DONALD Trump’s new tariffs are the week’s major news. How will they affect local businesses and the economy?
While the situation is uncertain and some analysts, like Fitch Ratings, suggest avoiding forecasts, here is an analysis of the potential impact on Malaysia.
Overall economy
The domestic economy will have to do the heavy lifting to ensure Malaysia’s gross domestic product growth forecast of 4.5%-5.5% in 2025 is achieved.
The higher than expected reciprocal tariffs are set to impact growth by the export channel and see many companies, local and foreign, rethink their investments and budgets. The US tariff rate on all imports effective next week will rise to around 22% from 2.5% in 2024, levels last seen in the 1930s.
Olu Sonola, Fitch Ratings’ head of US Economic Research, believes many countries will likely end up in a recession if the new tariff rates stay on for an extended period.
Central banks like Bank Negara and the Federal Reserve could be in a more pro-growth mode in 2025 than analysts and investors have been anticipating. The White House’s tariffs aim to raise income for the government and reshore manufacturing to the United States.
The high foreign investment figures over the past few years for Malaysia could trickle down as the tariffs also could kill the China+1 supply chain diversification strategy of many companies as the back door into the United States market is closing fast. That said, there is still room for negotiation, retaliation and further escalation.
Non-tariff barriers
All countries slapped with tariffs are wondering how the United States government calculated its non-tariff barriers (NTBs).
The United States has used a combination of trade deficit data, tariff rates and qualitative assessments of trade barriers. It has flagged Malaysia’s import permit and quota systems as potentially giving undue advantages to certain domestic providers.
Government procurement policies that favour certain local groups are also part of the problem. Also, do note that the import duties to be imposed on all fully-imported electric vehicles from next year will have an impact on the US’ Tesla.
For Malaysia’s NTBs to be at 47% was surprisingly high. But then so is Vietnam’s 90%, South Korea’s 50%, Thailand’s 72% and Cambodia’s 97%.
No doubt, the reciprocal tariffs hitting this region are hard, but the 24% imposed on Malaysia is one of the lowest. What would bode well for Malaysia would be for the government to take a hard look at some of its policies that impede freer competition and reduce those that have served their purpose.
Implementing newer laissez faire-friendly policies and bringing that up in negotiations in Washington DC could be a significant help for Malaysia’s industry.
Semiconductors
It is the single largest component of Malaysia’s exports to the United States and a major economic driver in the country.
The imposed tariffs seem like a blow to the local semiconductor sector, more so as our players not only export directly to the United States, but are also entrenched in a supply chain of products that end up there.
The new tariffs may put a dent on the China+1 theme.
Malaysian semiconductor-related stocks took a beating yesterday in what a dealer termed as “indiscriminate selling”, as investors feared the worst for the sector.
However, there may be positives: competitors such as Vietnam and China face higher tariffs.
US tariff measures could also accelerate the China+1 strategy, as more companies may look to Malaysia to capitalise on its relatively lower US tariffs.
Most positive of all is that semiconductors are one of the sectors exempt from the new tariffs, although it remains unclear if all Malaysian semiconductor companies are included.
It seems as if the exemption applies to semiconductor chips being sold to the United States. Most Malaysian companies in the sector are involved in assembly, testing, machinery and automation.
Another concern for the tech space is the AI Diffusion Framework that is set to take effect on May 15 after the 120-day comment period. This, coupled with potential future sectoral tariffs, could deal a double blow to the industry.
Rubber gloves
The 24% reciprocal tariffs could generally see local rubber glove makers benefit, as foreign competitor producers’ competitiveness would have been blunted by a higher tariff rate.
Indonesia, where Chinese glovemakers are adding greenfield capacity to circumvent US tariffs, was hit with a 32% tariff rate, while Vietnam, a favourite destination in the China+1 strategy in relocating supply chains, was slapped with a 46% tariff rate and Thailand 36%.
While there is still a small window of opportunity until April 9 for the countries to talk to the Trump administration to lower the tariff rate, the focus will probably be on more core export segments than gloves.
The actual impact on sales and average selling prices of local glove makers could be much more benign in the near term.
American buyers have stocked up with China-made gloves, who were the main competitors of local glove makers for the prized American market, ahead of being priced out of the market since early this year by tariffs imposed by the Biden administration.
Trump’s reciprocal tariffs will also mean competition for markets elsewhere will heat up, so any gains local glove makers achieve from the tariffs in the United States market could be offset somewhat by even thinner margins and lower volumes elsewhere.
The tariffs could encourage production in the United States itself. Hence, Supermax Corp Bhd, which has glove-making capacity in Texas, could be a big winner.
Global trade and
geopolitics
The Liberation Day tariffs show that trade is from now on the main factor in how the United States engages with the world.
It’s a mercantilist world view clearly enunciated by Trump and has nothing to do with allies or foes in the global geopolitical context. Otherwise, how do you explain Japan, a US treaty ally, being hit by higher tariffs than Iran which is no friend of the United States?
The global trade system was shaped in large by the United States in the decades after World War II. Alliances were shaped that helped determine the geopolitics that resonate until today, but this is being upended by Trump using tariffs as a bargaining tool in negotiations with countries that run a trade deficit.
Who will blink first? Will this fail and countries targeted by the US retaliate, with the world seeing a trade war as barriers rise?