BARELY three months since returning to the White House, President Donald Trump has imposed tariffs from universal baseline tariffs to country-specific tariffs on goods from Canada, Mexico, China and the European Union, which have sparked retaliatory tariffs.
Tariff action and retaliation among major economies have fuelled concerns about a full-blown trade war uncertainty, putting the world stock markets on the edge of extreme volatility.
It can severely disrupt global supply chains, increase cost of raw materials and push up consumer inflation, pushing the global economy toward stagflation (low growth and high inflation), and in the worst case, can cause a global recession.
China, still reeling from the property slump, faces further economic headwinds from a 34% tariff.
The US economy, at the epicentre, will bear the full brunt of the tariff war impact, with the probability of a recession rising to a nearly 50% chance within the next six to 12 months.
On April 2, 2025, the Trump administration unveiled the reciprocal tariff plan under the International Emergency Economic Power Act of 1977 (IEEPA), which Trump has dubbed “Liberation Day”, a moment to roll out a set of tariffs on imports from other countries, so as to liberate the United States from a reliance on foreign goods.
The US Census Bureau data for 2024 showed that the United States has incurred a trade deficit of US$24.8bil with Malaysia (contributing 2.1% of the US total trade deficit), placing Malaysia on the 14th spot in a “Dirty 15” list of nations that accounted for the bulk of trade imbalances with the United States.
However, the Statistics Department indicated that Malaysia had recorded a trade surplus of RM72.4bil, showing a discrepancy of US$9bil. Hence, a reconciliation of this statistical discrepancy is necessary to derive the “implied” tariff rates on Malaysia.
It must be noted that the trade deficit is also due to a significant number of US-based semiconductor companies operating in Malaysia for decades, contributing to our role as a major semiconductor exporter to the US.
Malaysia is a key player in semiconductor testing and packaging, contributing 13% of global semiconductor testing and packaging and being the world’s sixth-largest semiconductor exporter.
Though Malaysia’s average Most-Favored-Nation applied tariff rate was 5.6%; 7.4% for agricultural products and 5.3% for non-agricultural products in 2023, the United States Trade Representative (USTR) has derived that Malaysia is currently applying an average of 47% tariff (includes currency manipulation and trade barriers) on the US goods to Malaysia.
This has raised eyebrows on the basis of the calculation. Malaysia was removed from the US Treasury Department’s monitoring list for currency manipulation as of November 2024.
The United States has hit Malaysia with a 24% tariff on imported goods into the United States with effect from April 9, 2025.
It is lower compared to China’s 34% in addition to 20% imposed earlier, Vietnam (46%), Thailand (36%), Indonesia (32%) and Taiwan (32%), but higher than Singapore’s 10% and the Philippines (17%).
How’s the impact on Malaysia? Malaysia’s external sector will face a daunting challenge ahead, given the disruptive impact of the tariffs on supply chains, global demand and business operational costs.
The impacted industries are electrical and electronics (E&E) products (excluding semiconductors), machinery and equipment, optical and scientific equipment, rubber products, furniture products and palm oil.
In 2024, the United States was the third largest trading partner of Malaysia, accounting for 11.3% of Malaysia’s total trade (9.5% in 2021-2023; 9% in 2016-2020).
It was Malaysia’s second largest export destination (13.2% share); and the United States was Malaysia’s third largest importer (9.2% share). In February 2025, the United States displaced China as Malaysia’s largest export market (14.8% share).
More than half of Malaysia’s exports to the United States are electronics and electrical products (54.6%), machinery and equipment (14.5%), optical and scientific equipment (9%), rubber and rubber products (3.9%), furniture products (3.5%), palm oil and palm oil products (1.4%) and plastic and plastic products (1.3%), iron and steel products (1%) and aluminium products (0.8%).
Under the reciprocal tariffs, while the E&E products (HS code 85) accounted for 54.6% of total exports to the United States in 2024, the exclusion of semiconductors (RM45.3bil or 22.8% of total exports to the United States) provides a relief to Malaysia and the semiconductor players.
Similar exclusions were given to a list of products, including wood products, copper and copper products, energy products, and pharmaceuticals, which collectively recorded RM6bil of exports or 2.8% of total exports to the United States in 2024.
Nonetheless, there is a caveat which states that “all articles that may be become subject to duties pursuant to future actions under section 232 of the Trade Expansion Act of 1962”.
This means that the threat of industry-specific duties are still lingering and tariffs are not off the table. So, the big question is ultimately where do the tariffs start or end.
The United States remains one of the major foreign investors in Malaysia. It ranked second in terms of gross foreign direct investment (FDI) in 2024; fourth largest investor in terms of FDI stock at end-2024.
Approved US investment in the manufacturing sector was ranked between second and ninth placing during 2017-2024, with total approved investment ranging between RM1.1bil (ninth placing in 2017) and RM18.1bil (second largest investor in 2023).
Overall, the US ranked third in terms of total approved investments with foreign participation in various sectors, recording RM29.7bil or 17.4% of total foreign investment.
We draw comfort that the US authorities said that tariffs can be lowered if any trading partner takes significant steps to remedy the non-reciprocal trade arrangements and align sufficiently with the US on economic and national security matters. Trump said he would be open to negotiating with other countries about the duties.
We welcome the Ministry of Investment, Trade and Industry (Miti)’s stance of not considering retaliatory tariffs, instead will actively engage with the US authorities in addressing the impact of reciprocal tariff.
Malaysia will utilise the Trade and Investment Framework Agreement to seek reciprocal trade gains and pursue a Technology Safeguards Agreement with the US to facilitate high-tech cooperation in semiconductors, aerospace, and digital economy sectors. We call for a more collaborative approach to address the trade imbalance, emphasizing engagement and seeking reasonable solutions through consultations and joint efforts.
In addition to leveraging on existing bilateral and multilateral trade agreements (RCEP, CPTPP and China-ASEAN FTA) to expand trade, the Government has to speed up the Malaysia-European Union Free Trade Agreement negotiation, the Gulf Cooperation Council – Malaysia Free Trade Agreement, and consider to negotiate a Free Trade Agreement with the US to soften the impact of tariffs.
Malaysia’s small open economy (2024: total trade to GDP ratio of 149.1%; gross exports to GDP ratio of 78.1% and exports share to the US of 13.2%), will inevitably be affected by the US tariffs and global trade tensions via the trade, income, financial and investment channels. Our economy is still highly vulnerable to tariff war shock in major economies as China, the US and EU accounted for a combined exports share of 33.3% in 2024.
Overall, the direct and indirect impact of bilateral trade tariffs and global tensions on Malaysia’s export performance is largely dependent on the substitutability of the affected products, reconfiguration of supply chains and production, transshipment and Malaysian firms’ products’ cost and price competitiveness.
On the trade channel, higher tariffs reduce the competitiveness of our products in the US market by raising their prices and lowering demand for our products, which decreases their export potential. While Malaysia will enjoy lower tariffs advantages compared to other countries, and benefitting from some trade diversion, global trade tensions are expected to slow down demand and economic growth by disrupting trade flows, raising costs, and impacting supply chains, potentially leading to reduced investment and consumer spending. Companies’ profit margins could be squeezed due to price competition to offset the impact of higher tariffs.
On the income channel, lower exports demand would result in lower production, and would impact the employment and income of workers in the export-oriented industries, which will bear the bigger brunt of the tariffs impact. Lower employment and income will weigh on household spending.
On the investment channel, firms could adopt a cautious approach to capacity expansion on concerns about the impact of higher tariffs and lower export orders on their profitability. Our estimated private investment growth of 11.5% in 2025 (12.3% in 2024) is revised lower to 10% to reflect investors’ and businesses’ cautious sentiment on the tariff’s impact. The financial volatility induced by global trade tensions and economic slowdown could negatively impact wealth creation.
Penciling the tariffs shock in this prevailing moderate global growth and heightened global uncertainty, we have revised lower our 2025’s GDP growth estimate to 4% from 5% previously to reflect the impact of tariffs on exports and its spillover effect on domestic consumption and investment.
With exports at risk, domestic demand will continue to anchor growth this year, supported by fiscal and targeted income measures as well as an accommodative interest rate. Appropriate policies are crucial to manage supply, demand and price shocks.
Domestic-oriented industries such as services, construction, domestic sales driven manufacturing and agriculture sector will be relatively insulated from the tariffs shock as they apply only to physical exported goods. Nevertheless, weak exports can lead to a negative spillover effect, potentially weighing on business and investor sentiment, which can manifest in reduced spending and investment.
Given considerable external uncertainties, any changes in domestic policies pertaining to fuel subsidies rationalization, multi-tier levy and electricity tariffs have to be carefully calibrated to avoid disruptive adjustment to businesses, which have been inundated with increased operational costs.
We expect Bank Negara Malaysia will wait to assess the impact of tariffs on economic growth before making any policy decisions, potentially including interest rate adjustments if domestic growth is under threat to below 4% and domestic demand falters.
In ensuring Malaysia remains resilient and in better position to benefit and mitigate risks from its trade openness, our industries must continue to move up the value chain, focusing technology and innovation, restrategising suppliers and value chains, diversifying our export products and markets, enhancing investment ecosystem and attracting quality investments that would raise overall economic complexity and create high-value jobs. Malaysia must continue to proactively pursue multilateral and bilateral trade pacts with other economies.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.
