Diversified economy has flexibility to adapt

MALAYSIA’S diversified economic base has granted it greater flexibility in adapting to external shocks amid potential tariff threats for some countries under the Trump administration, according to economists.

They point out that Malaysia’s exposure is not only confined to commodities like oil and gas as well as palm oil, but also technology, aviation, hospitality and healthcare.

“The country’s economy is not overly dependent on any single sector,” says the Malaysian Institute of Economic Research executive director Anthony Dass.

There are free trade agreements like the Regional Comprehensive Economic Partnership and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership of which Malaysia is a member, he says.

“This provides further opportunities for trade diversification into alternative markets,” he tells Starbiz 7.

Furthermore, the country’s strategic position in the global supply chain means that it is able to benefit from the move by multinationals to relocate production to South-East Asia to avoid higher tariffs expected to be imposed on China.

“US-China trade tensions could incentivise multinational corporations to invest in upgrading their Malaysian facilities to produce high-value products such as advanced semiconductors and 5G-related components,” he opines.

Another plus point is the country’s “buoyant private consumption”, according to Sunway University professor of economics Dr Yeah Kim Leng.

“Local demand makes up 61% of gross domestic product.

“This means Malaysia can better withstand potential slowdown in exports driven by US’ protectionist policies,” he adds.

On the robust domestic banking sector, Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid says it is characterised by highly capitalised and strong risk management practices.

He points to the domestic capital markets that can cater to long-term funding for the government and corporate.

“This translates into a sturdy economy that can withstand gyration in the global demand,” he says.

However, the withdrawal of the United States from international agreements like the Trans-Pacific Partnership and the Paris Agreement has cast a spotlight on the US-led Indo-Pacific Economic Framework (IPEF) which has 14 members including Malaysia.

It was launched in 2022 to strengthen economic ties in the Indo-Pacific region.

“If the United States withdraws from initiatives like the IPEF, Malaysia may face challenges in maintaining market access and regional economic integration,” Dass cautions.

Trump has expressed strong opposition to the IPEF prior to his re-election as US president. Focusing on tariffs as he started his second term in office on Jan 20, he has imposed a 25% tariff on imports from Mexico and Canada beginning Feb 1.

On Tuesday, he extended the same deadline to China, threatening to impose a 10% duty on the country’s goods.

Yeah points out that while universal tariffs may be inevitable, Malaysia’s exports will remain competitive as long as the prices of its products are lower than those imposed on China-made goods. Meanwhile, the ringgit’s strength against the greenback will also be tested as a result of Trump’s protectionist policies.

This may mean fewer rate cuts by the US Federal Reserve or rate hikes should inflation remains stubbornly high.

Yeah notes that a safeguard against onerous tariffs being slapped on US imports from Malaysia is that many goods, especially semiconductor and other electronics products are produced by American companies that have set up production facilities in Malaysia.

“To onshore manufacturing plants to the United States will be costly, especially if the output is marketed to Asia, the Middle East and Africa,” he says.

Local automated test equipment (ATE) player QES Group Bhd opines that Malaysia’s outsourced semiconductor assembly and test as well as ATE players will not be heavily impacted by US tariffs due to the growth of US and European semiconductor firms in the country.

“Overall, the outlook for the semiconductor sector will become clearer after the second half of 2025, along with the policy direction under Trump 2.0 following his first 100 days in office,” says managing director and president Chew Ne Weng.

It appears that Trump, who is set on making the United States the global leading hub for artificial intelligence, has yet announce his stance on the limitation artificial intelligence (AI) chips from the United States which was unveiled by the previous administration. Data centres rely on AI chips to run their servers.