Donald Trump’s recent re-election as U.S. president has raised concerns for Malaysia’s economy, as his protectionist policies could bring serious challenges. With his “America First” approach, Trump aims to impose new tariffs on imports, including a proposed 10-20% on all imports to the U.S. and a steep 60% on Chinese goods.
Because Malaysia’s exports are closely tied to both the U.S. and China, it could face significant impacts. According to OCBC Global Market Research, Malaysia could lose as much as 1.5 percentage points in economic growth if these tariffs extend broadly to Asian countries, making it one of the most vulnerable economies in the region.
Malaysia’s economy is especially sensitive to U.S. trade policies because the U.S. is a key trading partner. In fact, Malaysia’s exports to the U.S. were higher than its exports to China from January to August 2024, which means that if tariffs are imposed, Malaysian goods may be more affected than goods from other countries. This could lead to decreased demand for Malaysia’s exports, especially those that include Chinese parts, which would become more expensive due to the additional tariffs.
OCBC outlines three possible scenarios of U.S. tariffs, each with varying impacts:
- Scenario 1: Only China faces a 60% tariff. Malaysia would feel an indirect effect through decreased demand from China, leading to a small 0.2 percentage point dip in growth.
- Scenario 2: A 10% tariff on all U.S. trading partners, including ASEAN countries, along with the 60% tariff on China. This scenario could cut Malaysia’s growth by up to 0.9 percentage points.
- Scenario 3: A 20% tariff on all U.S. trading partners alongside the 60% on China, which could reduce Malaysia’s growth by as much as 1.5 percentage points.
Trump Policies May Pose Risks but Open Manufacturing Doors
While Trump’s policies pose risks, they also open doors for Malaysia. Many companies are adopting a “China+1” strategy, expanding supply chains to countries like Malaysia to reduce reliance on China. This has already benefited Malaysia’s semiconductor industry, which currently holds around 13% of the global market in chip packaging and testing. Major corporations, including Intel and Infineon, have invested in Malaysia’s semiconductor sector, positioning the country as a stable and attractive base for manufacturing outside of China.
“Malaysia’s semiconductor industry has attracted large investments,” notes Business Today, “and may continue to gain interest as a manufacturing hub.” If the U.S.-China trade tensions continue, Malaysia’s role in the global supply chain may expand further, especially if it maintains political stability and investor-friendly policies.
Malaysia’s Energy Sector: Navigating Gains and Challenges in Trump Era
Trump’s pro-oil stance could also affect Malaysia’s energy sector, both positively and negatively. Malaysia is an oil exporter, so any increase in global oil prices due to Trump’s support for fossil fuels could boost Malaysia’s revenue. However, the ripple effects of higher oil prices may drive up production and consumer costs domestically, which could strain consumer purchasing power and raise operational costs for local businesses.
Malaysia will need to carefully balance these effects to ensure price stability while maximizing potential gains in revenue.
Palm Oil and Labor Practices
The Malaysian palm oil industry may also face renewed scrutiny under Trump’s administration. During his first term, U.S. restrictions on companies like FGV Holdings and Sime Darby Plantation—over allegations of forced labor—hurt Malaysia’s palm oil exports to the U.S. and harmed its image internationally.
If similar policies resurface, Malaysia must prioritize improving labor practices to meet international standards and protect its reputation as a responsible producer. Strengthening labor standards could help the palm oil sector retain access to global markets, even in the face of potential U.S. restrictions.
Currency Pressures and Capital Market Uncertainty
Trump’s influence on U.S. interest rates could pressure Malaysia’s currency and capital markets. Higher U.S. interest rates, currently around 4.75-5%, could attract global investors to U.S. assets, potentially leading to capital outflows from Malaysia. In 2023, Malaysia saw a 6.8% decline in foreign equity inflows, and the ringgit depreciated by approximately 8% against the U.S. dollar.
If the demand for U.S. dollars rises, the ringgit may continue to weaken, pushing up import costs in essential sectors like food and technology and compounding Malaysia’s inflationary pressures, currently at 2.8%.
To manage these risks, Malaysia must implement a strong risk management strategy to stabilize the ringgit and maintain market confidence.
Concerns for Foreign Direct Investment (FDI)
Trump’s protectionist policies may also limit foreign direct investment (FDI) into Malaysia. As a manufacturing hub in Southeast Asia, Malaysia could lose out on U.S. investments if Trump focuses on protecting domestic jobs and discourages American companies from investing abroad.
A decline in FDI could have long-term effects on Malaysia’s job creation, technology development, and economic stability, making it crucial for Malaysia to highlight its strengths as an appealing investment destination in the region.
Uncertainty Around Regional Trade Agreements
Trump’s re-election also raises questions about the future of Malaysia’s participation in the U.S.-led Indo-Pacific Economic Framework (IPEF), which aims to promote economic cooperation in the region. Trump has expressed skepticism toward international trade agreements, seeing them as disadvantages for the U.S. If he withdraws from IPEF or limits its scope, Malaysia could face challenges in maintaining its trade connections and regional economic integration.
In Summary
Trump’s return to office brings a complex set of challenges and opportunities for Malaysia. The risks are considerable—ranging from reduced demand for Malaysian exports to potential capital outflows, currency pressures, and stricter scrutiny of labor practices in the palm oil industry.
However, Malaysia’s strategic position in the global manufacturing landscape, particularly in semiconductors, and its potential to benefit from “China+1” strategies present avenues for growth. By strengthening its economic policies, diversifying trade partnerships, and promoting labor standards, Malaysia can work toward economic resilience in this new global environment.
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