PETALING JAYA: China’s response to the final tariff rate imposed by the United States could have a profound impact on the Malaysian economy.
With the outcome of tariff talks between the two countries now delayed for another three months, the fear now, according to Socio-Economic Research Centre (SERC) executive director Lee Heng Guie, is that Beijing will take aggressive measures to maintain its market share in the United States.
This may entail price dumping and undercutting, which would put pressure on Malaysia’s exports.
“If China ends up with a tariff structure similar to countries like Malaysia, Vietnam, Thailand and Indonesia – around 19% to 20% – the competition will be even tougher for Malaysia.
“Even if the tariff imposed by the United States on China is higher, it also depends on how high, because even before tariffs, China has been very competitive in most markets,” Lee said during SERC’s Malaysia Quarterly Economy Tracker (April to June) 2025 media briefing yesterday titled “The Future Ahead: Malaysia in a Changing Landscape”.
Lee noted that Chinese exporters have economies of scale and government support in the form of subsidies, export rebates and other incentives. “This allows them to undercut prices in a bid to gain more market share in the United States,” he said.
Lee added China could also engage in price wars to sell its products in other markets to help offset its lower sales in the US market, should it end up securing a relatively higher tariff from Washington.
China’s economy still remains challenging looking ahead and is projected to slow further in the second half of 2025 (2H25), Lee said, as the trade tariff impact continues and weakening consumer sentiment amid lingering risks in the property sector.
On Monday, the Trump administration extended its tariff truce with China for another 90 days to Nov 10. This move keeps US tariffs on Chinese imports at 30%, while Chinese duties on US goods remain at 10%.
Without the extension, Chinese imports into the United States would have faced tariffs of 145%, while US goods entering China would have been hit with a 125% rate. These tariffs were set to resume on Tuesday.
SPI Asset Management managing director Stephen Innes said the tariff truce “isn’t peace, it’s halftime”.
“The scoreboard hasn’t changed much, but both sides are in the locker room drawing up plays for the next quarter. The sledgehammer hasn’t been put back in the closet – it’s just leaning against the wall, waiting for November,” he said in a statement.
Lee stressed that halting trade with the United States is not feasible and reduced exports to this key market would directly impact Malaysia’s overall export performance.
This is given that the United States is Malaysia’s third-largest trading partner, accounting for 11.3% of the country’s total trade in 2024. It is also Malaysia’s second-largest export destination and one of the top-five sources of foreign direct investment (FDI).
“The tariff on local furniture exports, for instance, was 0% previously, but now it has been raised to 19%. Manufacturers may not be able to adjust immediately and this will affect their profit margins and overall profitability.
“However, they have to find ways to mitigate the impact by improving their costs and efficiency,” he said.
Lee said the country’s exports are expected to remain weak in 2H25 and 2026 due to the impact of the US sweeping tariffs on the global economy and trade flows. Malaysia’s export performance has been on the decline in the last two months.
“Exports remain in cautious territory, with a growth of 3.8% in the first six months of the year. For the full year, exports are expected to decline significantly and could even register a slight contraction.
“Exports’ ‘front-loading’ effects are expected to fade in 2H25,” he said.
On the whole, Lee said Malaysia is expected to sustain “moderate growth” in 2H25 and 2026, in line with the global trend. This is underpinned by private consumption and investment amid weak exports due to the impact of the US tariffs on exports.
“We remain positive on private investment with ongoing initiatives like the New Industrial Master Plan 2030, National Energy Transition Roadmap, National Semiconductor Strategy and the 13th Malaysia Plan (2026-2030).
“There have been a lot of approved investments over the past two to three years and this should help support private investment activity, going forward,” he said.
In 2024, Malaysia recorded RM379bil of approved investments, comprising RM170.4bil in foreign investments and RM208.1bil in domestic investments.
In the first quarter of 2025, total approved investments stood at RM90bil, of which RM60.4bil were foreign and RM29.4bil were domestic investments.
On whether he expects FDI to slow this year, Lee described the outlook as a “cautious investment approach” with a “wait-and-see” stance, amid near-term policy and trade-related uncertainties.
However, he believes Malaysia’s third investment upcycle – characterised by high-quality investments which began in mid-2023 – remained intact and would not “just fizzle out like that”.
“I am hopeful that it will be much more stable by 2H26,” Lee said.
In the meantime, he stressed that it was important for Malaysia to enhance its tax competitiveness and ease of doing business to remain relevant as an investment destination amid current trade uncertainties.
In this regard, Lee calls for measures like cutting the corporate tax rate from 24% to 22% and increasing the threshold for small and medium enterprises enjoying a preferential tax rate of 15% for the first RM2mil chargeable income.
SERC projects Malaysia’s gross domestic product growth to slow to 4% in both 2025 and 2026. It expects inflation to remain in the range of 1.5% to 1.8% for the year, and between 2% to 2.5% in 2026.
According to Lee, the growth outlook overall remains tilted to the downside, stemming mainly from sluggish global trade, subdued investor confidence and disappointing commodity output.
“Persistent external uncertainties along with weak implementation of the various masterplans could weigh on domestic demand, especially investment,” he said.
Meanwhile, Lee noted the ringgit’s outlook remains positive, backed by strong economic fundamentals and economic resilience – diversified economic sectors and export markets, sustaining investment flows and services growth.
“Nevertheless, negative risks for the ringgit are global growth prospects, the US trade policy, the Federal Reserve’s (Fed) interest rate path and the Chinese yuan. We expect the ringgit to end 2025 at RM4.20 against the US dollar,” he said.
As for the outlook on global growth, Lee said a continued slowdown in 2H25 and 2026 is expected due to the impact of ongoing tariffs and policy uncertainty, as well as geopolitical risks.
The US economy is expected to see a near-term slowdown as consumers’ front-loading purchase wanes and consumer inflation ticks up.
“Nevertheless, monetary easing, tax cuts, deregulation and strong tech investments are expected to cushion a severe economic slowdown. Higher consumer inflation risk could limit the Fed’s rate easing.
“We expect the Fed to pivot toward rate cuts in 2H25 and 2026 to support the economy, although the expected higher inflation may slow down the rate cut,” he said.
