Thailand has refused to slash a 20 percent tariff on Malaysian cars, saying it must first drop a restrictive national imports scheme, a report said today.

Malaysia argues that under a regional free trade deal, its auto exports to Thailand should only carry a five percent tariff, setting up a showdown between the neighbours at ministerial talks here this week.

Thai Finance Minister Thanong Bidaya said that under the Asean Common Effective Preferential Tariff (CEPT), parties are entitled to tariff cuts only if they remove other restrictions such as Malaysia's import permits scheme.

"(It) states that they should enjoy CEPT only upon getting rid of all quantitative restrictions," he was quoted as saying by the official Bernama news agency.

Thanong said that as a result, the 20 percent import duty imposed on Malaysia's cars and automotive parts could only be cut to five percent once all restrictions are removed.

Thailand will send a delegation to Malaysia next month to discuss the matter, he said.

Lower rates

"We want to look at how we can find satisfactory consensus among each other. That is all we wanted. So we have to discuss," he said.

Malaysia's Trade Minister Rafidah Aziz on Monday insisted that lower rates should be granted in the sensitive sector.

Malaysia announced in March that it will cut taxes in an attempt to enhance the competitiveness of national carmakers Proton and Perodua, and as part of a bid to become a regional hub for car manufacturing and exports.

One of the key changes was the reduction in the Asean Common Effective Preferential Tariff import duty to five percent for qualifying vehicles.

Malaysia also said it would phase out its controversial "approved permit" system for car imports, part of an affirmative action plan to raise the status of Muslim Malays, by the end of 2010.

Under the controversial scheme, only ethnic Malay entrepreneurs are given permits to bring in vehicles.