12 hours Ago By Bernama
KUALA LUMPUR: The April 2 tariffs unveiled by United States (US) President Donald Trump have shocked the world and represent a departure from the globalisation policy of previous US administrations.Tariffs are a tax imposed by a government on goods and services imported from another country.They can be used to raise revenue, affect trade flows or protect domestic industries.
The Trump tariffs seek to do all three.Since the US is Malaysia's third largest trading partner after Singapore and China, these new tariffs and their strategic implications need to be understood.First, Malaysia is not being singled out by the US.
Nor is the US quibbling with any specific trade policy upheld by Malaysia or any other country.From April 5, 2025, the US will levy a minimum 10 per cent tariff on all countries, from allies such as the United Kingdom (UK) to the Heard and McDonald Islands off the coast of Antarctica, uninhabited except for penguins.From April 9, some 90 other countries, including Malaysia, are facing higher "reciprocal" tariffs.
These are not reciprocating high tariffs that Malaysia levies on any US goods (most, in fact, are low).Rather, what the US is taking issue with is the existence of any trade deficit. The tariff formulaThe formula used to derive these higher tariffs seems controversial and borderline spurious.
It is effectively the bilateral trade balance between the US and another country divided by the US imports from that country.This total is then divided by two to offer a "discounted" rate, with a minimum rate of 10 per cent.Exacerbating this arbitrary approach is that only 2024 trade data is used.
"Reciprocal. That means they do it to us, and we do it to them," President Trump said on Wednesday.But, what is happening here is not "an eye for an eye" or "like for like".
Malaysia's Trump tariff rate is 47 per cent, with a discounted rate of 24 per cent.The Office of the United States Trade Representative (USTR) itself acknowledges that Malaysia's average most-favoured nation tariff rate is 5.6 per cent.
Trump and the USTR are claiming that trade deficits can be corrected with US tariffs and that trade deficits exist because of the domestic policies of its trading partners, with nothing to do with the exorbitant privilege of the dollar being the world's reserve currency for international trade, the production decisions made by US firms, or consumer demand for goods which cannot be produced within the US.The USTR claimed that "while individually computing the trade deficit effects of tens of thousands of tariff, regulatory, tax and other policies in each country is complex, if not impossible, their combined effects can be proxied by computing the tariff level consistent with driving bilateral trade deficits to zero."If trade deficits are persistent because of tariff and non-tariff policies and fundamentals, then the tariff rate consistent with offsetting these policies and fundamentals is reciprocal and fair," it said.
However, countries such as the UK with which the US enjoys a trade surplus are also facing the 10 per cent minimum tariff hike.Fairness has already left the stage.The mercantilist logic operating here is that the US trade deficit with any given country must be paid for out of tariffs on its exports.
For a country to reduce its Trump tariffs, it would either need to cut its exports to the US or buy enough US goods to even out its trade balance.However, it may not be Malaysia or any other country that may ultimately pay for these tariffs. Their costs can be passed down to US consumers.
Trump's tariffs will impose higher prices on US consumers, increasing inflation, depressing demand for goods, and courting the risk of a recession.These latter effects may reduce exports to the US, and consequently its trade deficit, rather than promote the return of manufacturing. Reshoring manufacturing to the USWhile Trump is on record as being most concerned with "reshoring" manufacturing to the US, the April tariffs target all goods, including agriculture and commodities, except copper, pharmaceuticals, semiconductors and lumber, energy, certain minerals not available in the US, bullion, and steel/aluminium and autos/auto parts already tariffed.
Goods such as bananas and coconuts, which are not readily grown in the US, are thus targeted because they may contribute to deficits.Electrical and electronic goods comprise the bulk of Malaysia's exports to the US, with semiconductors making up the largest share.While currently exempted from Trump's tariffs, US officials have said that measures on semiconductors are coming.
Reshoring chip production from Taiwan is a particular goal. It remains unclear what the US intends for Malaysia in this regard.With a discounted tariff rate of 24 per cent, Malaysia remains competitive versus regional alternatives such as China (34 per cent), India (26 per cent), Taiwan (32 per cent), Thailand (36 per cent) and Vietnam (46 per cent).
Except for Trump, US presidents of the past thirty years have supported the globalisation of manufacturing via multinational corporations, with China, Mexico and Canada being the primary trade partners, along with Japan and Germany to a lesser extent. The China issueIt is popularly believed in the White House that China has taken manufacturing jobs away from the US.However, there is also evidence to support that increasing labour productivity and technology adoption have reduced manufacturing employment in the US, while lower-skilled production is offshored to Asia.
Within Asia, China's competitive advantage has displaced Asian manufacturers, such as those in Japan and Malaysia, but not necessarily at the expense of US blue-collar jobs.The Federal Reserve Bank of St Louis (St Louis Fed) noted that when "the US can purchase goods from the world market simply by printing money or issuing debt, it is destined to run persistent trade deficits."This came about when the US abolished the Bretton Woods system, substituting the US dollar for gold as the world reserve currency.
This promoted foreign capital investment into US assets and appreciation of the dollar, making imports cheaper and exports less competitive, thus widening the trade deficit.Trump's tariffs do little to address these structural factors behind the US trade deficit or the worldwide distribution of manufacturing.Furthermore, the US has a trade surplus in services with the rest of the world.
Tariffs imposed on China during the first Trump administration have not improved the US trade deficit.They have simply encouraged tariff arbitrage as production moved to countries with lower tariffs.The same outcome may happen with the current Trump tariffs.
Malaysia must navigate new realitiesWhat can Malaysia do? Retaliatory tariffs would be inflationary to Malaysian consumers, and the government has wisely foresworn this.The EU and China are taking a combative approach that is better suited to their economic size.It is too early to draw conclusions on the semiconductor industry.
We know that Trump wants more semiconductor manufacturing in the US, but US companies are happy with their longstanding presence in Malaysia.Malaysia mainly provides backend testing services but has ambitions to increase its manufacturing presence.Increasing the latter will benefit from exports to the US, but tariffs will dampen demand.
To succeed in manufacturing exports now, firms need to either achieve production efficiency or engage in tariff arbitrage.The former is a better guarantee of long-term success. The US has shown its willingness to cut off circumvention loopholes.
Malaysia is at the lower end of the Trump tariff spectrum, but we may still be vulnerable to tariff arbitrage as 10 per cent tariff locations, such as Singapore or Brazil, may suddenly seem attractive for exporting to the US.However, we can expect Trump to clamp down on widening trade deficits just as Chinese solar panel circumvention via Malaysia was crushed last year.The best approach is to wait and see to gauge how US consumers, firms and individuals, respond to higher prices.
Relocating to the US or the 10 per cent-ers amid declining consumer demand or a recession would be futile.Likewise, Trump only has four years in office, and it is unclear if these policies will outlast him.One thing is clear.
No country, including the US, will emerge unscathed from this Trump tariff shock.Malaysia cannot expect a return to normal. We must navigate new realities.
YIN SHAO LOONG is deputy director of research at Khazanah Research Institute, where he focuses on semiconductor industrial policy and climate change. His work in federal and state governments covered environment, trade and investment policy.-- BERNAMATAGS: Donald Trump, Tariff, United States, ASEAN © New Straits Times Press (M) Bhd.
