Preparing Malaysia’s Toolkit for Trump Tariff Tumult
Lee Hwok-Aun
As trade negotiations with the US continue, Malaysia needs to trot out relief measures and pro-growth measures to mitigate the impact of Trump’s Liberation Day tariffs.
Malaysia made decent progress in the first 30 days of US President Donald Trump’s 90-day pause on his “Liberation Day” tariffs. The country’s delegation to Washington, led by Minister of Investment, Trade, and Industry, Tengku Zafrul Aziz, met with US officials on 24 April to exchange viewpoints. Apart from tariff-exempted semiconductors and pharmaceutical products, Malaysia’s exports to the US bear the blanket 10 per cent levy but the spectre of a maximum 24 per cent hangs until both parties reach an agreement. The economy may well avert a steep descent but Malaysia should prepare its toolkit to face possible fallouts.
Malaysian Prime Minister Anwar Ibrahim convened parliament on 5 May for a special session on the tariffs. His speech to the Dewan Rakyat underscored the priority of negotiating with the Trump administration. Later that day, Zafrul conveyed the White House’s chief contentions: the trade imbalance, US technology security, Malaysian investment in the US, transhipment of US-bound goods through Malaysia, and non-tariff barriers (NTBs) such as halal certification, foreign ownership limits, and bumiputera equity requirements. The specifics of the negotiations remain fluid or embargoed by non-disclosure agreements but Malaysia will assuredly address these sticking points, perhaps padded with imports of American products such as Boeing aircraft.
Global economic uncertainties require governments to secure the people’s trust. While the deal-making commences, the Anwar administration is laudably reporting on progress while keeping faith in “domestic economic resilience”.
Anwar’s speech emphasised the central oversight role of the National Geoeconomic Command Centre, and forthcoming efforts to buttress exporters, especially small and medium enterprises (SMEs), through RM1.5 billion (US$349 million) allocations for credit guarantees and development finance. The assurance of the highest-level coordination and commitment of new resources to support the impacted sectors should allay anxieties, but more details will boost confidence.
Anwar also committed to accelerating the pursuit of regional cooperation and new markets, most saliently, the ASEAN Power Grid, Johor-Singapore Special Economic Zone, infrastructure along the Malaysia-Indonesia border in Borneo, and engagements with the European Union, South Korea, Japan, and the Gulf Cooperation Council. Malaysia has previously leveraged exports to buffer economic shocks. The last two recessions, triggered by the Global Financial Crisis (GFC) and the Covid-19 pandemic, saw burgeoning goods trade surpluses. Amid the GFC, Malaysia generated surpluses of RM129 billion in 2007 and RM172 billion in 2008. During the pandemic-induced downturn, surpluses amounted to RM137 billion in 2020 and RM178 billion in 2021.
This time round, however, Malaysia would find it harder to export itself out of trouble. The current brewing crisis stems from the US barricading its borders, causing multiple countries to seek alternative markets. These conditions preclude an export surge as a swiftly deployable remedy. Nonetheless, trade and investment agreements should be pursued with resolve, emphasising mutual gains over trade surpluses.
Some domestic ramparts have been raised. Anwar asserted that his administration will not compromise on bumiputera policy, protection of strategic sectors, and vendor development. These matters are too sacrosanct to be conceded, although Malaysia could perhaps make tactful, ad hoc exceptions. Anwar’s position helped pre-empt attacks from the Perikatan Nasional opposition for not defending Malay and national interests.
Of course, parliamentary debate generated alternative views. Opposition leader Hamzah Zainudin called for the deferral of petrol subsidy rationalisation and higher electricity tariffs. Former finance minister Lim Guan Eng reiterated the raft of tax breaks and SME relief he had proposed in February.
These proposals are worth putting on the table, even while final decisions on fiscal reform and tax relief wait for a US trade deal resolution and clarity on global conditions. Determining the distribution of assistance, whether targeted at the worst-affected or availed across the board, will depend on whether the Trump tariff fallout impacts particular sectors or the overall economy. A coherent response should also distinguish relief measures to help businesses and households stay afloat from stimulus measures to spur growth or business transitions (measures announced so far mainly address the latter).
Malaysia’s pandemic experience offers guidance for its toolkit, particularly on relief provisions. In 2021-22, Malaysia bolstered existing programmes such as cash assistance and deployed emergency interventions like tax breaks and loan or rent moratoriums. Malaysia will probably not need to summon the full range — the economic shutdown of 2020 was greater than foreseeable circumstances in 2025 — but the groundwork can start.
The Employment Insurance System (EIS), which provides income and job search benefits to the unemployed, stands out as a previously underutilised programme that can be invigorated. In April 2020, when the number of unemployed increased by 170,000, only 6,000 sought out the EIS. Promoting awareness of the EIS to its 7 million members could expand future take-up rates.
Malaysia devised new modes for mitigating unemployment, especially the wage subsidy, which protected jobs by covering part of the wage cost for financially distressed employers. In practice, the wage subsidy was granted automatically for micro, small, and medium enterprises; the authorities lacked the time and resources to evaluate applicants’ financial status. In the latter stages, wage subsidy was designated for the tourism sector, which remained shuttered while other sectors began to reopen.
Should the Trump tariffs inflict economic loss, the Malaysian government might again be time-pressed to assess adversity levels before dispensing the wage subsidy or other aid and hence may need to designate beneficiaries by sector or supply chain. In preparation, businesses’ databases, especially those of US-concentrated exporters and their supply chains, could be consolidated to expedite targeted assistance when needed.
Malaysia has held steady in these testy times. There are potential ways for Malaysia to get a better deal. Disclosures of the US-UK deal indicate the US will keep a hardline stance on the 10 per cent tariff, but important American consumer goods and manufacturing inputs, such as cars, steel, and aluminium, may get waivers. Malaysia will want to emphasise the analogous qualities of its flagship semiconductor exports to retain their non-tariff status, as well as others like furniture, for which the US is a major market. Tightening regulations on technology security and transhipment, and addressing NTBs will help gain goodwill. But with the outlook staying unpredictable, Malaysia should gear up for potential tumult ahead.
Lee Hwok-Aun is Senior Fellow of the Regional Economic Studies Programme, and Co-coordinator of the Malaysia Studies Programme, ISEAS – Yusof Ishak Institute.
This article was first published on The Fulcrum.