The clock is ticking, the pressure is on

The Star

17-07-2025

PETALING JAYA: Indonesia's new US tariff deal piles fresh pressure on Malaysia, which now risks being the region's highest-tariffed exporter to the world's largest market.
Indonesia joins Vietnam in cutting better deals with Washington in the latest development of the tariff saga.
Goods entering the United States from Indonesia are now subjected to a 19% tariff – down from the previously threatened 32% in April.
Vietnam managed to slash its tariff from 46% to 20%, while the Philippines will see a higher rate of 20%, from 17% originally, but still lower than Malaysia's 25%.
Meanwhile, Singapore and Thailand are still negotiating with the United States.
A 10% tariff is currently imposed on Singapore.
Thailand, which was slapped with a 36% rate, has recently submitted a fresh proposal to cut levies on many US imports to zero.
For India, reports suggest the United States is working toward an interim trade deal with the country that may reduce proposed tariffs to below 20%. The new tariffs are due to kick in on Aug 1.
While this means there is still room for further negotiations with the United States, the fact remains that Malaysia is staring at a relatively steeper 25% tariffs among its neighbours.
SPI Asset Management managing director Stephen Innes said this situation should create urgency for Malaysia in its negotiations with Donald Trump's administration, noting that the country risks 'becoming collateral in a region that is rapidly aligning itself for tariff relief'.
Innes cautioned that should the tariff remain unchanged, Malaysia's long-standing role as a regional manufacturing hub - especially in high-value sectors like electronics and precision engineering could be undercut as US-oriented foreign direct investment (FDI) toward 'more tariff-friendly neighbours'.
'If Malaysia ends up with the highest US tariffs in the region, the knock-on effects could be significant. From a trade perspective, Malaysian exports will become less competitive.
'However, the more serious concern is FDI,' he told StarBiz, adding that foreign investors assessing South-East Asia – especially under China+1 strategies – will factor in tariff burdens.
Innes noted the redirection of new manufacturing investment has already played out in the past, with Vietnam emerging as a major winner due to faster trade deals and a more responsive policy posture.
Should a deal fail to materialise, a 25% tariff could slash Malaysia's exports by RM20bil and shave 1% off gross domestic product growth, said economist Geoffrey Williams.
'Malaysia's best strategy is to cut all tariffs on US goods and work to reduce non-tariff barriers as much as possible,' he said.
In return for a more favourable tariff deal, Indonesia agreed to buy US$15bil worth of US energy, US$4.5bil of American agricultural products and 50 Boeing jets. American exports to Indonesia will also be free of tariffs and non-tariff barriers.
Sunway University economics professor Dr Yeah Kim Leng suggested Malaysia can likewise offer the same conditions (no tariffs on imports from the United States) noting that the country's import tariffs on US goods are already low – at around 6.1%.
Yeah, however, said the more difficult demands for Malaysia to meet pertains to government procurement, halal requirements, investment in the United States and other non-tariff barriers.
'Given that Malaysia's exports to the United States are broadly similar to that of Indonesia's exports, the latter's lower tariffs will create a price disadvantage to Malaysian exporters, rendering Indonesia's exports more competitive in US markets,' he said.
Moreover, Yeah also stated Malaysia's potential loss in market share in the United States market is likely to lower trade, investment and manufacturing activities unless the loss is offset by increased exports to other markets.
Even so, the United States remains the single largest consumer market in the world, in terms of purchasing power and demand.
On this note, Innes pointed out mitigation measures like market diversification -such as boosting intra-Asean trade – still cannot be 'a substitute for US market access'.
'Malaysia can try to redirect exports to Asean, for instance, but the scale and absorptive capacity simply cannot compare. It is a case of selling more into a pond when you have just been priced out of the ocean,' he said.
Additionally, market diversification is a strategy that every other country is chasing as well.
Meanwhile, some experts are not as bearish about the impact of Malaysia's higher tariff, arguing that its strong fundamentals will help cushion the blow in the long run.
Although iFAST Capital research analyst Kevin Khaw Khai Sheng acknowledged that having a relatively higher tariff may lead to a dip in trade, capital flows and manufacturing competitiveness, he opined that these effects will likely be seen only in the short term of up to one year.
'In the longer term, Malaysia's role as a manufacturing base will remain intact, given the country's political stability, multilingual workforce and geographic advantages, which make shifting supply chains away from Malaysia not an easy feat despite short-term tariff pressures,' he said.
Khaw said countries like Vietnam and Indonesia gave up a lot of ground by agreeing to grant full market access for US goods – a move that will ultimately hurt their domestic economies.
He noted that Malaysia is already working on win-win solutions with the United States, as seen in the latest measure announced by the Investment, Trade and Industry Ministry (Miti) this week in tightening the rules related to US-origin chips.
'A win-win solution does not mean we have to open up our market entirely.
'Miti's latest measures on US sensitive technologies can also help us reach an understanding with the country without hurting our domestic economy,' Khaw said.
Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Dr Mohd Afzanizam Abdul Rashid said Malaysia needs to perform its due diligence before deciding on liberalising the local economic sector.
'We need to be clear on our existing industrial policies especially when there is an element of protectionism. The last thing that we need is to succumb to the peer pressure when it comes to US tariffs,' he said.
In the meantime, Universiti Tunku Abdul Rahman economics professor Wong Chin Yoong noted that when Indonesia imposes zero tariffs to US goods, it has to grant zero tariffs to Malaysian exports into Indonesia as well, based on the most favoured nation rule.
'Malaysia still benefits as long as the World Trade Organisation (WTO) rules are upheld. Vietnam and the country's other trading partners are members of the WTO.
'To some extent, this helps mitigate the adverse impact on domestic exports to the United States by keeping other markets open for our goods,' he said.
For now, Innes said Malaysia should push for exemptions in sectors where the country offers clear value - semiconductors, green tech, palm derivatives —through targeted bilateral talks.
'Domestically, Malaysia cannot just rely on legacy advantages; it needs to double down on investor incentives, streamline regulations, and upskill labour to keep its edge,' he said.