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Tariff strategy shift crucial
Jul 09, 2025
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7 min read
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PETALING JAYA: With just over three weeks until the Aug 1 deadline to negotiate with the United States on reciprocal tariffs, economists say Malaysia must urgently rethink its strategy to secure a better deal and avoid a long-term trade fallout.
They warn of a looming demand shock from the unilateral tariffs and urge policymakers to reassess their approach – including boosting imports from the United States and addressing non-tariff barriers – to secure a more favourable tariff rate and keep the country competitive.
The United States tariff on Malaysia import products was increased slightly to 25% – up from 24% – effective next month, but remains more favourable than those for Thailand (36%) and Indonesia (32%).
Vietnam, however, now enjoys a competitive edge with its rate slashed to 20%, down from 46%, following a revision announced last week – a reversal from when Malaysia previously held a better position.
Sunway University economics professor and government adviser Yeah Kim Leng said the tariffs, aimed at reducing the US trade deficit, could trigger wider economic effects.
“From a global perspective, these tariffs will create a supply shock in the United States by raising the cost of imported goods – essentially a price shock to the country’s economy,” he said.
“For the rest of the world, including Malaysia, it translates into a demand shock. As prices go up in the United States, consumption is likely to fall – and that means reduced demand for exports from affected countries.”
He said Malaysian exporters, particularly in US-exposed sectors, could see reduced orders as American buyers cut back.
“The key question now is whether market share will shift due to relative price changes stemming from the varying tariff levels, with countries facing lower tariffs potentially gaining a competitive edge,” said Yeah.
Still, he noted that since most countries face similarly high tariffs – in the 20% to 30% range – the overall impact may be “muted” unless the differences are significant.
Yesterday, US President Donald Trump signed an executive order extending the tariff implementation to Aug 1, from July 9 – leaving room for further negotiations.
The Investment, Trade and Industry Ministry (Miti) said it would continue engaging with its US counterparts for a “balanced, mutually beneficial, and comprehensive trade agreement”.
Yeah said Malaysia could strengthen its position by narrowing its trade imbalance with the US, which may be smaller than perceived.
“Our trade surplus with the United States may be overstated if services are considered,” he said.
To rebalance trade in goods, he said Malaysia could increase imports from the United States – particularly high-end tech products and machinery that support industrial development.
Yeah also urged Malaysia to resolve longstanding non-tariff issues raised by US trade officials.
Meanwhile, Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said sectors likely to be affected include furniture, solar panels, machinery and equipment, plastics and rubber.
While he expects continued engagement by the government, he said regulatory concerns may need review.
“Perhaps issues surrounding the halal certification would need to be re-examined as the US government raised concerns in their March 31 report,” he said.
That report also flagged other barriers, including vehicle import restrictions, limits on foreign ownership in certain sectors, high excise taxes and restrictive procurement rules.
Hong Leong Investment Bank (HLIB) Research said the 25% rate “is less favourable than anticipated” but appears to be a negotiation tactic.
“We interpret the latest letter not as an escalation, but an extension of the negotiation window beyond the July 9 deadline,” it said.
HLIB Research estimated Malaysia’s trade exposure to the United States at 7.2% of gross domestic product (GDP).
It said the new tariff could drag GDP by 0.5 to 1.5 percentage points, depending on demand elasticity.
“However, given the limited time frame for the implementation of new tariffs, elasticity may be dampened due to fewer available substitutes, which could moderate the initial impact,” it said.
HLIB Research has maintained its GDP projection at 4% for now, after revising it down from 4.9% following the April 2 “Liberation Day” announcement.
From a market view, the research house sees the sharp correction as a buying opportunity, especially for high-beta stocks, citing ample sidelined liquidity.
It retained its end-2025 FBM KLCI target at 1,640 points.
Yesterday, the index tracking the 30 largest companies by full market capitalisation on Bursa Malaysia’s Main Market closed 7.4 points, or 0.48%, lower at 1,530.14 points.
Kenanga Research said Malaysia remains relatively competitive compared to Thailand and Indonesia, but Vietnam’s 20% rate gives it an edge.
It warned that exporters may face margin pressure if they absorb tariff costs, but said Malaysian tech firms show better margin buffers, with 31% of firms posting earnings before interest, tax, depreciation and amortisation margins above 20%, compared to 12% in Vietnam.
“On the whole, the United States does still leave some leeway as it is expected that subject to elimination of tariff, non-tariff, policies and trade barriers, these tariffs will still be modified, and thus we won’t discount the fact that there could be still further changes in this space.”
A clause in the United States letter to Malaysia offers a potential workaround - encouraging Malaysian companies to set up production in the country to avoid tariffs, with fast-track approvals and potential incentives.
Yeah, however, said relocation is not a simple decision.
“It comes down to cost,” he said.
He noted most firms would find US manufacturing expensive, though case-by-case options exist.
He cited Supermax Corp Bhd’s glove plant in the United States as one example.
“Industries with high value-add or strategic US importance may find it viable. But it must be a hard-nosed business decision,” he said.
He said Malaysian electrical and electronics (E&E) firms already serving US clients could consider it.
“Furniture is less likely because it’s labour and capital-intensive with lower margins,” he said.
“Some high-end E&E firms might benefit if they can tap into incentives and stay competitive.”
Still, he warned that policy unpredictability may delay decisions.
“The risk of U-turns is real. Many will wait and see till there is clarity.”
The United States is Malaysia’s second-largest trading partner and top export destination.
For the first five months up till May 2025, total trade rose 37.5% year-on-year to RM159.3bil, with exports up 33.6% to RM95.32bil and imports up 43.8% to RM63.98bil.
Separately, the Federation of Malaysian Manufacturing (FMM) called the 25% tariff “deeply concerning,” warning of severe impacts on the manufacturing sector.
Representing over 13,000 companies, FMM said exporters were already struggling under a 10% baseline tariff.
It said the new hike would erode margins, disrupt shipments and hurt rubber, textiles, furniture and component sectors.
While semiconductors are exempt, the broader supply chain remains exposed, it added.
The group also flagged Malaysia’s worsening position compared to regional peers, noting that Vietnam had secured a reduced 20% rate while countries like Singapore, Brunei and the Philippines were not addressed in the latest round.
“These disparities risk diverting US sourcing to lower tariff alternatives and eroding Malaysia’s market share,” FMM said, urging the government to intensify diplomatic efforts for a deferral or exemption and to roll out immediate support measures for affected industries.
“Malaysia’s case must be urgently elevated at the highest levels of US policymaking,” FMM said.
At the same time, it called for targeted relief, stronger export promotion and fast-tracked reforms to protect jobs, maintain investor confidence and safeguard Malaysia’s manufacturing base.
Source: Tariff strategy shift crucial (Wednesday, 09 Jul 2025). The Star. Retrieved from https://www.thestar.com.my/business/business-news/2025/07/09/tariff-strategy-shift-crucial
Disclaimer
The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile. The information contained in this report is prepared from data believed to be correct and reliable at the time of issuance of this report. While every effort is made to ensure the information is up-to-date and correct, Bond and Sukuk Information Platform Sdn Bhd (“the Company”) does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information contained in this report and accordingly, neither the Company nor any of its affiliates nor its related persons shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.
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