Risks remain for exporters even with tariff cut

New Straits Times

4 days ago

KUALA LUMPUR: Malaysia's successful negotiation to reduce the reciprocal tariff imposed by the United States (US) on its exports to 19 per cent from 25 per cent is seen as a strategic step forward, placing the country on equal footing with major Asean peers while preserving key domestic policy priorities.
While the new tariff rate did not eliminate trade hurdles, it marked a meaningful improvement compared to the earlier 25 per cent proposal and underscored Malaysia's ability to defend its sovereign economic direction in the face of international pressure.
Still, economists cautioned that the relief is temporary and layered with risk. With the US being Malaysia's largest export market, accounting for RM198.65 billion in 2024, economic strain, particularly on manufacturers and small and medium enterprises, might intensify if broader reforms stall.
"The tariff may shave off growth, primarily through reduced exports. However, resilient domestic demand such as consumer spending, infrastructure projects and pre-emptive rate cuts by Bank Negara Malaysia (BNM) provide buffers," Centre for Market Education chief executive Alvin Desfiandi told Bernama in an interview.
Alvin said BNM's pre-emptive recent rate cut, which was the first in five years, supported Malaysia's economic growth but risked currency depreciation if US rates stay high.
He noted that further easing might be necessary if growth fell below 4.0 per cent, but any spike in inflation above 3.0 per cent could limit that flexibility.
"Thus, BNM should maintain flexibility for further rate cuts if growth falters, but anchor inflation at 2.0-3.0 per cent," he added.
Meanwhile, Alvin believed Malaysia is entering the period of recalibration from a position of relative strength.
"Malaysia's economy is navigating tariffs from a position of strength, with BNM's gross domestic product (GDP) forecast for 2025 already pricing in moderate disruption. The focus now shifts to industrial upgrades and market diversification to sustain growth beyond 2025," he added.
However, Alvin opined that short-term fallout is difficult to avoid as the 19 per cent tariff would directly impact Malaysia's competitiveness in the US market, especially in key sectors like electronics and semiconductors.
"The 19 per cent tariff will raise costs for US buyers, potentially reducing export volumes. This may create a domino effect that will negatively affect investment sentiment and currency movements," he said.
Alvin said that tariff exposure would be highest in the electronics and semiconductor sectors, squeezing already-tight profit margins for local manufacturers.
He said that Malaysia's reliance on Chinese components further complicated its position under Washington's stricter rules of origin.
"Tariffs will highly expose the electronics and semiconductors industry, squeezing margins for manufacturers," he said.
The risk of tariff stacking, where goods containing Chinese components are penalised under multiple jurisdictions, adds to exporters' cost pressures, potentially eroding Malaysia's competitiveness even without direct involvement in transhipment.
"Since Malaysia's National Semiconductor Strategy (NSS) aims to offset losses by moving into high-value chips and attracting US foreign direct investment (FDI), the government may provide emergency grants for small and medium enterprises (SMEs) to explore new markets," the economist added.
Beyond immediate mitigation, Alvin urged Malaysia to convert tariff pressure into opportunity and highlighted the importance of adopting a "tech-for-market access" strategy, trading supply chain transparency for stable US tariffs on semiconductor inputs.
The economist said that the need to build green industrial alliances with the US in electric vehicle battery and renewable energy sectors is equally important, with Malaysia serving as a strategic Asean gateway.
Moreover, he said Malaysia should also aim to lead on digital rulemaking by co-developing Asean standards in financial technology (fintech) and digital trade with the US.
"The country should trade supply chain transparency for stable US market access in semiconductors, form joint green industrial alliances in electric vehicles and renewables, and take the lead in digital rulemaking through US-Malaysia fintech partnerships," he said.
Alvin noted that this approach may transform tariffs into a catalyst for high-value FDI diversification, with the October Asean Summit offering a critical platform to lock in sectoral bargains.
By conceding tactically on processes such as certifications and monitoring while holding firm on policy sovereignty, he said Malaysia might retain negotiating credibility for future bilateral agreements.
Alvin also cited Malaysia Aviation Group's US$19 billion (US$1 = RM4.27) Boeing aircraft procurement as a symbolic but limited tool for rebalancing trade ties with Washington.
"The Boeing procurement offers moderate deficit relief and symbolic leverage in tariff talks but cannot single-handedly rebalance trade or guarantee future concessions," he added.
Its real value, Alvin said, was in demonstrating diplomatic pragmatism, aligned industrial strategy, and readiness to engage the US without surrendering sovereignty.
Meanwhile, economist Dr Geoffrey Williams welcomed the tariff reduction but warned that it still presented significant risks for Malaysia's trade-dependent economy.
"A potential 10 per cent drop in exports to the US could cost RM20 billion annually. This underlines the urgency for structural reforms and export diversification," he added.
Williams said Malaysia must avoid over-relying on short-term measures or blanket support policies.
"Redirecting fiscal savings to indiscriminate bailouts would be politically and economically unwise," he said, adding that businesses should double down on automation, supply chain resilience, and long-term competitiveness.
Williams added that the current outcome reinforced the need for Malaysia to fully implement its reform blueprints under the 13th Malaysia Plan (13MP).
"It's a reminder that domestic competitiveness must be earned," he said, adding that further negotiations with Washington would be necessary to secure improved tariff terms over time.
Alvin concurred that Malaysia's dual-track strategy, namely balancing critical interdependence with the US while engaging its Regional Comprehensive Economic Partnership (RCEP) and BRICS partners, would define its long-term trajectory.
He added that the 19 per cent tariffs would consolidate ASEAN unity in the short term, with Malaysia's October summit testing whether economic diplomacy could extract US compromises such as semiconductor exemptions.
"However, the longer-term trend is clear: ASEAN will reduce US dependence through RCEP integration and non-Western partnerships. If Trump offers no concessions in October, expect accelerated ASEAN+BRICS cooperation, a tacit admission that the US market is no longer worth sovereignty trade-offs," he said.
Alvin pointed out that, ultimately, the shift to a 19 per cent tariff level marked the end of Malaysia's low-cost FDI model but opened a new window for high-value investment if reforms hold.
"The tariff parity ends Malaysia's low-cost FDI model but accelerates its transition to high-value niches," he added.
With approved investments reaching RM378.5 billion in 2024, both economists agreed that Malaysia has shown resilience and policy clarity.
The challenge now is to lock in long-term investor confidence through the execution of New Industrial Master Plan 2030 (NIMP 2030), supply chain repositioning, and bloc-wide diplomacy.
Since April, Malaysia has been negotiating with Washington to reduce the previous 24 per cent tariff rate.
The Malaysia-US tariff negotiations officially began on May 6 and concluded on July 31, 2025, resulting in a recalibrated 19 per cent tariff rate that now positions Malaysia in alignment with key ASEAN peers such as Thailand and Indonesia. - Bernama