Malaysia must build an ultra-competitive economy to accept zero tariffs from the US in future — Phar Kim Beng

Malay Mail

24-07-2025

JULY 24 — When Thailand's top trade strategist admitted this week that Bangkok 'couldn't match' Vietnam's zero-tariff proposals to the United States, the alarm bells should have echoed in Putrajaya too. If a country with Thailand's export diversity and established relations with Washington is faltering under President Trump's revived tariff regime, then Malaysia must quickly realise it is no exception.
The harsh truth is this: Malaysia must build an ultra-competitive economy if it hopes not only to survive but to seize opportunities from the zero-tariff expectations now being tabled by Washington.
Without structural reform, we will continue absorbing punitive trade measures that not only damage exports but slow down critical investment into our emerging data and digital economy.
Malaysia currently benefits from a major exemption. Semiconductors and integrated circuits form 64 per cent of our bilateral trade with the United States—and these are presently exempted from the punitive tariffs under the US Section 301 measures.
But that reprieve is fragile. The US is watching not only what we export, but how we manage re-exports and transshipment activities.
If Malaysia is caught—red-handed—as a transshipment centre for third-country goods, particularly from China or sanctioned economies, a severe and punitive tax will kick in immediately. This is no longer theoretical. Washington has already indicated that any breach of trust in rules-of-origin enforcement will result in a full revocation of current privileges.
The implications are chilling. Once that breach occurs, the very sectors we think are protected—our crown jewels in E&E—may be the first to suffer.
Such a blow would not only unravel the semiconductor supply chain centred around Penang, Kulim, and parts of Selangor, but also stall the emerging cross-border data processing infrastructure that is gaining momentum between Johor and Singapore. With Amazon, Microsoft, and Google circling the region for hyperscale data centre hubs, any whiff of trade risk will divert their investments elsewhere—to Batam, Bintan, or even Danang.
Data centre servers and components containing the newest artificial intelligence chips from Nvidia are seen on display at the company's GTC software developer conference in San Jose, California, US, March 19, 2025. — Reuters pic
The precedent is already set. Vietnam managed to negotiate a 20 per cent tariff ceiling because it was seen as compliant, competitive, and cooperative.
Hanoi offered sweeping concessions—near zero tariffs on US imports—because it had already dismantled much of its own tariff walls through a network of 27 FTAs. It simply didn't hurt Vietnam to make a generous offer, because it was structurally ready to do so.
Thailand, by contrast, found itself flat-footed. It could not offer such zero-tariff terms because its internal market remained partially protected. The result? A 36 per cent tariff, among the highest in the region; much as Thailand is frantically trying to negotiate it away.
That same fate, of being slapped with high tariffs, could befall Malaysia unless we act swiftly and strategically, not to be any illegal transhippment centre for external powers with which the US is against. Malaysia cannot be caught in any geopolitical intrigue. Malaysia is a Trading nation time and again. Indeed, always.
What must Malaysia do? First, it must signal serious intent to modernise its economic structure.
That means reviewing the sectors that continue to depend on import protection, whether in agriculture, local manufacturing, or government procurement. We must find politically sustainable ways to open our markets without destabilising livelihoods—but openness must be the direction of travel.
Second, Malaysia must double down on trade diplomacy, not with platitudes but with strategy.
Like Vietnam, we must be willing to propose zero-tariff access to the United States on select US products—non-sensitive, consumer-oriented goods such as processed food, garments, medical equipment, or even educational services.
These are areas where Malaysia does not face domestic vulnerabilities and where targeted liberalisation could win significant goodwill.
Third, and perhaps most crucially, Malaysia must guard its credibility. We must ensure that customs enforcement, certificate-of-origin regimes, and port authorities cannot be manipulated for transshipment activities. The reputation of Malaysia as a trusted trade partner is the last firewall protecting our semiconductor exports—and it is far more valuable than any temporary gain from backdoor shipments.
This also means strengthening enforcement in free trade zones, revisiting loopholes in transloading practices, and ensuring transparency in our supply chain certification. The US Department of Commerce and USTR will not accept vague assurances. They want auditable compliance, and Malaysia must deliver it.
Finally, we must accelerate our shift toward high-productivity sectors. Data infrastructure, AI, and cloud computing—especially in Johor—can be a game changer.
But foreign tech giants will not place their servers or capital in a jurisdiction entangled in tariff penalties. For the Johor-Singapore integrated development plan to succeed, Malaysia must prove it is not only digitally capable but trade-stable and strategically sound.
The coming days will be pivotal. The US is expected to begin enforcing new tariff letters on August 1, and Malaysia's Ministry of Trade and Industry must be prepared with more than polite appeals. We need a firm, forward-leaning proposal that speaks the language of competitiveness, openness, and integrity.
In this new era of weaponised tariffs, Malaysia cannot afford to drift. Either we build an ultra-competitive economy—or risk being treated as a transitory backwater in the global value chain. The clock is ticking, and the world is watching.
* Phar Kim Beng is Professor of Asean Studies and Director of the Institute of Internationalization and Asean Studies (IINTAS).
** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.