Commentary: Malaysia can weather the Donald Trump tariff storm

KUALA LUMPUR: Even if Donald Trump’s “Liberation Day” 24 per cent tariff on Malaysia has been postponed, Malaysians will be fearful about what this all means for their livelihoods.

Businesses in Malaysia are making the most of the temporary reprieve, rushing to fulfil US-bound orders before the higher levy kicks back in. As this past week has reinforced, there is little basis on which to judge how long any Trump policy will continue, including the 90-day pause.                

Estimating the impact of tariffs and the wider Trump agenda on the Malaysian and global economies would be desirable. But it is ultimately an exercise in futility.

There is no way to reasonably predict how trade will adjust to a differential tariff shock that simultaneously affects all countries and nearly all goods. And leading estimates rely on models that falsely treat increasing and decreasing tariffs as the same shock, ignoring that existing traders have greater means and incentives to subvert new tariffs and preserve trade.

In practice, global markets will quickly learn to circumvent poorly enforced trade barriers: Russia’s trade patterns since its February 2022 Ukraine invasion are a case in point. Potential “government efficiency” cuts to the US customs workforce will not help enforcement, and China’s extensive trade and logistics networks leave it better placed than Russia to undercut escalating tariffs. 

What can be more confidently stated is that the economic implications of an unpredictable, uncooperative and illiberal US administration will be much greater than the trade impact of tariffs. While equally challenging to measure, the wider fallout will be of an order of magnitude greater.

A GREATER PROBLEM THAN TRADE DISRUPTION

Unpredictability is making investors across the world jittery. The world’s largest economy and consumer market is building barriers of unknown dimensions and fortitude, complicating investment decisions that require long-term returns to be viable.

The United States and China – the world’s two largest economies – are recklessly hurtling towards decoupling and the Trump administration threatens a profound US retreat into isolationism not seen for more than 100 years.

Tariff turbulence adds a steep escalation in major power rivalry to the list of Trump administration disruptions – from overseas aid to climate cooperation and participation in international governance.

There are early signs that Trump’s policies are stalling the US manufacturing investment boom, not boosting it as hoped. 

Major companies and investors are taking a massive financial hit that worsens investment prospects. US stock markets have had one of the most tumultuous weeks since World War II, reducing business equity to invest and borrow against. 

And those focused on trade perhaps missed how close to the brink US Treasury markets got before the tariff backdown. When safe haven assets like government bonds mirror the volatility and sales urgency of share trading, a global financial market collapse is an all too realistic prospect.   

MALAYSIA WELL-POSITIONED TO ABSORB TARIFF SHOCK

As an open economy currently enjoying an international investment boom, Malaysia is exposed to global headwinds. And as an increasing beneficiary of Chinese investment and the “China +1 strategy", coupled with its large trade surpluses with the US, it was always in Mr Trump’s crosshairs.

But Malaysia is also well-placed to weather the storm. About half of its gross domestic product comes from the services sector, which has not been the target of tariffs.

Its export markets are relatively diversified, with the US only directly receiving around 13 per cent of total exports. But its full trade, investment and financial exposure to the US is not clear, including the larger but more opaque volume of Malaysian intermediate goods exports that are destined for the US via a third country.

Malaysia could further leverage two things, if the additional “reciprocal” tariffs are ultimately implemented.

First, Singapore is already Malaysia’s leading export destination, and the recently established Johor-Singapore Special Economic Zone (SEZ) is timely. With Singapore facing the baseline 10 per cent tariff, Malaysian companies could use the SEZ to soften the tariff blow.

Second, Malaysia’s geographic location and geopolitical neutrality make it attractive for trade diversion, to reroute export-oriented investments from countries facing a higher tariff rate.     

Companies operating in and out of Malaysia will adjust to the tariffs without waiting for government action, and the 90-day reprieve will assist contingency planning. They will quickly assess and deploy tariff minimisation and business continuity strategies that adapt to (and possibly circumvent) tariff imposition.

This will mitigate much of the short-term trade impact most economists fear, but the speed, cost and completeness of the adjustment will determine the extent of damage — with compounding effects a significant concern.

KEEP CALM AND COORDINATE WITH ASEAN

Malaysia’s leaders and officials should continue to reassure traders and investors that it remains committed to open trade and investment. The government is steering clear of retaliatory tariffs and has established a National Geoeconomic Command Centre and a Ministry of Investment, Trade and Industry taskforce to monitor developments in consultation with stakeholders.

ASEAN Economic Ministers promptly met on Apr 10 and have collectively resisted retaliatory tariffs. Malaysia further using its chairmanship to forge ASEAN unity could help smooth supply chain adjustments and ease investor concerns.

As Vietnam's failed attempts to offer tariff concessions show, the Trump administration is more interested in upending the international trading system and seeing countries capitulate. Malaysia and ASEAN countries should also deprioritise negotiating – individually or collectively – with the US, and direct official energies towards mutually beneficial partnerships and monitoring sector-specific developments.

It bears remembering that major economic shocks typically do greater harm to vulnerable people, smaller businesses and poorer countries. Both wealthier countries and citizens recovered faster from the COVID-19 pandemic, and smaller companies were the biggest losers from Brexit.

With the US seemingly intent on creating vulnerability, countries including Malaysia must reinforce efforts to reduce it. 

Dr Stewart Nixon is the Deputy Director, Research at IDEAS (The Institute for Democracy and Economic Affairs) Malaysia.