Malaysia: Weighing economic effects from US reciprocal tariffs

• The reciprocal tariffs was finally unveiled on Wed (2 Apr), which brings the US effective tariff rates above 20%, something not seen since 1900’s. The baseline 10% tariff will take effect this Sat (5 Apr) and other reciprocal tariffs on the countries with the highest bilateral trade deficits with the US will take effect next Wed (9 Apr). Goods that are exempted from this reciprocal tariff order include copper, lumber, pharmaceuticals, semiconductors, gold, certain critical minerals, energy and energy products, as well as steel, aluminium, autos and auto parts that already subject to Section 232 tariffs (at 25%). The modification authority provides scope for a higher or lower tariff depending on the actions taken by countries to remedy the trade imbalances.
  
  
• Although the US’ 24% reciprocal tariffs on Malaysian products are within our expectations, stiffer levies were announced on other countries/regions particularly in Asia and major trading partners. Malaysia’s tariff is the second lowest in the region and there is scope for negotiations as Malaysia issued an official statement that it is not considering retaliation. However, the risks of escalation and retaliation by other countries have risen. This would impede global trade, growth, and investments more than previously anticipated though not to the extent of an outright recession just yet.
  
  
• We estimated that the direct impact from US’ reciprocal tariffs on Malaysia and secondary effects from tariffs on major trading partners could subtract 0.7% pts from our baseline forecast. As such, we are lowering our GDP growth projection for Malaysia to 4.0% in 2025 (from 4.7% previously). We imputed a slower gross export projection of 3.8% for Malaysia in 2025 (vs 4.5% previously). The implication on Malaysia’s consumer price inflation is expected to be small with supply-driven factors and potential excess supply dumping activities neutralizing the effects. Given the fluid global conditions and pending details of the fuel subsidy rationalization mechanism, we expect Bank Negara Malaysia (BNM) to maintain the overnight policy rate (OPR) at 3.00% for now.

Inclusion and exclusion of Trump’s reciprocal tariffs on 2 Apr

The reciprocal tariffs was finally unveiled by US President Trump on Wed (2 Apr), which brings the US effective tariff rates above 20%, something not seen since 1900’s. The baseline 10% tariff will take effect this Sat (5 Apr) and other country specific reciprocal tariffs on countries with the highest bilateral trade deficits with the US will take effect next Wed (9 Apr).

Although the US’ 24% reciprocal tariffs on Malaysian products are within our expectations (details in link), stiffer levies were announced on other countries/regions particularly in Asia. The reciprocal tariff on China is 34% (on top of earlier 20% levied, brings total tariff to 54%), European Union (EU, 20%), Japan (24%), South Korea (25%), Taiwan (32%), Indonesia (32%), Thailand (36%), and Vietnam (46%). Full list in appendix below.

Some goods are exempted from these new reciprocal tariffs. They include copper, lumber, pharmaceuticals, semiconductors, gold, certain critical minerals, energy and energy products, as well as steel, aluminium, autos and auto products that already subject to Section 232 tariffs (at 25%). For semiconductor, pharmaceuticals, and lumber, Trump indicated that he will announce the levies on them separately, suggesting that uncertainties remain.

Trump also signed an executive order to eliminate duty-free de minimis treatment for low-value imports from China, effective 2 May. To reduce the risk of transshipment and evasion, all ad valorem rates of duty imposed by this order or any successor orders with respect to articles of China shall apply equally to articles of both the Hong Kong Special Administrative Region and the Macau Special Administrative Region.

For Canada and Mexico, Trump said the existing fentanyl/migration International Emergency Economic Powers Act of 1977 (IEEPA) orders remain in effect and are unaffected by this order. This means USMCA (US-Mexico-Canada Agreement) compliant goods will continue to see a 0% tariff, non-USMCA compliant goods will see a 25% tariff, and non-USMCA compliant energy and potash will have a 10% tariff. In the event the existing fentanyl/migration IEEPA orders are terminated, USMCA compliant goods would continue to receive preferential treatment, while non-USMCA compliant goods would be subject to a 12% reciprocal tariff.

The newly unveiled reciprocal/country-specific tariffs will apply only to the non-US content of a subject article, provided at least 20% of the value of the subject article is US originating. “US content” refers to the value of an article attributable to the components produced entirely, or substantially transformed in, the US.

Still up in the air

Both the 10% baseline and country-specific reciprocal tariffs will remain in effect until the underlying conditions are deemed satisfied, resolved or mitigated. Otherwise, modification of the authority or additional actions will be taken by the US. This will be assessed through:

• The increase or decrease in overall trade deficit of respective economy with the US or non-reciprocal trade arrangements.
• Any retaliation from trading partners against the US.
• Any significant steps by trading partners to remedy non-reciprocal trade arrangements and align sufficiently with the US on economic and national security matters.
• A further deterioration in US manufacturing capacity and output.

Read full article

Julia Goh
Senior Economist
Follow Julia on LinkedIn

Loke Siew Ting
Economist
Follow Siew Ting on LinkedIn