Malaysia's licencing system for auto imports does not contravene World Trade Organization (WTO) rules, Trade Minister Rafidah Aziz said today amid rising pressure to abolish the controversial policy.

Rafidah said the system was necessary for "socio-economic reasons" - to help poorer Malays catch up with a wealthier Chinese minority - as such did not contravene WTO regulations.

Every car manufactured or assembled outside the country must secure an approved permit (AP) before it can be imported and sold locally.

APs are mainly issued to companies controlled by ethnic Malay investors under the system introduced in 1970 to encourage politically dominant but economically weak Malays and indigenous groups, jointly known as bumiputeras, to venture into the auto-distribution business.

The system is part of a wider affirmative action programme to help bumiputeras catch up with the richer Chinese minority.

No open bidding is involved in the process. Many of these permits are often sold on, bringing befty profits to their holders.

Foreign carmakers have cried foul over the system, which they say inflates the price of imported vehicles and benefits a few privileged license holders.

Critics also said it is a non-tariff trade barrier that violates trade liberalisation goals of the Association of Southeast Asian Nations Free Trade Area (Afta).

Only country with AP system

Rafidah acknowledged that Malaysia was the only country to have such a policy but she defended the AP system as necessary for "socio-economic reasons."

"The approved permit system is categorised under social economic development ... it does not contravene WTO regulations," she told reporters. "At the moment, this is the only way to help bumiputeras."

Rafidah said the a quota for cars than can be imported from Asean was raised from Jan 1 as part of market opening under Afta but APs were still required for "monitoring and data collection purposes.

"It's already a free market for Asean cars with 40 percent local content. You still need a permit but it is just for monitoring. You can bring in as many as you can sell," she said.

"But from non-Asean (countries), what is existing still operates until such a time in the future, when I cannot tell, when the whole system is abolished," she said, when asked if the system would be abolished in 2008 when the country is expected to fully liberalise its car market.

The number of permits given each year usually does not exceed 10 percent of the total number of cars sold in a year.

Who are the permit holders?

Last year, Malaysia issued 46,821 APs, most of which were for cars imported from non-Asean countries.

Rafidah refused to name any of the permit holders.

She said the APs were allocated to 116 companies, of which 40 were franchise holders importing specific brands and 76 were open AP holders that could import any car makes from any country.

The government has urged the firms to form consortiums to enhance efficiency and viability in terms of access to financial, after sales service and showroom facilities, she said.

Malaysia, one of the region's top passenger car markets, cut import duties to 20 percent on Asean cars on Jan 1 under Afta but it also raised excise duties on all new cars sold in the country to offset a fall in government revenue.

It has said, however, it would only defer reducing duties to the required level of below five percent to 2008.