WHEN I wrote on April 16 (column ‘Toughest trade talks yet‘) that trade talks with Washington would be the hardest in years, I was not exaggerating.
Even the chairman of a major investment bank here was caught off guard when the news broke.
Politics used to drag things out – 18 months to sign, another four years to enforce.
That era’s done. Policy direction is increasingly shaped by data models and the influence of Stephen Miran, 40, a mathematician and current chair of the White House Council of Economic Advisers, moving at Wall Street’s breakneck pace.
The one percentage point jump in the reciprocal tariff rate – from 24 per cent to 25 per cent – for Malaysian exports to the United States beginning August is a clear sign that the arbitrary trade policy of the White House presents a major hurdle to trade negotiations and deals.
After the softer stance taken by President Donald Trump’s administration against Vietnam, Indonesia and China, many would have been surprised to find the end trade war detente on July 9 resulted in a higher tariff rate for Malaysia, given that Prime Minister Datuk Seri Anwar Ibrahim had said trade negotiations had progressed well.
The 25 per cent tariff number could rise further as Trump has identified a new flashpoint – the BRICS – and threatened another 10 per cent tariff on all member countries.
Brazil has found that out the hard way.
South America’s leading economy was hit with a 50 per cent revised reciprocal tariff rate post the 17th BRICS summit in Rio de Janeiro recently (from 10 per cent in April) despite the United States running a trade surplus against Brazil.
In many ways, the tariff action speaks of Trump’s strategic convergence of geopolitics and trade.
Crudely put, tariff rates at 10 per cent is a tax on imports, at 25 per cent and above is more about encouraging import substitution or the reshoring that Trump wants.
Anything above 40 per cent will lead to a breakdown in trade flows.
So the 40 per cent transshipment tariff Hanoi got is part of a larger strategic effort to contain China’s growing economic clout in the region and the world.
The 20 per cent tariff on Vietnam’s goods and services will help it remain competitive and at the same time help keep US trade induced inflationary pressures contained and buy time for companies, local and foreign, to build new capacity or relocate resources to the United States.
This could be the new normal if Trump’s policy trajectory gets bipartisan support and if there’s traction with the re-industrialisation of the US economy and managing its deficits.
So, the 1 per cent rate jump for Malaysian imports, like a signal to noise ratio reading, gives Putrajaya about a week to show more resolve to ink some form of a deal with Washington.
Whether that happens or not is difficult to say.
Judging from our trade negotiation czar Datuk Seri Tengku Zafrul Abdul Aziz’s latest press conference, we may need to prepare for the final rate to stay unchanged because the need to defend our national economic interests or “red lines” as he calls them, leave little room to manoeuvre on the issue of non-trade barriers.
Our team has estimated the 25 per cent reciprocal tariff rate on Malaysia will raise the effective US tariff rate on Malaysian exports to around 18.8 per cent, after accounting for exemptions on products such as semiconductors and pharmaceuticals.
If implemented on Aug 1, it forecast the tariffs could reduce Malaysia’s gross domestic product growth by up to 0.8 percentage points in 2025.
This is probably one reason why Bank Negara cut the overnight policy rate by 25 basis points on July 9.
Rejecting compromise and maintaining the current 25 per cent tariff will have a far greater impact on the Malaysian economy.
My back-of-the-envelope analysis indicates that Malaysia’s exports to the United States will decline sharply from US$43.43bil in 2024 to just US$5bil in 2025, assuming the 25 per cent tariff is implemented for full year 2025.
This would effectively erase Malaysia’s trade surplus with the United States, which stood at RM72.4bil in 2024, and push it into a trade deficit of US$24.46bil.
A worst-case scenario could see export-driven industries shedding up to 270,000 jobs.
The picture could become further complicated.
Any US trade deal could see Malaysia facing a two-tier rate like what Vietnam achieved – a tariff rate on local export and another higher rate on transhipments as the country is highly integrated into China’s supply chains.
For Malaysia there are a variety of factors to consider.
The United States has been the biggest foreign investor for many years and a major export destination for goods such as semiconductors.
Average annual exports over the last five years is about RM230bil and US companies like Intel, Advanced Micro Devices and ExxonMobil have helped develop sectors like semiconductors and oil and gas over decades and create employment.
Malaysia will have some hard decisions to make.
Could agreeing to US trade demands lead to other major trading partners like the European Union, Japan and China asking the same terms?
How can the negotiators clinch a deal that is fair, comprehensive and inclusive and still benefit the economy?
How would it potentially impact Malaysia’s appeal as a trade diversion centre in ASEAN if it is not materially worse off compared with other ASEAN countries like Thailand (36 per cent).
A 10 per cent tariff is currently imposed on Singapore.
Thailand, which was slapped with a 36 per cent rate, has recently submitted a fresh proposal to cut levies on many US imports to zero, according to my Bangkok team.
Will MNC manufacturers continue to deploy the fading “China+1” strategy with Malaysia’s diminished tariff advantage against countries like Vietnam and Indonesia?
The actual impact, however, will depend on ongoing negotiations and adjustments by Malaysian exporters.
This bears repeating. Pay attention.
First, Malaysia’s best strategy is to cut all tariffs on US goods and work to reduce non-tariff barriers (i.e. affirmative action rules, equity ownership requirements) as much as possible.
Second, the United States remains the single largest consumer market in the world, in terms of purchasing power and demand.
Third, mitigation measures like market diversification such as boosting intra-ASEAN trade still cannot be a substitute for US market access.
Malaysia can try to redirect exports to ASEAN, for instance, but the scale and absorptive capacity simply cannot compare. It is a case of selling more into a pond when you have just been priced out of the ocean.
This kind of structural pressure puts Malaysia in a position where the economic costs go beyond just numbers: it challenges our export competitiveness, employment and long-term investment attractiveness.
For the average man, with increased competition from US products, it could hurt local companies’ earnings and, in turn, the returns of funds like the Employees Provident Fund (EPF).
Although Trump has warned that there will be no more extension after Aug 1, many are hopeful he will likely extend the deadline to strike deals, knowing very well negotiations take time.
The United States’ high income and substantial consumer market is his leverage in the trade talks and any tariffs applied will be like a blade that cuts both ways.
At the end of the day, despite Trump’s claims that foreign countries will pay the tariffs, it’s the American industry and consumers who will have to pay any tariff imposed.
Having too high a tariff rate would hurt consumer’s disposable incomes and put American exports at risk of being priced out.
To date, however, there’s little empirical data to support these claims.
Boycotts are another issue its products and services could face.
You only have to see how badly its inbound tourism industry has been hit since Trump’s return to the White House.
He also needs the tariff revenue to fund the budget deficit that is set to rise further due to his Big Beautiful Bill.
As of mid-2025, tariff revenue collected stood at about US$100bil with projections indicating the amount could grow to US$300bil for the whole year compared to US$260bil in 2024.
The number could have been higher if not for the front loading many importers had done.
Medecci Lineil leads a specialised quant team within Goldman Sachs’ investment banking division. He’s also a founding board member of consultancy firms in Kuala Lumpur and Singapore. Reach him at med.akilis@gmail.com.
