Broadening Malaysia’s trade

MALAYSIA has enjoyed strong economic growth of above 5% for two consecutive years – an impressive rate for a maturing emerging market economy.

Despite facing a reciprocal tariff of 19% imposed by the United States, Malaysia’s trade jumped to a record US$755bil in 2025, defying the external headwinds.

This leads one to wonder: Can the positive momentum be sustained in the Year of the Horse?

During discussions at the recent Forum Ekonomi Malaysia 2026, the bullish mood was palpable, not least because the economy has displayed remarkable resilience, given the uncertainties about global trade.

What became clear during the discussions is that Malaysia has significant opportunities to diversify its trade, both geographically and in terms of products.

Undoubtedly, global trade dynamics have been re-shaped by US tariffs, prompting trading partners to re-think their strategies.

Malaysia is no exception: as an open export-dependent economy, its trade portfolio is well-balanced and not overly dependent on one or two economies.

The data speaks for itself: 15% of Malaysia’s exports go to the United States, 12% to China, 8% to the European Union (EU), and almost 30% to its Asean neighbours.

If Malaysia were to face additional tariffs, it would be easier for Malaysian exporters to switch to alternative markets than for some regional peers.

While the US market is too large to ignore – with only 4% of the global population, US consumers account for 30% of the world’s household spending – this may change in the long term if populous emerging-market economies can weather short-term shocks and unlock long-term potential growth.

Against this backdrop, Malaysia has been strengthening ties with new and traditional partners.

For example, the Malaysia-United Arab Emirates (UAE) Comprehensive Economic Partnership Agreement officially came into force in October 2025.

This marked Malaysia’s first free trade agreement (FTA) with a Middle Eastern country, providing preferential access for Malaysian exports to the UAE.

Like its Asean peers, evolving tariff dynamics have pushed Malaysia to resume negotiations for a comprehensive FTA with the EU, a decade after they were put on hold.

Meanwhile, last October, China and Asean formally signed an upgraded FTA, known as the China-Asean FTA (CAFTA) 3.0, when Malaysia was the chair of the Asean Summit.

While the FTA 1.0 was mostly about tariff reductions, the 3.0 version focuses on aligning rules in areas like digital and green economies, supply chain connectivity, and support for small and medium enterprises.

But diversification goes beyond trading partners: products also matter.

Malaysia is a net energy exporter and, more importantly, plays a significant role in the global electronics supply chain.

In today’s world where artificial intelligence (AI) is a dominant theme, Malaysia has a clear opportunity to strengthen its position as a major tech hub in Asean.

Malaysia’s electrical machinery and electronics sector accounts for 45% of its total exports.

Malaysia, along with neighbouring Singapore, are the only two economies in Asean with semiconductor foundries.

While Malaysia’s energy exports were weak last year, electronics shipments came to the rescue, growing almost 20% year-on-year.

This is no overnight success story.

Decades of consistent foreign direct investment inflows from tech giants going back as far as the 1970s have transformed Malaysia’s electronics landscape, making Penang the “Silicon Valley in the East”.

Since the US-China trade tensions, the country has gained substantial market share across a range of different categories.

Malaysia now has about 7% of the global semiconductor market, led by its strength in processors, amplifiers, integrated circuits (ICs), and the assembly, testing and packaging industry.

But Malaysia’s tech ambitions do not stop there.

Despite holding a significant position in the back-end assembly, Malaysia strives to move to the front-end, climbing up the value chain in areas like IC design, advanced packaging and AI-driven manufacturing.

Proactive initiatives like the establishment of the Johor-Singapore Special Economic Zone can provide the ecosystem for such an ambition to thrive.

This requires one key asset: talent. Malaysia needs 50,000 skilled semiconductor engineers, but the country only produces 5,000 per year.

The race for talent is only set to intensify as many economies in the region are launching their own AI strategies.

How to nurture domestic talents, equip them with the adequate skills, and retain talent are key tasks for Malaysia’s policymakers.

The Year of the Horse is not short of challenges, but, for Malaysia, there are good reasons to believe in its trade potential, if Malaysia plays its cards right.