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Productive discussion: Tengku Zafrul (fifth from right) in Washington with United States senior official for the Asia-Pacific Economic Cooperation ambassador Matt Murray (fourth from right) and other Malaysian and US delegates.

MALAYSIA is at a pivotal moment in redefining its economic relationship with the United States, its second-largest foreign investor and export market.

Time is of the essence, and Malaysia must make a tough decision – either to resist US demands or compromise on its “red lines.”

Both options carry significant costs, but rejecting compromise and maintaining the current 25% tariff will have a far greater impact on the Malaysian economy.

Centre for Future Studies chief economist Mohd Yusof Saari forecasts that Malaysia’s exports to the United States will decline sharply from US$43.43bil in 2024 to just US$5bil in 2025, assuming the 25% tariff is implemented for full year 2025.

This would effectively erase Malaysia’s trade surplus with the United States, which stood at RM72.4bil in 2024, and push it into a trade deficit of US$24.46bil.

Mohd Yusof, however, says the actual impact will depend on ongoing negotiations and adjustments by Malaysian exporters.

“This kind of structural pressure puts Malaysia in a position where the economic costs go beyond just numbers: it challenges our export competitiveness, employment and long-term investment attractiveness,” he tells StarBiz 7.

He also forecasts that the decline in exports to the United States will affect around 270,000 jobs in Malaysia in a worst case scenario.

This can, however, be mitigated by government intervention, industry diversification and trade redirection strategies.

Moreover, if the tariff disagreements persist, Mohd Yusof warns, new foreign direct investment inflows, expansions and reinvestments might be delayed or redirected to other countries.

While compromise seems like the best option, it cannot be one-sided, especially if both parties are serious in maintaining healthy long-term relations.

The businessman in President Donald Trump would know this very well.

Malaysia is an important East-West trade route because of its location along the Straits of Malacca and its role as a global semiconductor market player.

As it is, Trump is pressuring Malaysia to make huge trade concessions in exchange for lower tariffs.

He also threatened a 10% extra tariff “pretty soon” on countries that choose to be a part of the so-called “anti-America” BRICS bloc. Malaysia is a partner country of BRICS.

Beyond these developments, it was also reported recently that the United States plans to restrict artificial intelligence (AI) chip shipments from companies like Nvidia to Malaysia and Thailand.

The news came not long after the Wall Street Journal reported that a firm from China trained its AI models in Malaysia at Nvidia-powered data centres.

This is not the first time Malaysia has come in the United States’ radar. American officials have previously spoken about sanctioned Iranian crude oil being transferred ship-to-ship in Malaysian waters.

This, along with Prime Minister Datuk Seri Anwar Ibrahim’s previous calls for de-dollarisation, would have ticked off the American administration.

Understandably, the pressure is huge on Malaysia’s lead tariff negotiator Tengku Datuk Seri Zafrul Abdul Aziz and his team.

The pressure piled further after Trump raised the import tariff on Malaysia from 24% to 25%.

Yin Shao Loong, the deputy director of research at Khazanah Research Institute, notes that the Trump tariffs currently have little impact on semiconductor exports, which is Malaysia’s largest exports to the United States.

Semiconductor tariffs are being discussed in a separate track under Section 232 of the Trade Expansion Act of 1962.

“The 25% tariffs have more effect on exports such as oscilloscopes, restaurant furniture and rubber apparel although each of these represent less than 3% of our total exports to the United States.

“Perhaps, the exporters can consider opening factories there, making money out of the subsidies and tax breaks available in the United States, and bringing the profits back to Malaysia,” says Yin.

At 25%, the rate is still lower than most Asean countries, except Singapore (10%) and Vietnam (20%).

The tariffs on Indonesia (32%) and Thailand (36%) are not very far off than Malaysia’s. The risk is that the tariffs on Thailand and Indonesia could be lowered to below 25% and Malaysia’s rate remains unchanged at 25% or sees little change.

This could make Malaysian firms move their plants to these countries, including Vietnam.

These countries may also appear more attractive to multinational corporations looking to build their base in South-East Asia.

Yin argues that the effects of the Trump tariffs will depend on the final rates assigned to all major trading partners of the United States and the strength of their local ecosystem.

“If Malaysia enjoys lower relative rates, then good. If our rates are equal or higher, our ecosystem and geographical neutrality will still help.”

Using Vietnam as an example which managed to reduce the tariff from 46% to 20%, Yin says Malaysia could hope for the minimum rate of 10%, should negotiations succeed.

“This would minimise the negative impacts of tariff arbitrage on Malaysia.

“It may lead to increased investment interest in Malaysia which could bring with it further problems as it could widen our trade surplus with the United States,” according to him.

The tariff talks between Putrajaya and Washington are not as simple as it looks.

There are many factors at play, namely the tariffs imposed by Malaysia on American products as well as the non-tariff barriers (NTBs)

A report released by the office of the US Trade Representative earlier this year highlights several major issues.

While it says Malaysia’s average Most-Favoured-Nation (MFN) applied tariff rate was only 5.6% in 2023, it mentions that duties for tariff lines where there is significant local production are often higher.

It also says Malaysia maintains very high excise taxes on motor vehicles, ranging from 60% to 105%, based on vehicle type and engine size.

But, beyond these issues, the report speaks in detail about the NTBs imposed by Malaysia.

These include preferential policies for bumiputras, the requirement of local ownership, import restrictions on motor vehicles, government procurement, halal import requirements for meat and inadequate intellectual property protection.

These NTBs are in place for a reason and removal of these rules and regulations often have racial and political implications.

Ong Kian Ming, Taylor’s University adjunct professor and former deputy minister of International Trade and Industry, does not think Malaysia can easily change some of the NTBs such as the process to obtain halal certification for beef producers there.

“In any case, I don’t think that that’s the main focus of the Trump administration.

“They prefer bigger ‘concessions’ such as the ones put on the table by Vietnam rather than NTBs on specific products.”

Yin also says that NTBs are not the reason why a final tariff has yet to be announced in the case of Malaysia. According to him, the United States’ demands “keep changing”.

Ong urges the government to follow Vietnam’s playbook and offer zero tariffs to all US imports and a higher transhipment tariff rate.

“This is possible, especially since our effective tariff rate on US imports is less than 5%,” he says.

The clock is ticking as the 25% import tariff is set for Aug 1. Tengku Zafrul and his team have three more weeks to bring home a favourable outcome.

Source: Tough times call for tough decisions (Saturday, 12 Jul 2025). The Star. Retrieved from https://www.thestar.com.my/business/business-news/2025/07/12/tough-times-call-for-tough-decisions

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Tough times call for tough decisions

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