19% or 25%, it’s still challenging

ANY tariff lower than the 25% announced on July 7 is a welcome development, but at 19%, it will still pose significant challenges for the economy and export-dependent industries.

The impact will extend across the supply chain, particularly affecting small and medium enterprises.

Regardless of the tariff level, losses and reduced profits are inevitable.

The stakes are high, as the United States has been Malaysia’s third-largest trading partner since 2015.

Both exports to the United States and imports from the country to Malaysia have continued to grow in the first half of this year (1H25), as American businesses stockpile inventories.

Halal certification, government procurement and restrictions on foreign shareholding of telecommunications and banking services have been major stumbling blocks to a free trade agreement with the United States in the past.

US President Donald Trump views the supply of rare earths as a national security issue crucial to technology leadership, with Malaysia’s rare earth mostly shipped to China.

Where does the 19% tariff rate put Malaysia in the global supply chain and among Asean economies?

Vietnam, heavily reliant on the United States market for exports, has been imposed a 20% tariff rate.

For Cambodia, Indonesia, the Philippines and Thailand, it’s 19%, similar to Malaysia. Singapore has a baseline tariff rate of 10%.

How will it impact Malaysia’s growth corridors, especially the Johor-Singapore Special Economic Zone where lower costs, plentiful land and developed infrastructure are key strengths?

Will they continue to be so with Malaysia’ tariff almost double that of Singapore’s?

These broad frameworks are not final agreements but rather an outline that would require further negotiation and clarification over the coming months or even years.

Despite the immediate imposition of tariffs, there is a risk that the United States may demand additional concessions, given Trump’s unpredictable trade policies.

Any finalised trade agreement will also need to be ratified by US Congress.

Additionally, transshipments and sectoral tariffs remain potential challenges.

The United States has a broad interpretation of transshipments, imposing rates such as 40% on Vietnam and 19% on Indonesia within Asean.

A sectoral tariff on semiconductors could pose significant difficulties for Malaysia’s electrical and electronics industries to manage effectively.

Malaysia’s overall trade with the United States jumped 32.6% to RM186.62bil in the 1H25 compared to 1H24. Exports grew by 28% to RM111.59bil on shipments of electrical and electronics (E&E) products, processed food as well as machinery, equipment and parts.

US imports to Malaysia surged by 40% to RM75.03bil.

In 2024, overall trade with the United States expanded by 30% to RM324.91bil, with exports rising 23.2% to RM198.65bil and imports leaping 42.1% to RM126.26bil.

In 2024, overall trade between the United States and Malaysia comprised 11.3% of Malaysia’s total trade of RM2.88 trillion.

It was a rebound from 2023, when overall trade declined by 6.5% to RM250.25bil in comparison to 2022.

From the trade breakdown, E&E products are the most sensitive to tariffs.

Exports of E&E products and machinery, equipment and parts together totalled RM366.14bil in 1H25 or 31% of total exports while for the whole of last year, it totalled RM670.22bil or 55.54% of total exports.

On the supply side, imports of processed food comprised nearly RM15bil in 1H25 and just over RM32bil for the whole of last year.

This is important to note because besides pharmaceutical products that have to go through the halal certification process, the United States is also likely to push for more agriculture and food products to be shipped to Malaysia.

There are still legal challenges facing the Trump administration, particularly regarding its authority to impose tariffs under the International Emergency Economic Powers Act.

Despite recent favourable decisions, a 6-3 Republican majority in the Supreme Court is not guaranteed.

While the announcement of the tariff rates provides some clarity, the unpredictable nature of the current administration suggests that global trade could face further instability.