Malaysia: Risk scenarios under Trump's reciprocal tariffs

• Next week (2 Apr) is Trump’s big tariff announcement as the reciprocal tariffs on America’s trading partners will be unveiled. There is caution for Malaysia being among the “dirty 15” countries that will be targeted for trade imbalances. While some countries may receive some breaks from the tariffs pending negotiations, we think that not all tariffs can be negotiated away given its strategic purpose within Trump’s economic agenda. As such, uncertainties are likely to linger post the reciprocal tariff announcement as Trump could expand his tariff list or widen the tariff rates whenever necessary to expedite his reshoring and fair-trade goals through his second presidential term.
   
• Given the risks, we have painted three potential tariff scenarios for Malaysia (tariffs <10%, tariffs between 10%-30%, and tariffs >30%). This is guided by Malaysia’s trade balances and tariff gaps of key export items with the US. We also refer to the tariffs that have been announced thus far, non-tariff barriers and unfair policies that were highlighted by Trump. Our findings suggest that Malaysia’s export sectors like electrical & electronics (E&E), rubber products, furniture, and optical & scientific equipment carry the highest risk of grappling with reciprocal tariffs.
   
• The final tariff outcome and implication will still hinge on the negotiation outcomes between Malaysia and the US, as well as proactive strategies by both Malaysian government and businesses to navigate the trade restrictions. Malaysia continues to emphasize its “centrality stand” in the tariff war, along with plans to expand its trading markets, enhance supply chain resiliency and promote localization. Agility and flexibility in cost structure and business operating models are equally important for firms to sail through the risks.

Which sectors in Malaysia are at risk?

As the reciprocal tariff investigation results are still up in the air, we delved into Malaysia’s trade sectors using the guiding principal stipulated in the America First Trade Policy Memorandum and "Fair And Reciprocal Plan“.

• The America First Trade Policy executive order (link), which was signed by Trump on 20 Jan 2025, initiated a series of trade investigations based on all countries or regions’ trade deficits with the US, trade relations with China, US economic security measures, and US federal authority for trade policy enforcement.
   
• The presidential memorandum introducing "Fair And Reciprocal Plan“ (link) on 13 Feb 2025 is aimed at all countries or regions’ tariffs imposed on US products and also non-tariff barriers and unfair policies such as:

1. Taxes imposed on US businesses, workers and consumers, including valueadded taxes;
2. Subsidies and burdensome regulatory requirements on US businesses operating overseas in other countries;
3. Policies and practices that cause exchange rates to deviate from their market value; and
4. Any other practice that limits market access or any structural impediment to fair competition with the US.

Guided by the above-mentioned criteria coupled with Trump’s tariff announcement thus far and current average import duties of ~20% faced by developing countries under Most Favoured Nation (MFN) treatment, we paint three potential tariff scenarios for Malaysia:

• Optimistic scenario: The US imposes tariffs of less than 10% on targeted sectors or Malaysia’s goods exports to the US. There will be limited or milder retaliatory measures from major economies with room for negotiations, while Malaysia stays outside of the retaliation group. The global economy is on soft landing alongside a strong US economic growth momentum and stable global financial conditions amid volatility. Under this scenario, Malaysia’s export to the US is expected to slow down and the secondary effects are expected to be manageable with limited supply dumping and healthy price competition from regional economies due to economies of scale.
   
• Possible scenario: The US levies most sectors or export goods of Malaysia with a rate of 10%-30%. This also covers the product specific tariffs that have been mentioned on autos, metals, semiconductors, and pharmaceuticals. There are tit-for-tat retaliations from major economies with room for negotiations. Malaysia still holds the stance of neutrality in trade war without retaliatory measures. The global economy is on soft landing but the US economy is set to soften (with a possibility of technical recession at some point). Global financial conditions remain stable amid higher volatility. Under this scenario, Malaysia’s exports to the US dwindle while the secondary effects are significant with increased supply dumping and price competition from regional economies particularly China, affecting domestic businesses to some extent.
   
• Pessimistic scenario: The US imposes more than 30% tariffs on all products imported from Malaysia. There is a full-blown global trade war with limited room for negotiations. Both global and US economy falls into recession while financial contagion effects are felt across the world. Under this scenario, Malaysia’s exports contract along with broad declines in global trade. The secondary effects on domestic sectors are worsened due to strong supply dumping and stiff price competition from around the world.

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Julia Goh
Senior Economist
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Loke Siew Ting
Economist
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