U.S.-Malaysia Relations: Implications of the 2008 Elections

U.S.-Malaysia Relations:
Implications of the 2008 Elections
Updated April 3, 2008
Michael F. Martin
Analyst in Asian Trade and Finance
Foreign Affairs, Defense, and Trade Division

U.S.-Malaysia Relations:
Implications of the 2008 Elections
Summary
This report discusses key aspects of the U.S.-Malaysia relationship (including
economics and trade, counterterrorism cooperation, and defense ties) and the possible
impact of Malaysia’s 2008 elections on the future of the relationship.
In parliamentary elections held on March 8, 2008, the Barisan Nasional (BN),
which has ruled Malaysia since independence in 1957, was struck by a “political
tsunami” that saw it lose its two-thirds “supermajority” for the first time since 1969.
Malaysia’s major opposition parties won 82 of the 222 parliamentary seats up for
election. In addition, the opposition parties won control of five of Malaysia’s 13 state
governments. The election results are widely seen as a vote against the current
policies of the Malaysian government, which could have implications for relations
with the United States.
Prior to the elections, the bilateral relationship has been generally positive and
constructive, particularly in the area of trade. Malaysia is a key trading partner of the
United States and is regarded as an effective and cooperative regional player in the
war against terror. The United States and Malaysia also have informal defense ties
including commercial access to Malaysian ports and repair facilities. Despite these
positive dynamics, the bilateral relationship has at times been strained. Past
differences have stemmed from disagreements between Malaysia’s former Prime
Minister Mahathir Mohamad and the United States over such issues as the internal
suppression of dissent in Malaysia, the Israeli-Palestinian conflict, Iraq, globalization,
Western values, and world trade policy. Relations are perceived as having improved
since Abdullah Badawi became prime minister in 2003.
After years of strong economic growth, Malaysia has become a middle income
country. Much of its gain in economic prosperity has come from the export of
electronics and electrical products, with the United States as its top export market.
According to U.S. trade figures, Malaysia exports over $30 billion of goods each year
to the United States and imports over $11 billion from the United States.
The United States and Malaysia have enjoyed a positive trade relationship over
the last few years, in part because both nations favor trade and investment
liberalization in Asia. Malaysia is the United States’ 10^th largest trading partner.
Building on their common perspective of international trade, Malaysia and the United
States concluded a trade and investment framework agreement in 2004 and are
currently negotiating a bilateral free trade agreement. Key issues still to be resolved
in the negotiations principally revolve around market access for key goods and
services in both the United States and Malaysia, and intellectual property rights
protection in Malaysia. In addition, the dismissal of Malaysia’s chief negotiator,
Trade Minister Datuk Seri Rafidah Aziz, may complicate future talks.
This report will be updated as circumstances warrant.

Contents
Malaysia’s 2008 Elections...........................................1
Political “Tsunami”............................................2
Implications of the Elections.....................................3
Malaysia’s Political Dynamics........................................4
Internal Politics...............................................6
Islam Hadhari ................................................8
Malaysia’s International Relations.....................................8
Regional Relations.............................................9
Malaysia-China Relations......................................10
Malaysia-Indonesia Relations...................................10
Other Bilateral Relations.......................................12
Malaysia’s Economy and Foreign Trade...............................12
Malaysia’s Current Economic Policies............................17
U.S.-Malaysia Bilateral Trade...................................18
Malaysia and U.S. Trade Relations...................................20
U.S.-Malaysia FTA...........................................20
U.S.-Malaysia TIFA ..........................................22
World Trade Organization (WTO)...............................23
Asia-Pacific Economic Cooperation (APEC) .......................23
Association of Southeast Asian Nations (ASEAN)...................23
Other Aspects of U.S.-Malaysia Relations.............................24
U.S. Invasion of Iraq..........................................26
Counterterrorism .............................................27
Military Cooperation..........................................29
Human Rights...............................................31
Relations with Sudan..........................................31
U.S. Assistance..............................................32
List of Figures
Figure 1. Map of Malaysia.........................................34
List of Tables
Table 1. Selected Indicators for the Malaysian Economy..................13
Table 2. Share of GDP by Sector: 2000, 2006-2008.....................14
Table 3. Malaysia’s Exports, Imports and Merchandise Trade Balance,
2001-2007 ..................................................15
Table 4. Malaysia’s Top 10 Export Markets ...........................16
Table 5. Malaysia’s Imports by Top 10 Trading Partners .................16

Table 7. Top Five U.S. Exports to and Imports from Malaysia, 2007........19
Table 8. Bilateral Assistance .......................................33

U.S.-Malaysia Relations:
Implications of the 2008 Elections
U.S. relations with Malaysia have
been generally positive over the last fewMalaysia In Brief
years. Both countries share interests in
maintaining regional stability, dealing withArea: 127,316 sq. miles (about thesize of New Mexico)
militant Islamists and separatists,Capital: Kuala Lumpur
developing close trade and investmentPopulation: 27.5 million (2007)
relationships, securing the safety of shipsEthnic Groups: Bumiputeras 58%
passing through the strategically important[Malay 47%, Indigenous 11%],
Strait of Malacca, and establishingChinese 24%, Indian 7%, Non-
mutually beneficial military cooperation.citizens 7%, others 4%
However, efforts to negotiate a bilateralReligion: Muslim, Buddhist,
free trade agreement (FTA) appear to beConfucian, Taoist, Christian,
stalled. In addition, Malaysia and theHindu, Sikh, Baha’i
United States appear to have conflictingLiteracy Rate: 92.5% (2006)
views of the future of regional economicLife Expectancy: Female - 76.3years; Male - 71.8 years (2006)
integration in East Asia.^Sources^:^M^a^l^a^y^sⁱ^a^Mⁱⁿⁱ^st^r^y^o^f^Fi^na^nc^e^,
^Economⁱ^c^Repor^t^2007/²⁰⁰⁸^.

U.S.-Malaysia relations improved
after former Prime Minister Mahathir
Mohamad turned over power to his former Deputy Prime Minister Datuk Seri
Abdullah Badawi on October 31, 2003, ending 22 years of rule by Mahathir.
However, an unexpectedly weak showing for Badawi’s political party, the United
Malays National Organization (UMNO), and its Barisan Nasional (BN) coalition
partners in the March 8, 2008 parliamentary elections may have implications for
U.S.-Malaysian relations.
This report provides an overview of recent political and economic developments
in Malaysia, and examines implications for U.S. policy.
Malaysia’s 2008 Elections
UMNO and its coalition partners have been in power since Malaysia’s
independence in 1957. In the first general election in 1959, UMNO and its coalition¹
partners received just over half the votes, but won 74 out of the 104 seats in the
Dewan Rakyat (People’s Hall), the more powerful lower house of Malaysia’s
¹ At that time, UMNO was part of a political coalition known as the Alliance Party, a
predecessor to the BN.

parliament.² In every parliamentary election from 1959 to 2004,³ an UMNO-led
coalition has won at least two-thirds of the seats in parliament — with the exception
of 1969, when the coalition won 95 out of 144 seats (66.0%). A two-thirds
“supermajority” is important because it allows the BN to amend Malaysia’s
constitution without support from opposition parties. In the election of 2004, the BN
won 198 out of 219, or 90.4%, of the seats.
Political “Tsunami”
The outcome of the parliamentary elections of March 8, 2008, surprised many
people. A major Malaysian newspaper, The Star, quoted one opposition leader who
compared the results to a tsunami.⁴ The BN barely received half of the popular vote,
and won just 140 of the 222 seats in the Dewan Rakyat — eight seats less than it
needed to retain a “supermajority.” The biggest losers among the BN members were:
^!UMNO, which saw its seats decline from 109 to 79;
^!The Malaysian Chinese Association (MCA), which dropped from 31
to 15 seats; and
^!The Malaysian People’s Movement Party (Parti Gerakan Rakyat
Malaysia, or Gerakan), which held onto only 2 of its 10 seats in the
Dewan Rakyat.
Most commentators stated the 2008 elections were the BN’s worst results since 1959.
The main opposition parties — the Democratic Action Party (DAP), the Islamic
Party of Malaysia (Parti Islam SeMalaysia, or PAS), and the People’s Justice Party
(Parti Keadilan Rakyat, or PKR) — all increased their number of seats in the
parliament. The PKR experienced the greatest rise — jumping from just one to 31
seats. The DAP and PAS both increased their seats on the Dewan Rakyat by 16 seats,
for a total of 28 and 23, respectively. Altogether, Malaysia’s opposition parties
received 46.8% of the popular vote, and won 82 out of the 222 seats on the Dewan
Rakyat.
The BN’s weakness was also reflected in the results of the 12 concurrent state
elections.⁵ Opposition parties took control of five of the 13 Malaysian states,
including surprise victories in Kedah, Penang, and Selangor. The PAS retained its
control over the state of Kelantan and the DAP leads a small opposition majority in
the state of Perak. Among the seven contested states in which the BN retained
control, the opposition gained seats in all but two states — Perlis and Sabah.
There are differing opinions on why the BN lost so much of its support, and the
opposition parties gained so much support. Some commentators maintain that
Badawi was responsible because he had failed to make adequate reforms within the

² Malaysia has a bicameral parliament consisting of the elected Dewan Rakyat, the lower
house, and the largely-appointed Dewan Negara (National Hall), the upper house.
³ Under Malaysian law, a parliamentary election must be held at least every five years.
However, in many cases, early elections were held after about four years.
⁴ “Nik Aziz Likens Big Win to a Tsunami,” The Star, March 9, 2008.
⁵ The State of Sarawak did not hold concurrent elections.

BN and the government . Others stated that economic factors, and in particular rising
income disparities and inflation, had led voters to switch from the BN to the
opposition parties. Another group of political observers saw the election results as
evidence that Malaysia’s ethnicity-based political system was obsolete and no longer
a reliable base of power for the BN.
Implications of the Elections
In the immediate aftermath of the elections, ex-prime minister Mahathir
suggested Badawi should consider resigning.⁶ While Badawi did not resign, he did
reorganize his cabinet, reducing the number of ministers (from 90 to 70) and
removing several long-standing members. According to Badawi, half of the members
of the cabinet announced on March 18, 2008, were “new faces.”⁷ Among the people
removed from the cabinet was Datuk Seri Rafidah Aziz, who had held the position
of Minister of International Trade and Industry for over 20 years. Aziz has been an
important figure in U.S.-Malaysian trade relations. It is unclear what impact, if any,
the new cabinet will have on Malaysia’s policies.
The dramatic drop in support for two of Malaysia’s ethnically-based political
parties — the MCA and the Malaysian Indian Congress (MIC) — has also led to calls
for political changes. Gerakan party chief Datuk Chang Ko Youn, who lost his seat
in the parliament to a DAP candidate, has suggested that BN member parties should
consider eliminating ethnic restrictions on party membership as a first step to the
formation of a single party.⁸ However, MIC president Seri S. Samy Vellu, who also
lost his bid for reelection to the parliament to an opposition candidate, rejected
Chang’s suggestion, saying “such an action will dilute the rights of the Indian
community.”⁹ Some commentators have suggested that the shift in Chinese and
Indian support to opposition party candidates reflects a growing sense among
Malaysia’s influential ethnic minorities that the BN no longer adequate reflects their
interests. Others attribute the desertion of the BN by Malaysia’s Chinese and Indian
to economic issues, such as food price inflation and rising income disparities.
The strengthening of opposition party power in the Dewan Rakyat and in state
governments is also expected to restrict the power of Badawi and the BN to
implement changes in policy. The loss of a supermajority in the Dewan Rakyat is
considered by some a psychological and political blow to the BN, which has ruled
virtually unchallenged in Malaysia since independence. There is discussion that the
election results may be the first sign that politics in Malaysia are starting the process
of transformation into a two-party, non-ethnic system, and possibly a more truly
democratic process.

⁶ Jane Ritikos, “Examine Losses, Says Dr. M,” The Star, March 10, 2008.
⁷ “Abdullah Announces Cabinet Line-Up, Half of Administration New Faces,” Bernama,
March 18, 2008.
⁸ “Samy: Time Not Ripe for Barisan to be a Single Party,” The Star, March 17, 2008.
⁹ Ibid.

In addition, opposition control of five of Malaysia’s 13 states may also curtail
Badawi’s power. For example, the new state government in Penang has already
announced that it will no longer abide by the BN’s long-standing “New Economic
Policy” that grants preferential treatment to Malaysia’s bumiputera.¹⁰ However, a
past judicial tradition of broadly interpreting the federal government’s power under
Malaysia’s constitution may mitigate the opposition’s ability to use the state
governments to exert power or influence.
A final concern raised by the BN’s weak showing in the 2008 is the potential for
social unrest and governmental policy change. The last time the BN (or its
predecessors) did as poorly in a parliamentary election was in 1969. Following the
1969 elections, there were violent ethnic riots in Malaysia between May and July
(precipitated by the “May 13 Incident” in Kuala Lumpur) during which
approximately 200 people were killed. Following the riots of 1969, the BN
announced a series of economic reforms, known as the “New Economic Policy”
(NEP). The events of 1969 are discussed in more detail below. However, in the
weeks following the election, there has been virtually no violence or ethnic unrest in
Malaysia.
For U.S.-Malaysia relations, the 2008 elections will have little direct or
immediate impact, with the possible exception of the removal of Aziz as Minister of
International Trade and Industry. Aziz has been Malaysia’s chief negotiator during
the U.S.-Malaysia free trade agreement (FTA) talks. Her departure implies a loss of
“institutional knowledge” for the Malaysian negotiation team. Her replacement, Tan
Sri Muhyiddin Yassin, was Minister of Agriculture and Agro-based Industry in the
previous cabinet.
Malaysia’s Political Dynamics
Many of the political cleavages of Malaysian society, which continue to have
relevance to today’s political dynamics, find their root in Malaysia’s colonial past.
Malaysia inherited a diverse demographic mix from the British. Through the
importation of labor, the British added ethnic Chinese and Indians to the Malay and
other indigenous populations of peninsular Malaya, Sabah, and Sarawak. The
demographic composition of Sabah and Sarawak includes a higher percentage of
indigenous groups, such as the Iban. Together the Malay and indigenous population
— collectively known as the bumiputeras — comprise about 58% of the population
compared to 24% for the Chinese and 7% for the Indians. Traditionally, ethnic
Chinese and Indians have controlled a disproportionately greater share of the nation’s
wealth than bumiputeras.
Malaysia has a complex history of inter-communal politics. A British plan after
World War II to create the Malaysian Union that incorporated all of the Malayan
territories except Singapore would have provided for common citizenship regardless
of ethnicity. Concerns among the Malays that they could not compete with the more

¹⁰ Claudia Theophilus, “Malaysia PM: Lessons to be Learnt,” Al Jazeera, March 11, 2008.
Malays and other indigenous groups are known as bumiputeras, or “sons of the soil.”

commercially-minded Chinese led to the creation of UMNO — a conservative,
Malay nationalist organization that later reformed itself into a political party.
Negotiations between the British and UMNO led to the creation of the Federation of
Malaya in 1948, which included Singapore and provided special rights for the
bumiputeras and Malaysia’s sultans. Sabah and Sarawak joined the Federation to
form Malaysia later in 1963, while Singapore left the Federation in 1965. At
independence in 1957, there was an understanding that Malays would exert a
dominant position in political life in Malaya, while ethnic Chinese and Indians would
be given citizenship and allowed to continue their role in the economy.¹¹
This accommodation between Malaysia’s ethnic groups has not always been
tranquil. Between 1948 and 1960, the Communist Party of Malaysia, which was
largely comprised of ethnic Chinese, waged a guerilla war against the British. This
came to be known as the “Malayan Emergency.”¹² The Internal Security Act (ISA),
which continues to be used to suppress groups that threaten the regime, originally
was put in place by the British to combat “communist subversion.” The Special
Branch, which Malaysia inherited from the British, continues to act as the primary
intelligence and security unit under the Royal Malaysian Police. During the
“Emergency,” Malays generally sided with the British against the communists whose
ranks were drawn largely from the Chinese community. By the mid-1950s, the
insurrection had collapsed.
Added to this history of inter-communal strife were the riots of May to July

1969 in which reportedly 196 were killed. Most of those killed were ethnic Chinese.

Rioting began on May 13, three days after the Alliance Party, a predecessor to the
BN, failed to win two-thirds of the seats in the Dewan Rakyat, and lost control of
Selangor and Perak. Much like the results of the 2008 elections, one of the main
losers in the 1969 elections was MCA, which lost 14 of its 27 seats in the Dewan
Rakyat. Because of the rioting, elections to be held in Sabah and Sarawak were
suspended and a state of emergency was declared.¹³
Partly in response to the 1969 riots, the New Economic Policy (NEP) was
instituted in 1971. NEP provided preferential treatment for the bumiputera majority
via a kind of quota system in order to increase their share of the economic wealth of
the country. The New Development Policy (NDP) replaced the NEP in 1990. The
NDP retained NEP goals, such as 30% bumiputera control of corporate assets. Prime

¹¹ Barbara Watson Andaya and Leonard Y. Andaya, A Brief History of Malaysia, University
of Hawaii Press, 2001; Harold Crouch, Government and Society in Malaysia, Cornell
University Press, 1996.
¹² Lt. General David Patraeus has reportedly studied the Malaya Emergency, among other
counterinsurgency operations, as he has prepared himself for operations in Iraq. Dan
Murphy, “New Commander, New Plan in Iraq,” Christian Science Monitor, February 9,

2007.

¹³ Stuart Drummond and David Hawkins, “The Malaysian Elections of 1969: An Analysis
of the Campaign and the Results,” Asian Survey, Vol. 10, No. 4 (April 1970), pp. 320-335.

Minister Mahathir’s subsequent Vision 2020 policy had similar elements, but was
more inclusive and attempted to do more to foster national ethnic unity.¹⁴
The BN appears to be relying on an expanding economy to be able to
disproportionately favor bumiputeras, while not undermining its economic appeal to
Malaysia’s Chinese and Indian population. In this way, Malaysia’s social harmony
— and support for the BN — may be linked to economic growth. For this reason,
periods of economic stagnation could carry the prospect of eroding the delicate
balance between ethnic groups in Malaysia and undermining support for the BN.
Internal Politics
Malaysia is a Constitutional Monarchy, but of an unusual kind, whose structure
includes 13 states and three federal territories. Every five years, the nine hereditary
Sultans elect one from among their group to be the Yang di Pertuan Agong, a
traditional title equating to a King. The Agong exercises limited authority and acts
on the advice of the Prime Minister, Parliament and the Cabinet. The Prime Minister
is the head of the Federal Government, which has 25 ministries. Out of a total of 13
states four are ruled by State Governors appointed by the Federal Government. In the
nine other states, the hereditary Sultan fulfills this function. Each state has a state
legislature. The lower house of Malaysia’s Parliament, the Dewan Rakyat, has 222
members elected for terms not to exceed five years. The upper house, the Dewan
Negara, has 70 members — 44 members appointed by the King and 26 elected
members with two from each state.
Malaysia is an “ambiguous, mixed”¹⁵ or “semi”¹⁶ democracy that has both
democratic and authoritarian elements. The constitution is largely democratic and
provides for regular elections that are responsive to the electorate. The government
is based on a parliamentary system and the judiciary is designed to be independent.
Despite this democratic structure, authoritarian control limits the ability of the
opposition to defeat the ruling coalition at the polls.¹⁷
Prime Minister Badawi heads the United Malays National Organization
(UMNO), the key party in the BN. The BN also includes the Malaysian Chinese
Association (MCA), the Malaysian Indian Congress (MIC), the Parti Gerakan
Rakyat Malaysia (Malaysian People’s Movement Party, or Gerakan), and a number
of smaller political parties. The opposition is led by the Pan-Malaysian Islamic Party
(Parti Islam Se-Malaysia, or PAS), the People’s Justice Party (Parti Keadilan Rakyat,
or PKR), and the Democratic Action Party (DAP). In 1999, PAS, DAP, PKR, and
Malaysian People’s Party (Parti Rakyat Malaysia, or PRM) formed an opposition
alliance known as the Barisan Alternatif (Alternative Front), but the alliance

¹⁴ YAB Dato’ Seri Dr. Mahathir Mohamad, Vision 2020, (Kuala Lumpur: Institute of
Strategic and International Studies, 1991).
¹⁵ Crouch, pp. 4-5.
¹⁶ William Case, “Malaysia’s General Elections in 1999: A Consolidated and High-Quality
Semi-Democracy,” Asian Studies Review, March, 2001.
¹⁷ Crouch, p. 5.

fragmented in 2001 following the withdrawal of the DAP. For the 2008 elections,
DAP, PAS, and the PKR formed an alliance called the Barisan Rakyat (People’s
Front) with a number of smaller parties.
UMNO is the most influential party in Malaysia today and represents the
interests of the mostly Sunni Malays. The Malaysian administration, under both
Mahathir and Badawi, has promoted a moderate form of Islam — Islam Hadhari (see
below) — under a secular polity while opposing the rise of Islamic extremists whose
policies are more closely associated with PAS.¹⁸ The ruling BN, under Mahathir’s
leadership, used the power of the state, including the ISA, to thwart political gains
by PAS, which advocates a more conservative view of Islam. PAS’s influence is
traditionally found in the northeast states of Kelantan and Terengganu.¹⁹
The transition from Mahathir to Badawi was consolidated in the March 21, 2004
elections that expanded the ruling BN’s hold on parliament from 77% to 90% of the
seats. The BN also increased its share of votes from 57% to 64%.²⁰ Following the

2004 elections, the government’s coalition controlled 11 of 12 state governments.

The election was viewed by observers as a vote of confidence by Malaysians in
Badawi’s relatively moderate form of Islamic practice as opposed to the hard-line
approach of PAS.²¹ The PAS, which offered a more Islamist agenda, lost voter
confidence, including in its area of traditional support in northeast peninsular
Malaya.²²
The political transition from Mahathir to Badawi led to an improvement of U.S.-
Malaysian relations. Some think Badawi, who was first elected to Parliament in
1978, is attempting to strike a balance between providing continuity of leadership to
produce stability, and meeting expectations for a more open and consultative style
of government. Badawi pledged to work with the BN to realize the policy goals
articulated in Vision 2020.²³ It is thought that Badawi’s political legitimacy will at
least in part be dependent on his ability to deliver sound economic growth and to
counter the perceived rise of Islamic extremism in Malaysia.²⁴ Badawi’s respected

¹⁸ For a more detailed discussion of these dynamics see William Case, “Deep Insecurity and
Political Stability: Inside Mahathir’s Malaysia,” in Bruce Vaughn ed. The Unraveling of
Island Asia? (Westport: Praeger Publishers, 2002).
¹⁹ S. Jayasankaran, “Lost Ground,” Far Eastern Economic Review, March 21, 2002.
²⁰ “Malaysia’s Election: Bravo Badawi,” The Economist, March 27, 2004.
²¹ See Anthony Smith, “Malaysia’s 2004 Elections: Mahathir’s Successor Succeeds,” Asia
Pacific Security Studies, April 5, 2004 and “So Much for the New Broom,” The Economist,
April 3, 2004.
²² The term “Islamist” is used to identify those who would affiliate themselves with more
extreme interpretations of Islam.
²³ “Abdullah Pledges to Work Hard to Make Vision 2020 a Reality,” New Straits Times,
September 8, 2003.
²⁴ Bridget Welsh, “Elite Contestation, Political Dilemmas and Incremental Change,”
Woodrow Wilson Center, July 24, 2003.

religious background²⁵ has helped him counter the rising popularity of PAS and the
forces of Islamic extremism.
However, Badawi’s government has been beset by division within UMNO. In
part, these are based on differences between former Prime Minister Mahathir
Muhammad and Prime Minister Badawi. More recently, now ex-Minister Aziz has
supposedly used her leadership of the Wanita Umno, UMNO’s main women’s
organization, in an attempt to influence government and party policies. It is thought
that party divisions led Badawi to call for the early general elections of 2008 in hopes
of securing a fresh mandate and reinforcing his position within his party.²⁶ The
outcome of the elections was clearly contrary to his hopes.
Islam Hadhari
Under Badawi’s leadership, Malaysia has been developing a concept, Islam
Hadhari, that seeks to promote a moderate or progressive view of Islamic
civilization.²⁷ Badawi has stated that “we are responsible for ensuring that the culture
of extremism and violent acts in the name of Islam does not happen in Malaysia.”²⁸
Some observers believe that Islam Hadhari could promote a view of Islam that
encourages and emphasizes development, social justice and tolerance.²⁹ Increasing
attention appears to be focused on the role that moderate Islamic ideology and
moderate Islamic states can play in countering the forces of Islamic extremism within
the region and beyond. However, some analysts are concerned about what they see
as an “increasing Islamisation trend in Malaysia” and that “a more conservative form
of Islam is emerging” in Malaysia despite government efforts through Islam Hadhari
to “pave the way for the development of Malaysia as a bastion of Islamic
moderation.”³⁰
Malaysia’s International Relations
Malaysia has been playing an active role in international organizations both in
its region and beyond. Besides Asia Pacific Economic Cooperation (APEC),
ASEAN, and the World Trade organization (WTO), Malaysia is also a member of the

²⁵ Badawi’s father and grandfather were Islamic religious scholars. Badawi himself has a
degree in Islamic Studies.
²⁶ “Malaysia: Country Report,” The Economist Intelligence Unit, February 2007.
²⁷ Transcript of Interview with the Prime Minister of Malaysia,” Bernama, February 17,

2005.

²⁸ “Malaysian Premier calls on Muslims to Defy Militants,” Agence France Presse, July 20,

2005.

²⁹ Paul Wiseman, “In Malaysia Islamic Civilization is Promoted,” USA Today, November
4, 2004. Evelyn Goh, “Keeping Southeast Asia on the U.S. Radar Screen,” PacNet
Newsletter, May 26, 2005.
³⁰ Mohamad Nawab Mohd Osman, “Where to Islam Hadhari?” IDSS Commentaries,
November 28, 2006.

Asian Development Bank (ADB), the Islamic Development Bank, the Non-Aligned
Movement (NAM), Organization of Islamic Conference (OIC), the United Nations,
and the World Bank. In 2006, Malaysia chaired ASEAN, the Organization of Islamic
Conference (OIC), and the Non-Aligned Movement (NAM). Malaysia has been an
active contributor to international peacekeeping, including most recently in East
Timor. It also sent personnel to assist the Aceh Monitoring Mission in Indonesia in
2005 and 2006. Malaysia has also been seeking to facilitate negotiations between the
government of the Philippines and the Moro Islamic Liberation Front.³¹
Regional Relations
Malaysia has placed much emphasis on regional cooperation despite its
differences with certain regional states. In the past, Malaysia and the Philippines
have differed over the Philippines’ claim to parts of Sabah. Indonesia and Malaysia
came into conflict as a result of Indonesian military raids over the border in Borneo
in 1963. These were part of its policy of confrontasi and repelled by Malaysian and
Commonwealth forces. Malaysia remains a member in the Five Power Defense
Arrangements along with Australia, New Zealand, the United Kingdom, and
Singapore, which has its roots in Malaysia’s colonial past.
Malaysia has significant interest in the hydrocarbon potential of the South China
Sea. In the past, this has put Malaysia in conflict with Brunei over the Baram Delta
off the coast of Sabah and Sarawak. In July 2002, independent U.S. contractor
Murphy Oil, working for Malaysia’s state oil company Petronas, discovered the
Kikeh field, which is estimated to hold 700 million barrels of oil.³² This represents

21% of Malaysia’s current reserves, which are projected to run out in 15 years.³³

Malaysia, China, the Philippines, and Vietnam have conflicting claims over the
Spratly Islands and the South China Sea. Though continuing, this conflict has been
less contentious in recent years than it was in the 1990s.
Malaysia was a founding member of ASEAN in 1967 and in the 1990s was a
strong advocate for expanding ASEAN to include Burma, Laos, and Vietnam. More
recently, Malaysia has sought a more influential role in ASEAN and Southeast Asia,
particularly with respect to trade issues. Malaysia hosted the East Asian Summit in
Kuala Lumpur in December 2005 as part of its efforts to transform ASEAN into a
more integrated regional association.³⁴ Malaysia also promoted the drafting of the
new ASEAN Charter and is one of the five members to ratify the new agreement.³⁵
In addition, Malaysia has supported efforts to form closer trade relations with nations

³¹ “The United States and Malaysia: A Diverse and Expanding Partnership,” U.S.
Department of State, Bureau of Public Affairs, July 26, 2006.
³² S. Jayasankaran, “Well-Oiled,” Far Eastern Economic Review, August 28, 2003.
³³ S. Jayasankaran, “Oil and Water,” Far Eastern Economic Review, July 3, 2003.
³⁴ For additional information see CRS Report RL33242, East Asia Summit (EAS): Issues for
Congress, by Bruce Vaughn.
³⁵ Singapore was the first member to ratify the new charter on December 18, 2007. Since
then, Brunei, Laos, Malaysia, and Vietnam have ratified the charter. Burma (Myanmar),
Cambodia, Indonesia, the Philippines, and Thailand have not ratified the new charter.

outside of ASEAN via the “ASEAN+3” and “ASEAN+6” models. However,
Malaysia’s relatively small size and a lack of consensus in ASEAN to follow a
Malaysian lead place limits on the extent to which Malaysia can assume a leadership
role within ASEAN and the region.
Malaysia-China Relations
The attitudes of Malaysia (and other ASEAN states) towards China have
undergone a significant shift over the past two decades.³⁶ Relations with China were
once characterized by much suspicion. More recently, Malaysia has viewed China
as both a major competitor and a major trading partner. There are some indications
that Malaysia has attempted to maintain the value of its currency, the ringit, in line
with the value of China’s currency, the renminbi, to protect its competitive position
in key commodity markets.
Malaysia normalized relations with China in 1974, but has maintained close
economic and trade relations with Taiwan. Over 2,000 Taiwanese companies have
invested in Malaysia. In 2007, while China was Malaysia’s 4^th largest trading partner,
Taiwan was its 7^th largest trading partner. Hong Kong, a special administrative region
of China, was Malaysia’s 8^th largest trading partner in 2007.
In recent years, issues of economic competition and cooperation have been more
of a concern to ASEAN states than security concerns.³⁷ China currently is said to be
thought of “as more of an opportunity with concomitant challenges, rather than as a
threat” as it was as recently as 1999, when China fortified Mischief Reef in the South
China Sea which it had occupied in 1994.³⁸ To assert its claims to the South China
Sea, Malaysia constructed a concrete building on Investigator Shoal in the Spratlys
in 1998. ASEAN states’ perceptions could change again should China more actively
reassert its claims in the South China Sea or go to war over Taiwan.³⁹
Malaysia-Indonesia Relations
Relations between Malaysia and Indonesia have at times been tense. Among the
top issues between the two nations are differences over Malaysian policies towards
illegal Indonesian workers and a maritime dispute off Borneo which has implications
for control of valuable energy resources. The presence of thousands of illegal
Indonesian workers in Malaysia that have supposedly displaced many of Malaysia’s
Indian workers may have contributed to Malaysia’s Indian population deserting

³⁶ Jane Perlez, “Asian Leaders Find China a More Cordial Neighbor,” The New York Times,

18 October, 2003.

³⁷ Alice D. Ba, “China and ASEAN: Re-navigating Relations for a 21^st Century Asia,” Asia
Survey, August, 2003.
³⁸ Rommel Banlaoi, “Southeast Asian Perspectives on the Rise of China: Regional Security
After 9/11.” Parameters, Summer, 2003.
³⁹ J. Wong and S. Chan, “China-ASEAN Free Trade Agreement,” Asian Survey, June, 2003.

UMNO and the BN in the 2008 elections.⁴⁰ Many undocumented Indonesians
working in Malaysia were pressed to leave Malaysia in late 2004 and early 2005.⁴¹
There are also allegations of the human trafficking of Indonesian women and children
to Malaysia for commercial sexual exploitation.⁴²
Malaysia also awarded an oil concession to Royal Dutch Shell in 2005 in the
waters off Sabah in northeastern Borneo that are also claimed by Indonesia. The
conflict escalated to the point that both nations sent naval ships to assert their claims
before diplomacy eased tensions.⁴³ Malaysia agreed to participate in the monitoring
of the peace treaty signed in August 2005 between Indonesia and Gerakan Aceh
Merdeka (GAM) along with the international monitoring team led by the European
Union.⁴⁴ Malaysia has also called for ASEAN states to discuss defense issues as well
as foreign and economic policy.⁴⁵
Illegal forest fires in Sumatra in August 2005 led Malaysia to close schools, as
well as Malaysia’s largest seaport, and declare a state of emergency in Kuala
Selangor and Port Kelang as smoke severely limited visibility and created a
significant health risk.⁴⁶ The Indonesian government reportedly placed the blame for
the fires on 10 logging companies, of which 8 were Malaysian-owned.⁴⁷ Given that
illegal burning of forests in Indonesia has led to dangerous smoke pollution in
Malaysia before, some observers have speculated that more must be done to put in
place legal frameworks to control trans-border pollution.⁴⁸ An estimated 70% of all
logging in Indonesia is illegal.⁴⁹
Badawi met with his Indonesian counterpart, President H. Susilo Bambang
Yudhoyono, on January 11, 2008, in Putrajaya, Malaysia, as part of the “annual
consultations” between the two countries. Their discussions focused on the land and
maritime border issues, bilateral defense cooperation, Indonesian migrant workers
in Malaysia, illegal logging, and bilateral economic cooperation.

⁴⁰ Vijay Joshi, “Ethnic Tensions in Malaysian Election,” Associated Press, March 6, 2008.
⁴¹ “Crackdown on Undocumented Workers Ends ... for Now,” Asia News, February 2, 2005.
⁴² For more information on human trafficking between Indonesia and Malaysia, see the U.S.
State Department’s Trafficking in Persons Report, June 2007.
⁴³ “Malaysia at a Glance: 2005-06,” Economist Intelligence Unit, June 2005.
⁴⁴ “M’sia to Send Peace Monitors to Aceh,” Bernama Daily, August 6, 2005.
⁴⁵ “Malaysia Says Southeast Asian Grouping Should Tackle Defence Issues,” Agence
France Presse, August 7, 2005.
⁴⁶ “Indonesian Fires Blanket Central Malaysia,” The New York Times, August 12, 2005.
⁴⁷ “Malaysia Must Prosecute Cos for Haze-Indonesia,” Dow Jones, August 14, 2005, and
“Govt Vows to Prosecute 10 Firms Over Forest Fires,” The Jakarta Post, August 16, 2005.
⁴⁸ “Malaysia: Pollution Levels Close Schools,” Asia Pacific Radio, August 11, 2005.
⁴⁹ Jared Diamond, Collapse: How Societies Choose to Fail of Succeed (New York: Viking
Publishers, 2005), p. 471.

Other Bilateral Relations
Malaysia’s border with Thailand has been a source of friction in their bilateral
relationship. Thailand’s southern provinces are Muslim majority areas where
separatist violence has been increasing. Malaysia agreed to work with Thailand under
a Joint Development Strategy for border areas to develop the economy and living
conditions of people in the border region. Badawi has highlighted the need to address
poverty as a means of alleviating the conflict in Southern Thailand.⁵⁰
Malaysia’s relations with neighboring Singapore have been termed “bumpy”
since Singapore’s independence in 1965. The “bumpiness” of the relationship
emerges from several factors, including ethnic tensions, economic and trade
interdependency, and common security concerns.⁵¹ Singapore is a largely Chinese
city-state with a large Malay minority; Malaysia is a largely Malay nation with a large
Chinese minority. Economic conditions force Singapore to rely on Malaysia for many
resources, including water and labor. At the same time, Malaysia relies on Singapore
for capital investments and trade-related business opportunities, including the re-
export of many Malaysian goods. Finally, both nations are reliant on the flow of
shipments through the Strait of Malacca. In addition to the Five Power Defense
Arrangement, Malaysia and Singapore also have established coordinated naval
patrols with Indonesia to protect freight shipments in the region. According to
Singapore’s minister of foreign affairs, George Yeo, the results of the 2008 elections
should not affect bilateral relations.⁵²
Malaysia’s Economy and Foreign Trade
Malaysia is a relatively mature industrialized nation, whose economy relies on
both domestic forces (personal consumption and private investment) and external
trade for its growth and development. Following a short, severe recession in 1998
and a mild turndown in 2001,⁵³ Malaysia’s real gross domestic product (GDP) has
grown between 5% and 6% per year for the past five years. The current official
government estimate has its real GDP increasing 6.0% in 2007 and projecting 6.0%-

6.5% growth in 2008 (see Table 1). Malaysia’s central bank, Bank Negara Malaysia,

projected 2008 GDP growth of 5.0%-6.0% two weeks after the parliamentary

⁵⁰ “Malaysia, Thailand Prepare to Accelerate Development of Border Regions,” BBC News,
February 12, 2007. “Malaysia Pledges to Aid Thai Government in Ending Violent Unrest
on Shared Border,” Global Insight, February 12, 2007.
⁵¹ For an overview of Malaysia-Singapore relations, see K.S. Nathan, “Malaysia-Singapore
Relations: Retrospect and Prospect,” Contemporary Southeast Asia, vol. 24, no. 2 (August

2002), pp. 385-410.

⁵² “Bilateral Ties Not Affected,” New Strait Times, March 25, 2008.
⁵³ The 1998 recession was precipitated by the Asian Financial Crisis (see CRS Report
RL30517, Asian Financial Crisis and Recovery: Status and Implications for U.S. Interests
by Richard Cronin for details). The 2001 downturn is generally attributed to the global
economic downturn following the attacks on the Pentagon and World Trade Center (see
CRS Report RS21937, 9/11 Terrorism: Global Economic Costs, by Dick Nanto for details).

elections, citing “turbulent global financial markets and slowing U.S. growth” as
reasons for its less optimistic forecast.⁵⁴
Malaysia’s GDP and average per capita income classify it as a middle income
country according the World Bank’s system, comparable to Mexico and Russia.⁵⁵ At
official exchange rates, the per capita income in 2007 was $5,740, but its purchasing
power parity value was estimated at $13,289.
Table 1. Selected Indicators for the Malaysian Economy

20062007 (est.)2008 (proj.)

Real GDP Growth 5.9%6.0%6.0- 6.5%
Nominal GDP (billion ringgits)572.555641.499681.7
Nominal GDP ($ billion)148.940161.843n.a.
Nominal GDP per Capita ($)5,3835,740n.a.
GDP per Capita - purchasing power^a
parity. ($)11,66313,28914,206
Inflation Rate - CPI3.6%2.0%2.5 - 3.0%
Inflation Rate - PPI6.8%6.8%n.a.
Unemployment Rate3.3%3.3%n.a.
Exports ($ billion; fob)160.845176.311188.3
Imports ($ billion; cif)131.223147.065159.1
Exchange rate (ringgits per U.S. dollar)3.6783.447n.a.
^Source:^M^a^l^a^y^sⁱ^a^{’s M}ⁱⁿⁱ^st^r^y^o^f^Fi^na^nc^e; ^W^o^{rld T}^r^{ade A}^tlas;^an^{d C}^R^{S calcu}^lation^s^.
^{a. P}^u^rch^a^sⁱⁿ^g^pow^er^parity^es^tim^ates^of^{per capita GDP}^attem^p^{t to rev}^a^lu^{e of}^fⁱ^{cial GDP}^fⁱ^g^u^r^es^by
^com^p^arin^g^th^{e relativ}^{e cos}^t^s^of^{a s}^e^{lect g}^r^ou^{p of}^g^oodsⁱⁿ^eachⁿ^a^tion^an^d^th^en^recalcu^latin^g^per
^{capita GDP}^{to ref}^l^{ect th}^{e relativ}^{e pu}^rch^a^sⁱⁿ^g^pow^{er in}^eachⁿ^a^tion^.
Since the 2001 economic downturn, Malaysia’s economic growth has relied on
a combination of strong domestic demand and continued export growth. In 2007, the
main sources of real GDP growth were (in order): domestic consumption, public
consumption, public investment, and private investment. Because imports grew more
rapidly than exports, 6.2% compared to 4.1%, external trade actually lowered
economic expansion in 2007. Government forecasts project private investment will
play a greater role in economic growth in 2008, surpassing both public investment
and public consumption.
Another indication of the maturation of Malaysia’s economy is its sectoral
balance (see Table 2). While agriculture and manufacturing continue to play an

⁵⁴ “Bank Negara Lowers 2008 Growth Target,” New Strait Times, March 26, 2008.
⁵⁵ For a list of the World Bank’s ranking of economies by per capita income, see
[http://siteresources.worldbank.org/ DAT AST AT IST ICS/Resources/GNIPC.pdf].

important role in Malaysia’s economy, the nation’s GDP mainly comes from the
service sectors. The sectoral structure of Malaysia’s economy is more akin to those
of South Korea and Thailand than Indonesia, the Philippines and Vietnam.
Although agriculture provides a relatively small portion of Malaysia’s GDP, it
plays an important role in the nation’s overall economy. One out of every three
Malaysians live in rural areas. Approximately one out of every eight workers in
Malaysia are employed in agriculture, animal husbandry, fishing, or forestry. Rice
and palm oil are two crops of particular importance to Malaysia, the former for
political reasons because many Malaysian farmers are reliant on rice for their
livelihood and are opposed to the import of rice. The latter is important for economic
reasons, as palm oil is a traditional major export crop for Malaysia.
Table 2. Share of GDP by Sector: 2000, 2006-2008
Sector200020062007 (est.)2008 (proj.)
Agriculture 9.4% 7.9% 7.7% 7.5%
Construction 3.6% 3.1% 3.0% 3.0%
Manufacturing 30.0% 31.1% 30.3% 29.6%
Mining 7.2% 8.8% 8.6% 8.4%
Services 54.3% 51.8% 53.2% 54.3%
Adj ustme nts 0.0% -2.7% -2.8% -2.8%
^Source:^Dep^a^r^t^m^eⁿ^t^o^f^{Statistics, Malay}^s^ia
Malaysia’s manufacturing sector accounts for nearly a third of the nation’s GDP,
employs about 30% of its workers, and accounts for over 80% of its export earnings.
It is dominated by the production of automobiles, and electrical and electronic
products.
Malaysia is a regional leader in the production of automobiles, automotive
components and parts. Its two major automobile manufacturers, Proton and Perodua,
export their vehicles to over 40 countries, and Malaysia’s leading motorcycle
manufacturer, Modenas, exports to markets around the world, including Argentina,
Greece, Iran, Malta, Mauritius, Singapore, Turkey, and Vietnam. Malaysia’s
automotive industry benefits from Malaysia’s tariff and non-tariff trade restrictions
on the import of automobiles, motorcycles, and components and parts for
automobiles and motorcycles.
The electrical and electronics (E&E) industry of Malaysia is a world-leader in
the production of semiconductors and the assembly of E&E products, much of which
is done under contract for leading international electronics companies.
Approximately half of Malaysia’s export earnings come from the E&E industry.
However, over half of Malaysia’s imports are raw materials, components, equipment,
and capital goods to be used by its E&E manufacturers. As a result, the nation’s

economy is somewhat dependent on the global demand for electrical and electronic
products.
Malaysia’s service sector is highly diversified, providing services for both the
domestic and external segments of the economy. The service sector provides over
54% of the nation’s GDP and more than half of its employment. Following the Asian
financial crisis in 1997, Malaysia placed severe restriction on foreign participation
in some service sectors, including financial services. Over the last five years,
Malaysia has gradually loosened those restrictions, but access to Malaysia’s financial
markets is still very limited to foreign companies.
Foreign trade was a major driver of Malaysia’s economic growth in the past and
continues to be important for its overall economic health. According to official
figures, Malaysia’s total trade exceeded 1 trillion ringgits for the first time in 2006.
Over the last six years, Malaysia’s exports increased 81.0% in value, while its
imports rose by 80.2% (see Table 3). Malaysia runs a balance of trade surplus of
about $30 billion per year.
Table 3. Malaysia’s Exports, Imports and Merchandise Trade
Balance, 2001-2007
(billion ringgits and U.S. dollars)
YearExportsImports Trade Balance

2001334.3 (88.2)280.2 (73.866)54.0 (14.336)

2002357.4 (93.370)303.1 (79.870)54.3 (13.500)

2003397.9 (100.113)316.5 (80.093)81.4 (20.020)

2004480.7 (125.857)400.1 (105.297)80.7 (20.560)

2005533.8 (140.979)434.0 (114.626)99.8 (26.353)

2006589.0 (160.845)480.8 (131.223)108.2 (29.622)

2007605.2 (176.311)504.8 (147.065)100.4 (29.246)

^Sources^{: Min}ⁱ^str^y^o^f^{Statistics, Malay}^s^{ia an}^d^Glo^b^a^{l T}^r^ad^{e A}^tlas.
According to Malaysia’s trade statistics, the United States was and continues to
be its largest export market (see Table 4). In 2007, 15.6% of Malaysia’s exports went
to the United States, down from 18.8% in 2006. With the exception of the
Netherlands and the United States, all of Malaysia’s top 10 export markets are in the
Asia-Pacific, indicating a regional export focus.

Table 4. Malaysia’s Top 10 Export Markets
(billion ringgits)
Partner20062007
Total Exports589.0605.2
United States110.694.5
Singapore 90.8 88.5
Japan52.255.2
China42.753.0
T hailand 31.2 30.0
Hong Kong29.128.0
Netherlands 21.4 23.6
South Korea21.323.0
Australia 16.7 20.4
India18.820.2
^So^urce^{: Min}ⁱ^str^y^o^f^Iⁿ^terⁿ^atioⁿ^a^{l T}^r^ad^{e an}^d^Iⁿ^d^u^str^y^{, Malay}^s^ia.
Japan is historically the largest supplier of Malaysia’s imports, but the United
States was a close second in 2006 (see Table 5). Outside of Germany and the United
States, all of Malaysia’s leading suppliers of imports are in Asia, more evidence of
its regional trade focus.
Of Malaysia’s largest trading partners, China, Japan, South Korea, and Taiwan
have a bilateral merchandise trade surplus. Every other nation has a bilateral trade
deficit, with the United States running the largest bilateral trade deficit. According
to Malaysia’s trade figures, both Malaysia’s exports to the United States and its
imports from the United States declined in 2007, by 14.6% and 9.1% respectively.
Table 5. Malaysia’s Imports by Top 10 Trading Partners
(billion ringgits)
Partner20062007
Total Imports480.8504.8
Japan63.665.5
China58.264.9
Singapore 56.2 58.0
United States60.254.7
Taiwan 26.228.7
T hailand 26.3 27.0
South Korea25.924.9

Partner20062007
Germany21.123.4
Indonesia 18.2 21.4
Hong Kong12.714.7
^Source:^Minⁱ^str^y^o^f^Iⁿ^terⁿ^atioⁿ^a^{l T}^r^ad^{e an}^d^Iⁿ^d^u^str^y^{, Malay}^s^ia.
Malaysia’s Current Economic Policies
The current goals for Malaysia’s economic policies are to continue its strong
economic growth, maintain full employment, reduce inflationary pressures, and lower
the fiscal deficit. In addition, as part of its larger policy of Islam Hadhari, the
government seeks to reduce poverty, improve living standards, and reduce income
and wealth inequality between the nation’s various ethnic groups. In particular, there
is concern about the income and wealth differential between the bumiputera and the
ethnic Chinese and Indian of Malaysia.
For the period 2006 to 2010, the Malaysian government has established a set of
objectives to achieve its overall economic goals as part of its Ninth Malaysia Plan.⁵⁶
First, it will attempt to move its production into higher value-added activities by
greater investment in education. Second, Malaysia seeks to improve the quality of the
Malaysian work force by promoting the values of Islam Hadahari and improving the
quality of Malaysia’s educational system. Third, the government will address
persistent sources of both regional and ethnic economic inequality. Fourth, Malaysia
will seek to eliminate poverty by 2010 and continue to improve living standards.
Fifth, in order to facilitate the achievement of the preceding objectives, the Malaysia
government will strengthen the quality of its government agencies.
The key macroeconomic policies for the Ninth Malaysia Plan emphasize
continued growth by increasing the role of Malaysia’s private sector and by attracting
foreign direct investment (FDI), especially in higher value-added activities. In
addition, the government will attempt to keep inflation under control. Also, there is
the explicit objective of reducing the federal fiscal deficit from 3.8% of GDP in 2005
to 3.4% of GDP in 2010. Finally, having ended the peg of the ringgit to the U.S.
dollar on July 21, 2005, Malaysia’s central bank, the Bank Negara Malaysia, has
officially adopted a managed float of the ringgit against several foreign currencies.⁵⁷
However, there is some evidence that Malaysia’s de facto exchange rate policy is to
maintain the value of the ringgit relatively constant when compared to the value of
China’s renminbi.⁵⁸

⁵⁶ For more details about the Ninth Malaysia Plan, see its webpage,
[ h t t p : / / www.epu.j pm.my/ r m9/ ht ml / o ve r vi e w.ht m] .
⁵⁷ Following the Asian Financial Crisis of 1997, the value of the ringgit fell from 2.5 ringgits
to US$1, to over 4 ringgits to the US$1. In September 1998, the Bank Negara Malaysia
pegged the exchange rate at 3.5 ringgits to US$1.
⁵⁸ With the exception of the spring of 2007, the value of the ringgit has stayed within 2% of
(continued...)

Malaysia’s stated foreign trade policy for the next five years will continue to
support trade and investment liberalization. Malaysia had projected the value of total
trade (imports plus exports) will exceed 1 trillion ringgits ($286 billion) by 2010, but
achieved that figure in 2006 and 2007. The government sees the formation of the
proposed ASEAN Free Trade Area (AFTA), the trade liberalization and facilitation
efforts of the Asia-Pacific Economic Cooperation (APEC), and the current efforts
by the World Trade Organization (WTO) for greater liberalization of trade in goods
and services as being consistent with its overall trade policy. In particular, Malaysia
strongly supports ASEAN’s discussions with China, Japan, and South Korea — the
so-called “ASEAN+3” — about the possibility of forming an East Asian economic
community. The successful conclusion of a free trade agreement with the United
States would also be viewed as being consistent with its current trade policy.
U.S.-Malaysia Bilateral Trade
In general, trade relations between the United States and Malaysia are
dominated by the outsourcing of the production of machinery, and electronic and
electrical products by multinational corporations with operations within the United
States and Malaysia. This trade pattern is revealed by the cross-shipment of similarly
categorized goods to and from Malaysia, as well as the sector structure of U.S.
foreign direct investment (FDI) in Malaysia. From 2001 to 2006, Malaysia’s exports
to the United States grew substantially, regardless of which nation’s trade statistics
are used, but then noticeably declined in 2007 (see Table 6). However, U.S. exports
to Malaysia have not experienced similar growth. As a result, the U.S. bilateral trade
deficit with Malaysia increased between 2001 and 2007 — up $9.2 billion according
to the United States and $5.6 billion according to Malaysia.
Table 6. U.S.-Malaysia Bilateral Trade Flows, 2001-2006
(Billion dollars)
2001 2002 2003 2004 2005 2006 2007
U.S. Figures
Exports to Malaysia9.410.310.910.910.512.611.7
% of Total Exports1.31.51.51.31.21.21.0
Imports from Malaysia22.324.025.428.233.736.532.8
% of Total Imports2.02.12.01.92.02.01.7

⁵⁸ (...continued)
the value of the renminbi since China adopted a crawling peg in July 2005.

2001 2002 2003 2004 2005 2006 2007
Malaysian Figures
Exports to U.S.17.818.817.823.627.730.227.5
% of Total Exports20.220.217.818.719.718.815.6
Imports from U.S.11.813.112.215.214.816.415.9
% of Total Imports16.016.415.214.512.912.510.8
^So^urce^{: Glo}^b^a^{l T}^r^ad^{e A}^tlas
In addition, the relative importance of each other as a trading partner has
declined since 2001. From Malaysia’s perspective, the United States purchased
20.2% of its exports in 2001, but only 15.6 of its exports in 2007. Similarly, the
United States provided Malaysia with 16.0% of its imports in 2001, but just 10.8%
of its imports in 2007. For the United States, Malaysia was the supplier of 2.0% of
its imports in 2001 and 1.7% in 2007, and was the buyer of 1.3% of its exports in

2001 and 1.0% of its exports in 2007.

Table 7 lists the top by categories of goods traded between Malaysia and the
United States in 2007, according to U.S. trade data. The data reveals considerable
reciprocal trade in machinery (HS84), electrical machinery (HS85); over three-
quarters of bilateral trade in 2007 was in these two types of commodities. Much of
this cross trade was due to outward processing of electronic and electrical products
in Malaysia by major U.S. companies.
Table 7. Top Five U.S. Exports to and Imports
from Malaysia, 2007
(in million dollars)
ExportsImports
Commodi ty Value Commodi ty Value
Electrical Machinery (85)6,320.6Machinery (84)14,500.4
Machinery (84)1,709.7Electrical Machinery (85)10,941.4
Optical & Medical691.4Optical & Medical957.0
Instruments (90) Instruments (90)
Iron & Steel411.7Rubber (40)839.5
Aircraft (98)320.2Furniture & Bedding829.7
In the bilateral exchange of machinery in 2007, the United States and Malaysia
were shipping back and forth mostly computers and related equipment (HS8471) and
parts and accessories for office equipment (HS8473). In the exchange of electronics
and electrical products, the United States exports were mostly integrated circuits and
microassemblies (HS8542) and its imports were primarily telephones and telephone

parts (HS8517), as well as a significant amount of integrated circuits and
microassemblies (HS8542).
Since 2000, the United States has consistently been among the leading sources
of foreign direct investment (FDI) in Malaysia, along with Hong Kong, Japan, and
Singapore. In 2007, the United States invested 3.0 billion ringgits ($870 million) in
Malaysia, which was 17.3% of Malaysia’s total inward FDI for the year.⁵⁹ The United
States was Malaysia’s fourth largest source of FDI in 2007, after (in order): Japan
(6.5 billion ringgits), Germany (3.7 billion ringgits), and Iran (3.1 billion ringgits).
The cumulative value of U.S. FDI in Malaysia is over $20 billion, with much of it
being invested in electronics and electrical manufacturing, as well as the
petrochemical industry.
Malaysia and U.S. Trade Relations
Malaysia and the United States currently hold similar positions on international
trade relations in general, but occasionally differ on specific issues. Both nations
support the general concept of trade and investment liberalization and facilitation.
Also, both are actively pursuing trade and investment liberalization via multilateral
and bilateral fora. However, on specific issues, there are differences between the
United States and Malaysia on the goals and means of obtaining those goals. As a
result, the two nations sometimes share the same view on trade issues, and sometimes
have different, and even, opposing views.
Since Malaysia and the United States are members of the World Trade
Organization (WTO), there is a shared “baseline” for their bilateral trade relations.
For example, both nations grant the other nation “normal trade relations,” or NTR,
status as required under the WTO. Also, since Malaysia and the United States are
both members of the Asia-Pacific Economic Cooperation (APEC), they are both
committed to APEC’s Bogor Goals of open trade and investment in Asia by 2020.⁶⁰
In addition, the United States and Malaysia concluded a trade and investment
framework agreement (TIFA) in May 2004, are currently negotiating a free trade
agreement (FTA), and are parties to various regional trade associations that are
considering multilateral trade and investment agreements.
U.S.-Malaysia FTA
On March 8, 2006, the United States and Malaysia announced they would begin
negotiating a bilateral free trade agreement (FTA).⁶¹ The announcement was made

⁵⁹ Source of FDI data: Malaysian Industrial Development Authority, or MIDA
[ h t t p : / / www.mi da .gov.my/ ] .
⁶⁰ For more information about APEC and its Bogor Goals, see CRS Report RL31038, Asia
Pacific Economic Cooperation (APEC) and the 2007 Meetings in Sydney, Australia, by
Michael F. Martin.
⁶¹ “United States, Malaysia Announce Intention to Negotiate Free Trade Agreement,” U.S.
(continued...)

by ex-U.S. Trade Representative Rob Portman and Malaysia’s then-Minister of
International Trade and Industry Rafidah Aziz on Capitol Hill with a bipartisan group
of Members of Congress in attendance. The stated goals for the proposed FTA were
to remove tariff and non-tariff trade barriers, and expand bilateral trade.
Since the announcement, The United States and Malaysia have held six rounds
of negotiations concerning the terms of the proposed FTA.⁶² The sixth round of talks
were held in Kuala Lumpur on January 14-17, 2008.⁶³ Among the outstanding issues
in the negotiations are: (1) market access for U.S. exports to Malaysia of agricultural
goods, automobiles, and automotive parts and components; (2) market access for
Malaysian exports to the United States of agricultural goods; (3) market access for
U.S. services, especially financial services, in Malaysia; (4) Malaysia’s enforcement
of intellectual property rights (IPR) protection; and (5) Malaysia’s government
procurement system and its preferential treatment for businesses owned and operated
by ethic Malays, or bumiputera.
Conditions for the fifth round of talks (held in Malaysia on February 5-8, 2007)
were complicated at the end of January with the news of a $16 billion energy
development deal between Malaysia’s SKS Group and the National Iranian Oil
Company that would develop Iranian gas fields and build liquefied natural gas
plants.⁶⁴ Over the last six years, trade between Iran and Malaysia has grown rapidly.
According to Malaysia’s Department of Statistics, total trade between Malaysia and
Iran rose from $224 million in 2000 to over $1.045 billion in 2007. In addition, Iran
was Malaysia’s third largest source of inward FDI in 2007 (see above).
During a House Committee on Foreign Affairs Hearing on January 31, 2007,
then-Chairman Tom Lantos called the deal “abhorrent,” and sent a letter to U.S.
Trade Representative Susan Schwab requesting the suspension of negotiations on the
proposed FTA until Malaysia renounced the deal with Iran.⁶⁵ U.S. Trade
Representative Schwab indicated that she intended to continue the negotiations with
Malaysia.⁶⁶
Malaysia sharply rejected the call to revoke the energy deal with Iran. Aziz
reportedly stated that the United States has no right to block Malaysia trading with

⁶¹ (...continued)
Trade Representative’s website: [http://www.ustr.gov/Document_Library/Press_Releases/

2006/March/United_States,_Malaysia_Announce _ In t e n t i on_to_Negotiate_Free_T r ade_

Agreement.html ].
⁶² For details about the proposed FTA and its negotiation, see CRS Report RL33445, The
Proposed U.S.-Malaysia Free Trade Agreement, by Michael F. Martin.
⁶³ An informal round of talks were held in Washington, DC on April 13, 2007.
⁶⁴ “Malaysia Stands by Iranian Gas Deal,” BBC News, February 2, 2007.
⁶⁵ “Remarks by Congressman Tom Lantos, Chairman, House Committee on Foreign Affairs,
at Hearing, ‘Understanding the Iran Crisis,’” January 31, 2007.
⁶⁶ Reported in Washington Trade Daily, February 5, 2007.

any country, even after the conclusion of the proposed FTA.⁶⁷ Badawi also was firm
on the issue, “We reject the pressure being inflicted upon us.... Do not bring any
political matters into trade.”⁶⁸ In an official statement on February 6, MITI repeated
Malaysia’s objections to Representative Lantos’ comments, stating:
The call by Tom Lantos to suspend the free trade agreement negotiations because
of a business deal by a Malaysian company with the National Iranian Oil
company does not augur well for the negotiations.... Malaysia reiterates that the
FTA negotiations cannot be held hostage to any political demand, and cannot be
conducted under such threats. Malaysia is also ready to suspend negotiations if⁶⁹
the situation warrants it.
Further complicating the negotiations was the passing of the April 2, 2007⁷⁰
deadline for consideration under Trade Promotion Authority. Because President
Bush did not notify Congress by the deadline, there are several scenarios under which
Congress could consider the implementation bill for the proposed U.S.-Malaysia
FTA.⁷¹
U.S.-Malaysia TIFA
On May 10, 2004, Malaysia and the United States signed a bilateral trade and
investment framework agreement.⁷² The U.S.-Malaysia TIFA states that both parties
desire to develop trade and investment between the two countries, ensure that trade
and environmental policies are supportive of sustainable development, and strengthen
private sector contacts. To achieve these goals, the TIFA established a Joint Council
on Trade and Investment, jointly chaired by Malaysia’s Minister of International
Trade and Industry and the U.S. Trade Representative, that is to meet at least once
a year for the purpose of implementing the TIFA.
The U.S.-Malaysia TIFA also set out a two-part work program. The first part
committed both nations to consultation on trade and investment liberalization and
facilitation, with explicit consideration to trade in services, information and
communications technology, biotechnology, and tourism. The second part stipulated
that the United States and Malaysia will “examine the most effective means of

⁶⁷ “Malaysia Defends State Despite U.S. Threat to Halt FTA Talks,” Bernama - Malaysian
National News Agency, February 2, 2007.
⁶⁸ “Malaysia Stands by Iranian Gas Deal,” BBC News, February 2, 2007.
⁶⁹ “Statement by the Ministry of International Trade and Industry on US Congressman Tom
Lantos Request to Suspend Malaysia-US FTA Negotiations,” February 6, 2007.
⁷⁰ For a more detailed discussion of Trade Promotion Authority, see CRS Report RL33743,
“Trade Promotion Authority (TPA): Issues, Options, and Prospects for Renewal,” by J. F.
Hornbeck and William H. Cooper.
⁷¹ For a discussion of those scenarios, see CRS Report RL33445, The Proposed U.S.-
Malaysia Free Trade Agreement, by Michael F. Martin.
⁷² The full text of the TIFA is available at the U.S. Trade Representative’s website at
[http://www.ustr.gov/assets/T rade_Agr eements/T IFA/asset_upload_file922_10023.pdf].

reducing trade and investment barriers between them, including examination and
consultations on the elements of a possible free trade agreement.”
World Trade Organization (WTO)
Both the United States and Malaysia have been members of the World Trade
Organization, or WTO, since its creation on January 1, 1995. While the United
States is generally seen as being a consistent supporter of trade and investment
liberalization, Malaysia’s trade policy has undergone significant changes over the last
12 years. However, under the Bawadi Administration, Malaysia has generally been
supportive of trade and investment liberalization.
For the current Doha Round, the United States and Malaysia are in general
agreement on the overall goals of the talks, but have differed on some of the
specifics. In particular, Malaysia joined its fellow ASEAN members in pushing the
United States and the European Union to improve their market access offers for
agricultural goods, including “making substantial reductions in trade distorting
domestic support by the major players.”⁷³
Asia-Pacific Economic Cooperation (APEC)
The Asia-Pacific Economic Cooperation (APEC) group is another multilateral
forum where the United States and Malaysia are both founding members. While
Malaysia and the United States accept APEC’s Bogor Goals for trade and investment
liberalization by 2020, as well as APEC’s “open regionalism” approach, there have⁷⁴
been some differences of opinion on the future of APEC. During the 2006 APEC
meetings, The United States proposed the transformation of APEC into a Free Trade
Area of the Asia-Pacific, or FTAAP. This proposal received a mixed response from
other APEC members. Many observers believe that Malaysia prefers the formation
of an all-Asian free trade area that would exclude the United States (see below).
Association of Southeast Asian Nations (ASEAN)
During its January 2007 summit in Cebu, ASEAN invited Australia, India,
Japan, New Zealand, the People’s Republic of China, and South Korea — the so-
called “ASEAN+6” — to attend as part of the second East Asia Summit (EAS). The⁷⁵
first EAS was held in Kulua Lumpur in December 2005. ASEAN has also held
talks about greater regional cooperation with just Japan, China, and South Korea —
the ASEAN+3. ASEAN+3 met after ASEAN’s last summit in Singapore in
November 2007. Malaysia is a founding member of the Association of Southeast

⁷³ “Statement on the Doha Development Agenda of the WTO,” January 13, 2007.
⁷⁴ For more information on APEC, see CRS Report RL31038, Asia Pacific Economic
Cooperation (APEC) and the 2006 Meetings in Hanoi, Vietnam, by Michael F. Martin.
⁷⁵ For more information about the first EAS Summit, see CRS Report RL33242, East Asia
Summit (EAS): Issues for Congress, by Bruce Vaughn.

Asian Nations (ASEAN). ASEAN currently has 10 members; the United States is not
a member.⁷⁶ East Timor has applied to become ASEAN member.
Malaysia is widely seen as a major supporter of the formation of an all-Asian
free trade area that would exclude the United States. To some observers, Malaysia’s
support for the EAS is a continuation of Mahatir’s East Asian Economic Caucus and
its predecessor, the East Asian Economic Group. According to one source, the goal
of forming an all-Asian free trade area was endorsed after the second EAS by China
after overcoming its reluctance to include Australia and India.⁷⁷ An attempt to forge
a similar agreement during the 2005 East Asia Summit was unsuccessful.
The possible creation of an all-Asian free trade area is seen by some observers
as a response to the growing influence of the European Union and the United States
in international trade relations. For the United States, the proposed all-Asian free
trade area is a rival model to its proposed FTAAP.
Malaysia is one of the five members of ASEAN that have ratified the new
ASEAN Charter.⁷⁸ One of the main outcomes of the November summit in Singapore
was the signing of a new charter on November 20, 2007. To be officially adopted, the
new charter must be ratified by all 10 members of ASEAN. Even before the charter
was signed, the Philippines indicated that it was unlikely to ratify the charter unless
Burma (Myanmar) upheld the document’s provisions on democracy and human
rights.
Among its key provisions, the new charter commits the organization to its
transformation into a regional economic community similar to the European Union
by 2015. Included in its provisions are a collective commitment to the creation of an
ASEAN Community “in which there is free flow of goods, services and investment;
facilitated movement of business persons, professionals, talents and labour; and freer
flow of capital.” However, the charter also contains an “ASEAN minus X” provision
that effectively allows any ASEAN member to opt out of economic commitments if
it so chooses. It is unclear at this time how the creation of an ASEAN Community
will affect U.S. policies in Southeast Asia.
Other Aspects of U.S.-Malaysia Relations
Bilateral relations between the United States and Malaysia are viewed as having
improved since Badawi came to power. In the past, the relationship suffered from

⁷⁶ The current ASEAN members are: Brunei Darussalam, Cambodia, Indonesia, Laos,
Malaysia, Myanmar (Burma), Philippines, Singapore, Thailand, and Vietnam.
⁷⁷ “Asian Leaders Plan Free-Trade Area from India to New Zealand,” by Arijit Ghosh and
Francisco Alcuaz, Jr. Bloomberg, January 15, 2007.
⁷⁸ The other four members to have ratified the new charter are Brunei, Laos, Singapore, and
Vietnam.

what a U.S. official called “blunt and intemperate public remarks”⁷⁹ critical of the
United States by former Prime Minister Mahathir, who generally subscribed to a
view of the United States as a neo-colonial power strongly under the influence of a
coterie of Zionist Jews.⁸⁰ However, Mahathir’s strong expression of sympathy and
support following the attacks on September 11, 2001, apparently led to a thawing of
a previously cool relationship that culminated with an official state visit to the White
House by Mahathir in May 2002.⁸¹ The more cordial relationship between Malaysia
and the United States has seemingly continued into the Badawi administration.
However, there are aspects of U.S.-Malaysia relations that periodically raise
tensions between the two nations. In particular, Malaysia was and continues to be
opposed to the U.S.-led invasion of Iraq, and frequently critiques the U.S. approach
to counterterrorism as lacking balance. In addition, the United States has expressed
misgivings about Malaysia’s relationships with certain nations (in particular, Iran and
Sudan) and continues to include Malaysia in the State Department’s annual Country
Reports on Human Rights Practices.
Prime Minister Badawi met with President Bush at the White House on July 19,
2004, during a three-day visit to the United States.⁸² Badawi’s visit sought to further
strengthen the bilateral relationship between Malaysia and the United States
following this important transfer of political leadership.⁸³ Malaysian Foreign
Minister Syed Hamid Albar reportedly stated that Badawi would “exchange views
on how we can deal with Islamic issues, how we can avoid the perception of
prejudice, [and the] perception of marginalization of Muslims.”⁸⁴ Badawi has also
focused on strengthening already strong bilateral trade and investment ties between
the United States and Malaysia.⁸⁵
During his 2004 visit to Washington, Prime Minister Abdullah Badawi and
President Bush reportedly discussed the need to move the bilateral relationship
forward and rebuild confidence. Prime Minister Badawi reportedly told the president

⁷⁹ Prepared Statement of Matthew Daley, Deputy Assistant Secretary, Bureau of East Asian
and Pacific Affairs, U.S. Department of State, As submitted to the Committee on
International Relations House of Representatives, Subcommittee on Asia and the Pacific,
March 26, 2003.
⁸⁰ Alan Sipress, “Malaysia Calls on Muslims to resist Jewish Influence,” Washington Post,
October 17, 2003.
⁸¹ Pamela Sodhy, “U.S.-Malaysian Relations during the Bush Administration: The Political,
Economic, and Security Aspects,” Contemporary Southeast Asia, vol. 25, no. 3 (2003), pp.

363-86.

⁸² The two heads of state have met on other occasions, but the 2004 visit has been the only
official state visit to the White House.
⁸³ Malaysian Prime Minister to Meet with U.S. President 19 July,” BBC Monitoring Asia
Pacific, July 6, 2004.
⁸⁴ “Malaysian Leader to Tell Bush Terrorism Has Increased,” Associated Press, July 9,

2004.

⁸⁵ “Abdullah’s Leadership Style Gets Positive Response From Leaders,” Bernama Daily,
July 9, 2004.

that “we need to find the moderate center, we must not be driven by extremist
impulses or extremist elements ... we need to bridge the great divide that has been
created between the Muslim world and the West.”⁸⁶ During Badawi’s visit, President
Bush expressed his opinion that “the United States and Malaysia enjoy strong
bilateral ties, ranging from trade and investment relationships to defense partnerships
and active cooperation in the global war on terrorism. As a moderate Muslim nation,
Malaysia offers the world an example of a modern, prosperous, multi-racial, and
multi-religious society.”⁸⁷
U.S. Invasion of Iraq
Even before the invasion began, Malaysia was a vocal critic of a possible U.S.-
led war against Saddam Hussain’s government in Iraq. At an Extraordinary Islamic
Summit Session of the OIC held in Doha on March 5, 2003 — two weeks before the
war began — then-Prime Minister Mahathir stated Malaysia’s opposition to war
against Iraq.⁸⁸ In his speech to UMNO’s 54^th General Assembly on June 19, 2003,
Mahathir said, “The hunt for the terrorists has made the world tense and unsafe.
Bombs explode in many parts of the world. Afghanistan and Iraq were attacked and
Syria and Iran were similarly threatened unless they changed their governments.”⁸⁹
Malaysia’s opposition to the Iraq war and the continued U.S. presence in Iraq
continued after Badawi became prime minister. In a speech at the Oxford Centre for
Islamic Studies in January 2004, Badawi said, “The world must never forget that Iraq
was illegally invaded. The world was told before the fact that the invasion was
necessary because of an imminent threat posed by weapons of mass destruction. We
know today that this reason was baseless.”⁹⁰ During an UMNO party meeting in
September 2004, Badawi reportedly said that Western countries had fueled
international terrorism through the invasion of Iraq and their pro-Israel stance on the
conflict between Israel and the Palestinians.⁹¹ Later on that same month, in his speech
before the United Nations General Assembly, Badawi stated, “Malaysia is convinced
that the fight against terrorism cannot succeed through force of arms alone.”⁹² He
went on to denounce “the increasing tendency to attribute linkages between
international terrorism and Islam.”⁹³ Badawi also indicated that he believed that the

⁸⁶ Speech by The Honourable Abdullah Ahmad Badawi, Prime Minister of Malaysia, Dinner
Hosted by the U.S.- ASEAN Business Council, Washington, DC July 19, 2004.
⁸⁷ President Bush, Written Remarks to the U.S. ASEAN Business Council Dinner Honoring
Prime Minister Badawi, July 19, 2004.
⁸⁸ Speech by Prime Minister Mahathir, Extraordinary Islamic Summit Session of the OIC,
March 5, 2003.
⁸⁹ Speech by Prime Minister Mahathir, 54^th UMNO National Assembly, June 19, 2003.
⁹⁰ Speech by Prime Minister Badawi, Oxford Centre for Islamic Studies, January 20, 2004.
⁹¹ “Malaysia Accuses West of Fueling Terrorism,” AFP, September 23, 2004.
⁹² Address of Prime Minister Badawi, United Nations General Assembly, September 27,

2004.

⁹³ Ibid.

United Nations should be “given the lead role” in returning Iraq to a peaceful, stable
nation.⁹⁴
Although the rhetoric has changed in tone and tenor over the last four years,
Malaysia opposition to the U.S. military presence in Iraq remains strong, and its
disagreement with U.S. approach to terrorism continues. On January 15, 2008,
Badawi stated:
The fundamental point I am making is that religion in general, and the teachings
of Islam in particular, cannot be faulted as either the reason for economic
deprivation in the Muslim world or the source of the discord which persists
between the Muslim world and the West. The problems which continue to fester
in Afghanistan, Iraq, the Golan Heights, Lebanon and Palestine are vestiges of
the projections of power by the centres of world power. The resulting humiliation
being felt by Muslims is the real cause of their loss of trust and confidence⁹⁵
towards the West.
Counter ter r or i sm
Though Malaysia opposed the U.S.-led invasion of Iraq, the United States
considers Malaysia a valuable ally in the war against militant Islam in Southeast
Asia. Southeast Asian Islamic populations in Brunei, Indonesia, and Malaysia (and
to a lesser extent in Burma, the Philippines, Singapore, and Thailand) constitute a
third of the world’s Islamic population and are experiencing a spiritual, social, and
cultural revival at a time when there is also increased radicalization among some
groups in the region as demonstrated by the terrorist group Jemaah Islamiya (JI) and
Abu Sayyaf.⁹⁶
Malaysia reportedly estimated that there were 465 members of JI in Malaysia⁹⁷⁹⁸
in 2003. Malaysia has detained over 110 suspected terrorists since May 2001. The
Malaysian government believes that it has effectively crippled the Kumpulan
Mujahedin Malaysia (KMM), which is thought to have had close ties with the
Jemaah Islamiya (JI) terrorist group. The KMM sought the overthrow of the
Malaysian government and the establishment of an Islamic state over Malaysia,
Indonesia and Muslim parts of Southern Thailand and Southern Philippines. Two of

⁹⁴ Ibid.
⁹⁵ Statement by the Honourable Abdullah Ahmad Badawi Prime Minister of Malaysia on the
Occasion of the First Alliance of Civilizations Annual Forum, January 15, 2008.
⁹⁶ S. MacDonald and J. Lemco, “Political Islam in Southeast Asia,” Current History,
November, 2002. For additional information, see CRS Report RL31672, Terrorism in
Southeast Asia, coordinated by Bruce Vaughn.
⁹⁷ Bridget Welsh, “Malaysia: Security Begins at Home,” in David Wiencek and William
Carpenter, Asian Security Handbook: Terrorism and the New Security Environment,
(Armonk: M.E. Sharpe, 2005).
⁹⁸ Country Reports on Terrorism, 2005, United States Department of State, Released April
2006 and J. Chao, “Malaysia’s War on Terror Worries Rights Advocates,” American
Statesman, November10, 2002.

JI’s leaders, Noordin Mohammad Top and Azahari Husin, the later now captured, are
Malaysian, though Top is thought to be a fugitive in Indonesia.⁹⁹
The increasingly perceived comity of interests after September 11, 2001,
improved the bilateral relationship. Foreign Minister Syed Hamid Albar stated in
January of 2001 that Malaysia was looking forward to closer ties with the United
States when President Bush assumed office.¹⁰⁰ The September 11, 2001 attacks
against the United States were strongly criticized by former Prime Minister
Mahathir, and the two nations subsequently began to work closely on counter-terror
cooperation. Mahathir met with President Bush in Washington in May 2002, where
they signed a memorandum of understanding on counterterrorism. Some Malaysian
officials have, in general terms, equated the ISA with the USA Patriot Act. It has
been argued that U.S. criticism of the ISA became muted following the passage of
the USA Patriot Act.¹⁰¹
In May of 2002, the United States and Malaysia signed a declaration that
provides a framework for counterterrorism cooperation.¹⁰² Malaysia has taken a
leading regional role in the war against terror by establishing a regional
counterterrorism center in Kuala Lumpur that facilitates access to counterterror
technology, information and training.¹⁰³ The concept for the center was announced
in October 2002 following a meeting between President Bush and then-Deputy Prime
Minister Badawi at the APEC meetings in Mexico.¹⁰⁴ Malaysia hosted the ASEAN
Regional Forum Inter-sessional Meeting on Counter-Terrorism in March of 2003.¹⁰⁵
U.S. Coordinator for Counter-terrorism Ambassador Cofer Black emphasized
the need to develop “sustained international political will and effective capacity
building” to more effectively fight terrorism.¹⁰⁶ Within this context Ambassador
Black made special reference to Malaysia’s contribution to the war against terror in
Asia. He identified Malaysia’s opening of the Southeast Asia Regional Center for
Counter-terrorism in August 2003 as a key example of counterterrorism capacity
building in Asia. Other observers have questioned the degree to which the center has
established its effectiveness. Since becoming Prime Minister, Badawi has continued

⁹⁹ Country Reports on Terrorism, 2005, United States Department of State, Released April

2006.

¹⁰⁰ “Looking Forward to Warmer Ties in Post-Clinton Era,” New Straits Times, January 10,

2001.

¹⁰¹ Sodhy, op. cit.
¹⁰² “Malaysia, USA Sign Anti-terror Declaration,” BBC Monitoring Service, May 15, 2002.
¹⁰³ R. Hamsawi, “Local Funding for Anti-Terror Center,” New Straits Times, April 3, 2003.
¹⁰⁴ “Malaysia: Minister Gives Details of ASEAN Anti-terror Centre Project,” BBC
Monitoring Service, April 2, 2003.
¹⁰⁵ See CRS Report RL31672, “Terrorism in Southeast Asia” for further information on
terrorism in Southeast Asia.
¹⁰⁶ United States Department of State, Patterns of Global Terrorism, 2003, April, 2004.

Malaysia’s commitment to fight terrorism.¹⁰⁷ While attending a regional counter-
terror conference in Bali, Indonesia in February 2004, then-U.S. Attorney General
Ashcroft reportedly stated that the United States is very satisfied with the role that
Malaysia has played in fighting terrorism and that Malaysia has provided a good
example to countries in the region.¹⁰⁸
However, during an address to a regional defense conference in Singapore in
June 2004, Malaysian Defense Minister Najib Tun Razak admonished the West when
he stated, “Let there be no doubt, there is more (terrorism) to come if we continue
to ignore the need for a balanced approach to this campaign against terror.... We are
concerned that powerful states may not be going about this campaign in ways that
will win the hearts and minds of millions of ordinary people worldwide.”¹⁰⁹ Some
observers view this exchange as highlighting differences in regional Southeast Asian
states’ desires to include more “soft power” approaches to the war against terror as
opposed to what they feel is an over reliance on “hard power” by the United States.
Military Cooperation
Military cooperation between the United States and Malaysia includes high-
level defense visits, training exchanges, military equipment sales, expert exchanges
and combined exercises. The 2007 Congressional Budget Justification for Foreign
Operations states that “exposure to U.S. ideals promotes respect for human rights.”
It goes on to state that “the Malaysian military has not been involved in systemic
violations of human rights.”
In mid-2005, Deputy Secretary of State Zoellick and Malaysian Deputy Prime
Minster Najib witnessed the renewal of an Acquisition and Cross Servicing
Agreement that provides a framework for bilateral military cooperation.¹¹⁰ Malaysian
officers train in the United States under the International Military Education and
Training (IMET) program and there is a student exchange program between the
Malaysian Armed Forces Staff College and the U.S. Army Staff College at Fort
Leavenworth. United States troops also travel to the Malaysian Army’s Jungle
Warfare Training Center in Pulada. Humanitarian assistance, disaster relief, anti-
piracy, and counterterrorism are areas that have been identified as areas of mutual
interest. Between 15 and 20 U.S. Navy ships visit Malaysia annually. Bilateral
military exercises include all branches of the service.¹¹¹ Malaysia has also bought
significant military equipment from the United States, including F-18/D aircraft.
Recent military procurement is reportedly seeking to narrow the technology gap with

¹⁰⁷ “Malaysia Pledges Terror Fight,” The Wall Street Journal, November 4, 2003.
¹⁰⁸ “U.S. Compliments Malaysia for Role in Anti-terrorism Efforts,” Bernama Daily,
February 5, 2004.
¹⁰⁹ “Malaysia Says U.S. Needs to be More Balanced in Its War Against Terrorism,”
International Customwire, June 6, 2004.
¹¹⁰ “Malaysia’s Efforts Against Terror,” Bernama, June 8, 2005.
¹¹¹ Huhtala, April 14, 2003.

small, but well armed, Singapore.¹¹² Such purchases will also likely help Malaysia
secure its maritime interests in the Strait of Malacca and the South China Sea.
United States warships and U.S. military personnel go to Malaysia to participate
in joint Cooperation Afloat Readiness and Training exercises with Malaysia in the
South China Sea. The exercise is aimed at bolstering bilateral military ties and
improving the ability of the United States Navy to operate in regional waters.¹¹³ In
an address in Malaysia in June 2004, Admiral Fargo pointed to shared concerns over
“transnational problems,” including “terrorism and proliferation, trafficking in
humans and drugs and piracy” and emphasized that “we have tremendous respect for
sovereignty.”¹¹⁴ The United States has sent Coast Guard officers to the Marine Patrol
training Center in Johor Baharu to help train Malaysian officers in maritime
enforcement. Malaysia established a Maritime Enforcement Agency in 2005 to
increase maritime patrols.¹¹⁵ Over 50,000 ships a year pass through the Straits of
Malacca. Some ships have been vulnerable to piracy in the 600 mile long strait.
There is also concern that terrorists could seek to mount an attack against shipping
in the strategically vital strait.¹¹⁶
After some apparent mis-communication, Malaysia and the United States
reportedly have come to a mutual understanding on how best to secure the Straits of
Malacca, which are territorial waters from possible terrorist acts.¹¹⁷ An estimated
30% of world trade and half of the world’s oil transits through the Straits of
Malacca.¹¹⁸ Testifying before the House Armed Services Committee on March 31,
2004, Admiral Thomas Fargo, Commander of the U.S. Pacific Command, identified
the Straits of Malacca off Malaysia’s coast as an area where there is concern that
international terrorists might seek to attack shipping or seize a ship to use as a
weapon. Fargo also reportedly suggested the idea that U.S. counterterrorism forces
be positioned in the area to be able to deal with such a threat. This idea reportedly
was announced without prior consultation with Malaysia, which reportedly responded
“coolly” to the suggestion.¹¹⁹ Malaysia reportedly prefers an arrangement, in the
words of Defense Minister Najib, where “the actual interdiction will be done by the

¹¹² S. Jayasankaran, “Malaysia: Call for Arms,” Far Eastern Economic Review, May 16,

2003.

¹¹³ “U.S. Navy Task Force to Head for RP,” Manila Times, July 14, 2004.
¹¹⁴ Admiral Thomas Fargo, Commander, U.S. Pacific Command, Malaysia Media
Roundtable, June 23, 2004.
¹¹⁵ “24 Hour Surveillance for the Malacca Strait,” Bernama, March 11, 2005.
¹¹⁶ “Malaysia to Beef Up Malacca Patrols,”Agence France Presse, February 6, 2007.
¹¹⁷ For a discussion of threats to shipping in the strait and regional responses see Bronson
Percival, Indonesia and the United States: Shared Interest in Maritime Security, U.S.-
Indonesia Society, June 2005.
¹¹⁸ “Malaysia Accepts U.S. Aid, But Not Patrol, In Strait,” International Herald Tribune,
June 22, 2004 and Prime Minister of Singapore Lee Hsien Loong,”Engaging a New Asia,”
Washington, July 12, 2005.
¹¹⁹ “Indonesia, Malaysia Give Cool Response to Suggestion of U.S. Troops in Malacca
Strait,” Voice of America Press Release, April 7, 2004.

littoral states.”¹²⁰ This approach was subsequently supported by Fargo during a visit
to Malaysia, where he reportedly stated that U.S. cooperation would focus on
intelligence sharing and capacity building to assist regional states in addressing the
potential threat.¹²¹ On July 20, 2004, Malaysia, Indonesia, and Singapore began
coordinated naval patrols of the Straits of Malacca.¹²²
Human Rights
The State Department report on human rights practices in Malaysia stated that
the Malaysian government “generally respected the human rights of its citizens;
however, there were problems in some areas.”¹²³ Among the problems remaining are:
abridgement of citizens’ right to change their government, detentions of persons
without trial, restrictions on freedom of the press, restrictions on freedom of
assembly and association, ethnic discrimination, and incomplete investigation of
detainee deaths. The report also mentioned that “the civilian authorities generally
maintained effective control of the security forces.”¹²⁴
Relations with Sudan
Although official bilateral trade in 2007 was small (less than $53 million in
exports and only $42 million in imports), Prime Minister Badawi has publically
stated that Malaysia hopes to increase trade and investment relations with Sudan.
Malaysia already plays an important role in Sudan’s trade with other nations.
Malaysian companies — along with companies from China, France, India, Kuwait,
and the United Kingdom — are reportedly major investors in Sudan’s petroleum
industry. In 2005, the Sudanese government received $2.3 billion in revenues from
petroleum exports.¹²⁵ The Malaysian newspaper, The New Straits Times, reports that¹²⁶
Malaysia is the second largest investor in Sudan, after China. Malaysian
companies reportedly provide substantial construction and transportation services to
Sudan’s oil industry. Petronas, Malaysia’s state oil company, has interests in nine oil
fields in Sudan, plus a refinery project on Port Sudan.¹²⁷

¹²⁰ “Malaysia, United States to Discuss Security in the Straits of Malacca,” International
Custom Wire, June 6, 2004.
¹²¹ See “U.S. to Render Assistance to Littoral States of Malacca Strait,” International
Customwire, June 23, 2004 and “U.S. Navy Task Force to Head for RP,” Manila Times, July

14, 2004.

¹²² “Indonesia: Three Nations Patrol Straits,” Stratfor, July 20, 2004.
¹²³ U.S. Department of State, Country Reports on Human Rights Practices - 2007.
¹²⁴ Ibid.
¹²⁵ “Divestment Campaign Targeting Sudan over Darfur Goes Global,” Associated Press,
May 1, 2007.
¹²⁶ “Malaysia to Help Sudan with More Investments,” The New Straits Times, April 17,

2007.

¹²⁷ “Malaysia PM Visits Darfur, Seeks Firmer Sudan Ties,” Reuters, April 18, 2007.

Malaysia is the current chair of the Organization of the Islamic Conference
(OIC); Sudan is also a member. During an April 2007 trip to Sudan, Prime Minister
Badawi expressed some support for its fellow OIC member, saying the situation in
Darfur was being exaggerated by the media.¹²⁸ In addition, Malaysia would
“approach the leaders of the Organization of the Islamic Conference and Islamic
Development Bank to extend whatever help that can be given to the government of
Sudan.”¹²⁹
Malaysia also opposes proposed U.N. sanctions on Sudan. In the opinion of
Prime Minister Badawi, the sanctions would hurt the people of Malaysia.¹³⁰ Instead,
Malaysia prefers to allow more time for talks between the United Nations and Sudan.
The United States has so far held off on unilateral sanctions on Sudan to give the
United Nations time to convince Sudan to permit U.N. peacekeepers into Darfur.
However, during Prime Minister Badawi’s visit to Sudan, Sudan’s President Omer
Hassan Ahmed Al-Bashir told reporters he hoped Malaysia would help Sudan
“confront Western pressure to accept international forces in Darfur.”¹³¹
U.S. Assistance
U.S. assistance to Malaysia is relatively modest in size, and has been declining
in value over the last four years. United States foreign assistance to Malaysia has
included International Military Education and Training (IMET), Non-Proliferation
Anti-Terrorist Demining and Related Programs (NADR), Anti-Terrorism Assistance
(ATA), and Export Control and Related Border Security Assistance (EXBS). For
FY2009, the Bush Administration has requested funding for International Narcotics
Control and Law Enforcement.
IMET programs with Malaysia seek to contribute to regional stability by
strengthening military-to-military ties and familiarizing the Malaysian military with
U.S. military doctrine, equipment, and management that promotes interoperability.
The U.S. is a leading training partner with Malaysia at its Southeast Asia Regional
Counter-terrorism Center.

¹²⁸ “No Sanctions on Sudan: Malaysia,” Bernama, April 17, 2007.
¹²⁹ “Malaysia PM Visits Darfur, Seeks Firmer Sudan Ties,” Reuters, April 18, 2007.
¹³⁰ “No Sanctions on Sudan: Malaysia,” Bernama, April 17, 2007.
¹³¹ “Malaysia to Help Sudan with More Investments,” The New Straits Times, April 17,

2007.

Table 8. Bilateral Assistance
(in millions of dollars)
Account F Y 2007actual F Y 2008estimate F Y 2009request
International Military Education and0.8710.8760.750
Training (IMET)
International Narcotics Control and Law--0.400
Enforcement
Non-Proliferation Anti-Terrorist Demining2.4011.9981.540
and Related Programs (NADR)
T otals 3.272 2.874 2.690
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^R^e^l^eas^{ed March}^{11, 2008. S}^{ee al}^s^o^C^R^S^R^e^port^R^L^31362,^U^.^{S. For}^eⁱ^{gn Ai}^{d t}^o^Eas^t^{and Sout}^{h As}ⁱ^a^:
^{Selected Recipients}^{, by}^T^h^om^as^L^u^m^.

CRS-34
Figure 1. Map of Malaysia

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