Estimating the welfare loss due to vehicle tariffs in Malaysia

The Malaysian Government initiated domestic automobile production in 1985, paired with hefty tariffs on imported vehicles to protect the growing industry, using the infant industry argument as underlying. To gain empirical knowledge on the effectiveness of the infant industry argument for the automobile industry, the cases of Japan, South Korea and Spain are briefly analysed. The findings suggest that the Malaysian Government has failed to implement the infant industry type policies successfully. Additionally, the welfare cost of protecting the Malaysian vehicle industry is calculated using a Harberger triangle welfare loss analysis. The welfare loss is estimated for the year 2017 at MYR 11.3 b (US$2.8 b). It is suggested that the benefits of keeping the protectionist measures are too small to justify the costs. To close the article, policy recommendations are presented to reduce the welfare loss by gradually opening the sector up to international competition.