Tariff cut offers some relief but not without trade-offs

New Straits Times

3 days ago

KUALA LUMPUR: Malaysia's successful push to reduce punitive United States (US) tariffs from 25 to 19 per cent offers partial relief to exporters and calms fears of a steeper economic fallout.
But the reprieve, economists say, is no cause for celebration, as it is "modest at best", and likely came in exchange for Malaysia holding the line on sensitive domestic policies.
COST REMAINS HIGH
Economist Dr Geoffrey Williams said the revised tariff, although pitched as a win, continues to impose a heavy cost.
"It just puts Malaysia in line with Indonesia and the Philippines and only marginally below Vietnam. Singapore has no reciprocal tariffs, so is way ahead of other Asean countries," he told Business Times.
Williams estimated that a 10 per cent reduction in Malaysian exports to the US, the world's largest consumer market, could cost the economy RM20 billion or RM670 per person.
"This is the cost of protecting Malaysian markets with non-tariff barriers and Bumiputera preference schemes," he added.
POLICY RED LINE
Investment, Trade and Industry Minister Datuk Seri Tengku Zafrul Abdul Aziz said Malaysia stood firm during negotiations by drawing a "red line" on domestic economic policies.
He said the 19 per cent tariff rate was achieved without compromising the nation's sovereign right to implement key policies to support socio-economic stability and growth.
Williams described these trade-offs as "a huge cost" to maintaining what he called Malaysia's protectionist policies.
"If the 19 per cent tariff is due to refusal to remove barriers, cut Bumiputera preferences and improve trade access, then there is a huge cost to maintaining these Malaysian protectionist policies."
GEOPOLITICAL RECALIBRATION
Center for Market Education chief executive Dr Carmelo Ferlito said the US tariff regime should be seen as part of a broader geopolitical recalibration.
He said it had become clear early on that US President Donald Trump was not aiming for high tariffs per se, but rather to compel various players to come to the negotiating table and secure broader advantages for the US.
"And of course, re-affirming that the US is the biggest consumer in the world and it's important not to get out of their influence area."
While short-term impacts may take time to materialise, Ferlito pointed to deeper structural consequences.
"Tariffs do not directly translate into higher prices. But the medium-run outcome will be fewer occasions for trade, fewer products in the market and potentially job losses."
He urged Malaysia to strengthen its structural competitiveness instead of relying on reactive government support.
"The only useful government support comes from regulation that makes business easier, limiting compliance and administrative duties and slashing anything that hinders competitiveness."
CAUTIOUS OPTIMISM
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the tariff reduction signals Washington's openness to negotiation.
"As a result of recent discussions, the previously imposed retaliatory tariffs of 25 per cent have now been reduced to 19 per cent. Consequently, the negative impact on Malaysia's economy is expected to be slightly mitigated," he said.
Even so, Afzanizam noted that external headwinds remain a concern. Bank Negara Malaysia has revised its gross domestic product (GDP) growth forecast for 2025 to a more cautious range of 4.0 to 4.8 per cent, down from an earlier projection of 4.5 to 5.5 per cent.
The revised outlook was announced ahead of the 13th Malaysia Plan (13MP), which sets an annual growth target of 4.5 to 5.5 per cent between 2026 and 2030.
Meanwhile, CIMB Treasury and Markets Research and Hong Leong Investment Bank (HLIB) viewed the tariff outcome as a mixed but ultimately strategic result for Malaysia.
STRATEGIC COMPROMISE
While CIMB Research noted that Malaysia stood firm on protecting key domestic policies, which led to a mid-tier 19 per cent rate, it also highlighted that the country still lags behind Singapore, which remains exempt.
HLIB, meanwhile, described the reduction as broadly positive, saying it enhances Malaysia's competitiveness in attracting foreign investment and reinforces its role in global supply chain diversification.
STAYING RESILIENT
As Malaysia begins implementing the 13MP, which includes RM611 billion in total planned funding and RM430 billion in development expenditure, economists agree that long-term strategies to enhance resilience will be critical.
Afzanizam said the country must invest in productivity and forge new global partnerships, particularly with Europe, the BRICS bloc and Asean neighbours.
"These measures will reinforce investor and business confidence, underpinned by pragmatic policies and the government's proactive response to emerging challenges," he said.
Still, external risks persist. Afzanizam said the 19 per cent US tariff could weaken consumer purchasing power in the world's largest economy, potentially dragging on global demand and growth.
Williams, meanwhile, said the timing of the announcement could not have been worse.
"This will certainly take the shine off the RMK13 launch on Friday and will be the immediate focus of concern," he said.