the Department of Environmental Quality (DOE). The DOE has made the determination that they will no longer issue licenses for importation of this category of good since the 2005 regulations were issued. These e-waste rules seem to be confusing the situation with respect to refurbished goods – and since the agency has stopped issuing licenses, some refurbished goods have been impacted.

This situation can likely be remedied through clarification in an FTA for free flow of refurbished goods.

Preferential Rules of Origin
Preferential rules of origin, or PRoO, vary from FTA to FTA. The lack of standardized approach to PRoO increases costs to conduct origin assessments and can significantly increase compliance costs for U.S. companies.

To the greatest extent possible, U.S. trade negotiators are urged to seek PRoO for this and all other FTAs that are: (1) based on the qualifying change in tariff classification; (2) flexible and provide the high-tech sector an opportunity to propose changes to specific PRoO based on their experience since the implementation of other FTAs; and (3) avoid the use of value content thresholds and process based rules.

Elimination of Customs User Fee/ Merchandise Processing Fee
ITI would like to see a provision for the exemption of the merchandise processing fee on originating goods, similar to those included in the implementing legislation for the North American Free Trade Agreement, the U.S. – Singapore Free Trade Agreement, and the U.S. – Chile Free Trade Agreement.

Customs Processes and Procedures – Revised Kyoto Convention and Provisions
We continue to support the development of strong chapters on Customs Administration and Trade Facilitation for this and all other U.S. FTAs.

While the ASEAN Secretariat indicates that “significant progress has been achieved in adopting the best practices and provisions as set forth in the Revised Kyoto Convention with a view to simplify and harmonize Customs practices and procedures”, the lack of transparency in Customs procedures and delays in Customs clearance in the region have been noted in surveys in recent years.

As of 1 April 2006 Malaysia (1) is not a contracting party to the 1974 International Convention on the Simplification and Harmonization of Customs procedures (Kyoto Convention); (2) has not acceded to the Revised Kyoto Convention (formerly known as the Amendment to the International Convention on Simplification and Harmonization of Customs Procedures) , which entered into force in February 2005.

U.S. negotiators are strongly urged to (1) promote the adherence and accession to the Convention by Malaysia; and (2) secure inclusion of the RKC provisions in any final U.S. – Malaysia FTA. The provisions include, among other items: cooperation among Customs officials; Internet publication of Customs information (e.g., regulations, rulings, decisions); special procedures for low value shipments; and procedures for express shipments.

Malaysia’s accession to and implementation of the provisions of the Revised Kyoto Convention will further assist efforts to establish a clear, transparent and predictable Customs environment for both Government and the Trade.

Labeling Requirements for Telecommunications Equipment and Power Adaptors
U.S. negotiators are encouraged to work with their counterparts to simplify the labeling process for telecom equipment and power adapters, so that manufacturers are able to self-generate labels.

Today, all telecommunications equipment must be certified before being marketed or used. The Communications and Multimedia Commission (CMC) has also appointed SIRIM as the certifying agent. Technical regulations for telecommunications equipment include electrical safety and EMC requirements (emission and immunity). Certified products must bear an approved label, which can be purchased from SIRIM. Importers need an import permit to bring communications products into Malaysia and permits are issued by SIRIM on behalf of Customs. All technical compliance labels are now printed and sold, to registered suppliers and importers only, by the SIRIM.

Similar to the telecommunications equipment issue above, AC/DC power adaptors must be certified. Certified products must bear an approved label, which is purchased from SIRIM. Certificates are good for only one year. As a result, suppliers / importers are required to obtain a certificate for these products every year.

Removal of Foreign Ownership Restrictions
Foreign investment in terrestrial broadcast networks is strictly prohibited. The government also imposes a 20% limit on foreign investment in cable and satellite operations, through licensing agreements. Such restrictions stifle competition and impede expansion of the television industry.

Domestic Procurement Preferences
The Malaysian Government Procurement market is currently restrictive to open competition from foreign owned entities and foreign bidders. In order to bid on many Government contracts, foreign entities are frequently required to join in joint ventures with local entities. Under these imposed joint venture requirements, in most cases foreign bidders are restricted from being prime contractors in Government tenders. Open tenders appear to have categories that separate open tenders by, for example, local only, and, international only. We would like to see more transparency on the clarification and justification for these categories. Various provisions in the National Economic Policy (NEP) do not permit Foreign Owned Companies (FOCs) to directly bid on government contracts.

Tenders for goods and services should be based on principles of non-discrimination, merit and value. Government requirements for purchases from local sources limit market competitive pricing and options in the goods and services sectors. In the ICT sector, this can result in foreign investors who are less willing to provide the full range of technology and services that they currently provide to other economies with more open and competitive markets. To remedy this situation we recommend that the Government adopt non-discriminatory policies that open the market to competition from foreign vendors. We understand these preferential government procurement practices apply also to government-linked companies.

WTO Government Procurement Agreement
Malaysia is not a member of the WTO Government Procurement Agreement. In the negotiation process, U.S. negotiators should encourage accession to the GPA by Malaysia.

Previous U.S. FTAs have included an e-commerce chapter that includes nondiscrimination language for “digital products”, including software. A similar e-commerce chapter should be included in the US-Malaysia FTA.

Trade Marks
ITI would like to see Malaysia accede to the Madrid Protocol and the Trademark Law Treaty. Malaysia should also broaden its definition of trademark to include non-traditional marks such as sound marks, scent marks, and colors and include an anti-dilution provision in its trademark law. On the enforcement side it is important for Malaysia to empower customs to seize counterfeit goods. Currently, they are only empowered to seize goods if custom fees are not paid or the goods are contraband. Empowering the Enforcement Division of the Ministry of Domestic Trade and Consumer Affairs to arrest larger-scale counterfeiters is also important

Patents
Patent laws - local law suggests that any resident patent applicant shall seek prior permission from Ministry to submit any patent application outside Malaysia. The requirement hinders submission of US patent applications from US Company employees in Malaysia and increases risk of potential intellectual property exposure before gaining protection in US and other major markets. Although requiring permission for foreign patent filing is fairly standard however this process is cumbersome. It would be helpful to examine possibilities to simplify it.

Strengthened enforcement provisions addressing Optical Disc Piracy
This is a significant problem in Malaysia, despite some concrete steps taken of late by the government to address the situation. Until recently the country was one of the major exporters of pirate optical discs to the world, especially Europe, and is still a major producer. The government recently tightened inspections at the border and cracked down on air freight exports. Pirated DVDs and VCDs from Malaysia are still being intercepted in Australia, the UK, the US, South Africa and throughout Europe. Licensed and unlicensed factories continue to produce pirated products, and recent crackdowns have made these operators more vigilant.

Commitments that ensure full adoption of the WIPO Digital Treaties consistent with language included in all previous FTAs.
There are problems with the legal framework that will guide Internet use in the country. The Copyright Act amendment falls short on WIPO Copyright Treaty provisions. Malaysia should therefore make commitments consistent with those previous FTA partners have made to provide sufficient remedies against piracy of audiovisual product over the Internet, including notice and take down provision, temporary copy protection, making available rights, and protection for technological protection measures.

Agreement to Copyright Term Extension
Malaysia should commit to longer periods of protection, rather than the 50 years currently extended to audiovisual works. By doing so, Malaysia would join the ranks of countries with proper modern copyright laws. Term extension would also directly benefit Malaysian films, sound recordings and performers, particularly those dating back to the 1950s and 1960s. Such extended copyright protection serves to encourage copyright owners to not only invest in new works but also to distribute, preserve and reissue older works in the new formats that consumers want. Currently, Malaysia offers protection for authors for 50 years from death and producers for 50 years from first publication. All FTAs negotiated to date have include terms of protection of 70 years and greater.

Commitment on Anti-Camcording
Illegal camcording is expected to increase in Malaysia due to its illicit lucrative nature. Malaysia should be asked to make an anti-camcording commitment making the possession and/or use of recording equipment and devices in movie theaters a crime (theft of film prints is also a problem and, if not already dealt with in the law, should be prohibited under the FTA).

ITI member companies include Accenture, Agilent Technologies, AMD, Apple, Applied Materials, Canon U.S.A., Cisco, ca, Corning, Dell, Eastman Kodak, eBay, EMC, Hewlett-Packard, Honeywell, IBM, Intel, Intuit, Lenovo, Lexmark, Micron, Microsoft, Monster, National Semiconductor, NCR, Oracle, Panasonic, SAP, Sony Electronics, Sun Microsystems, Symbol Technologies, Tektronix, Texas Instruments, Time Warner, Unisys, Verisign and Vonage.


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ITI Submission on the United States - Malaysia Free Trade Agreement