In a bold move that has sent ripples through global trade, the United States has imposed a 25 per cent tariff on Malaysian exports, escalating an already tense trade environment.

This latest tariff, announced by U.S. President Donald Trump, affects a wide range of Malaysian goods and has raised serious concerns about the economic impact on the Southeast Asian nation.

As Malaysia grapples with this challenge, the question arises: how will the country respond to safeguard its economy and maintain its crucial trade relationship with the US?

The tariff hike, slightly higher than initially indicated, targets Malaysian exports at a time when the manufacturing sector is already under significant pressure. Malaysia’s manufacturing industry, which contributed about 23 per cent to the nation’s GDP in 2023, stands to suffer considerable setbacks.

Key sectors such as electronics, machinery, and rubber goods which are the major export earners, face the brunt of these tariffs. Analysts forecast a potential reduction in Malaysia’s economic growth rate from 5.0 per cent to as low as 4.0 per cent if trade tensions worsen, with the tariff potentially shaving 0.4 per cent off GDP growth.

Absorb part of tariff cost

The immediate impact is clear. Malaysian exporters may be forced to absorb part of the tariff cost to remain competitive, squeezing profit margins.

Furthermore, countries affected by similar tariffs might redirect their goods to Malaysia, increasing competition and potentially flooding the local market with cheaper imports. This scenario threatens to destabilise domestic industries and could lead to job losses and reduced investor confidence.

Malaysia’s government has responded with a measured yet proactive approach. Prime Minister Datuk Seri Anwar Ibrahim has emphasised the importance of conducting a comprehensive impact assessment to understand which sectors are most vulnerable.

The government plans to convene a meeting of ASEAN economic ministers to coordinate a regional response, recognising that unilateral action may be less effective against the backdrop of a complex geopolitical trade landscape.

Importantly, Malaysia has rejected the notion of retaliation, instead opting for engagement and negotiation. The Ministry of Investment, Trade and Industry has reiterated its commitment to pursuing a balanced, mutually beneficial, and comprehensive trade agreement with the United States. This approach reflects Malaysia’s recognition of the United States as its third-largest trading partner, accounting for over 11 per cent of total trade, and the need to preserve this vital economic link.

Bolster long-term economic resilience

Experts suggest that Malaysia must accelerate key economic reforms to bolster long-term resilience. This includes diversifying export markets to reduce dependence on the United States, enhancing domestic productivity, and supporting industries through targeted subsidies or tax relief to cushion the tariff’s effects.

The government is also urged to avoid policies that could increase operational costs for manufacturers, such as raising taxes or electricity tariffs, which would exacerbate the financial strain on exporters.

The path ahead will require careful diplomacy and strategic economic planning. Malaysia’s trade officials are actively engaging with their U.S. counterparts to clarify tariff scopes and seek concessions. Meanwhile, the government is running simulations and impact studies to prepare effective support measures for affected industries.

The broader context of this tariff imposition is part of a wider U.S. strategy to leverage trade tariffs as a bargaining chip to push for concessions from multiple countries.

Malaysia, along with other nations like Japan, South Korea and Thailand, faces the challenge of responding individually in a fragmented global trade environment.

Experts note that despite ASEAN’s collective potential, the diverse economic profiles and interests of member states make a unified front difficult, leaving Malaysia to navigate these waters largely on its own.

Above all, while the U.S. tariffs present a significant challenge, Malaysia’s response so far has been pragmatic and forward-looking. By focusing on dialogue, regional cooperation, and economic reform, Malaysia aims to mitigate the immediate impacts and strengthen its economic foundations for the future.

The resilience of Malaysian industries, combined with government support and strategic diplomacy, will be crucial in weathering this trade storm and securing the nation’s economic well-being in an increasingly protectionist world.

-- BERNAMA

Assoc Prof Dr Khairunneezam Mohd Noor is Senior Lecturer, Da'wah and Islamic Management Programme, at the Faculty of Leadership and Management, Universiti Sains Islam Malaysia.