Impact analysis as tariff deadline looms

ON Wednesday night, July 9, company owners, investors and politicians will likely be consuming copious amounts of coffee, meticulously analysing scenarios and countermeasures as they anxiously await updates on the US government’s stance on tariffs, particularly from President Donald Trump.

That is the last day of the 90-day reprieve Trump granted the world before implementing arbitrary tariffs.

Investment, Trade and Industry Minister Tengku Datuk Seri Zafrul Abdul Aziz says meetings in Washington DC are “progressing well”, but anything can happen.

Markets are used to Trump’s unpredictable changes, even at the eleventh hour.

However, if a decision is made, several scenarios could unfold for Malaysia, with analysts and fund managers sharing their perspectives on each.

So, what is the worst case scenario for Malaysia?

There are some who think Trump will keep the 24% tariff he first imposed on Malaysia, although there are others who think it could be worse than that.

“Our base case is that even after July 9, the tariff rate for Malaysia will remain at 24%. The worst case is, it could go higher,” says iFAST Capital research analyst Kevin Khaw Khai Sheng.

Khaw says if the base case happens, there might be minimal market disruption, with a potential easing of 10% to 24% in the second half of the year as more negotiations take place. He also believes a 24% tariff rate is already factored into the markets.

Any tariff above 10% would likely disappoint many countries, including Malaysia. According to earlier remarks by US Treasury Secretary Scott Bessent, the 10% baseline acts as a “floor” for trading partners, with final rates unlikely to go lower unless significant concessions are made.

Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong offers a different perspective. He cautions that if no deal is reached and Malaysia faces the 24% tariff, the market impact could be “sharp, immediate, and broad-based,” potentially reducing the FBM KLCI by a “high single-digit to low double-digit percentage range.”

Export-oriented sectors, in particular, might experience significant repricing.

Yong suggests that a “better-than-feared” outcome would be a 10% tariff with exemptions. This, he explains, would ease a major market concern and likely spark a significant relief rally.

The sectors most vulnerable in a no-deal scenario – technology, manufacturing and exports – would lead the rally. Investors would closely examine the exemptions, as companies qualifying for them could see the most dramatic upward re-rating.

The “most complex” outcome for the country would arguably be a tariff of between 10% and 24%, adds Yong.

“The market will enter a ‘muddling through’ phase. Performance will be highly fragmented. Investors will likely remain cautious, favouring defensive sectors like utilities and consumer staples.

“Companies unable to absorb or pass on the increased costs will be punished by the market,” he says.

SPI Asset Management’s managing director Stephen Innes suggests that if no deal is reached and the full 24% tariff is implemented, gross domestic product (GDP) growth could decrease by 0.5 to one percentage point. This could bring the projected 2025 GDP forecast of 3.9% to 4.1% down to around 3% to 3.6%.

Innes cautions that even a midpoint outcome of a 15% tariff would lead to “choppier seas”, with reduced export margins, selective pain in low-margin sectors, and a modest repricing across equity and foreign-exchange markets.

“In contrast, a softer outcome – such as a 10% tariff with strategic carve-outs – would likely result in a more modest 0.2 to 0.4 percentage point drag on GDP, with markets wobbling briefly before finding their footing,” he says.

Malaysia’s GDP may be as much as 1.4 percentage points lower if no deal is struck, according to Caroline Wong, senior country risk analyst for BMI, a Fitch Solutions company.

“In the absence of discernible progress on tariff negotiations, a more likely scenario would be one where Malaysia seeks an extension beyond the 90-day deadline. We have revised our 2025 real GDP growth forecast for Malaysia from 4.7% to 4.2%,” she says.

Additional risks

The outlook could be more complex. Countries like Malaysia may also need to contend with second-order risks in the form of tighter import rules imposed by the United States such as safety and environmental standards, additional certification requirements and slower customs clearance.

The United States could also tighten rules of origin such as raising local content requirements for exports from Malaysia.

“Still, the country’s regional integration through Regional Comprehensive Economic Partnership Agreement and growing importance in China’s supply diversification strategy act as stabilising ballast for Malaysia,” says SPI Asset Management’s Innes.

But RAM Ratings Service Bhd senior economist Woon Khai Jhek says the high tariff levels between the United States and China compared with those they imposed on other countries, give rise to potential trade substitution and demand diversion.

“However, given that some of their steep tariffs have been rolled back, with US tariffs on China at 30% currently from 145% previously, we estimate that the overall diversion gains to Malaysia to be negligible,” Woon adds.

The devil is in the details

Another consideration is how Malaysia’s neighbours will fare. Could Malaysia be disadvantaged if its tariff rates are higher?

“This is likely if other countries negotiate a lower tariff rate than us. Fund flows in the region would then focus on other countries instead of us,” Tradeview Capital CEO Ng Zhu Hann says.

Hann though reckons that the semiconductor sector could see some exemptions, given Malaysia’s role in the global supply chain.

Already, Trump struck a deal with Vietnam this week, agreeing to impose only a 20% tariff on the country, down from 46% previously. But a 40% tariff will be imposed on transshipment from Vietnam into the United States. The deal will see Vietnam dropping all levies on US imports.

In a way, Vietnam’s deal sets the benchmark for Malaysia’s own tariff talks with the United States.

“I would not be surprised if some countries fail to reach a deal that is favourable to the United States, resulting in tariffs higher than the so-called 10% baseline. Vietnam is a good example where they ended up with a 20% tariff but lower than the 46% reciprocal tariff,” says AmBank Group chief economist Firdaos Rosli.

The devil will be in the details. A report by MUFG Bank on the Vietnam-US situation notes that the implications for Vietnam will be determined by how transhipping is defined and whether there will be a stricter determination on the foreign value content of shipments.

This may also mean that when attempting to determine the full impact of US tariffs on Malaysia, all details will matter greatly.