RAM: US tariffs to pose disruption to Malaysia

Published on 03 Apr 2025.

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The sweeping reciprocal tariffs, announced on 2nd April by the US on many of its key trading partners, are set to disrupt global trade flows significantly. Malaysia was not spared and is set to face a 24% tariff, a major step-up from the 2.2% trade-weighted average tariff Malaysian goods currently faces when imported into the US. This will directly impact Malaysia’s export performance given that the US accounts for around 11.3% of Malaysia’s exports. 

The biggest risk to Malaysia’s overall trade performance would come from a disruption to the electrical and electronics (E&E) sector. Although currently exempted from the new reciprocal tariffs, the US has said that it will soon place tariffs on E&E. Malaysia is particularly vulnerable because of the country’s heavy reliance on the US as an E&E export destination. E&E exports to the US represent about 20% of Malaysia’s overall E&E exports, or 7.9% of Malaysia’s total exports.

Malaysia could also be pressured by a broader slowdown in global trade activity. As the world’s largest importer, the US accounts for about 24% of the world's imports and plays a pivotal role in driving global trade. The shock to US import demand could trigger global cascading effects and weigh on economic growth, particularly among small and open economies. A slowdown in global trade activity will have a significant influence on Malaysia’s economic performance. While Malaysia’s domestic consumption remains the backbone of the economy, around 36% of Malaysia’s value-added output is to meet final consumption outside of Malaysia. Notably, final demand consumption from the US constitutes around 5.4% of Malaysia’s Value-Added (which is a proxy for overall GDP). This suggests the direct impact of a 1ppts decline in US final demand would lower Malaysia’s overall GDP growth by around 0.05ppts, not accounting for second-round effects.

The most significant spillover risk would be from a slowdown in China given that it constitutes around 12.4% of Malaysia’s total exports and is facing an additional 34% US import tariffs. The EU and Japan, which respectively account for about 7.7% and 5.5% of Malaysia’s overall exports, will also be facing hefty increases in tariffs. Given that some of the countries that were hit with high tariffs are also Malaysia’s key export destinations, this underscores the risk from a trade tariff-induced economic slowdown on Malaysia’s export performance. 

In terms of sectoral exposure, exporters of furniture, recreational goods, rubber products and apparel are among those that would be most at risk due to their high exposure to the US. This is because over a fifth of exports for these products are shipped to the US. However, given their relatively small contribution to Malaysia’s total exports, the broader impact is likely to be limited. Nonetheless, Malaysia has lower tariff rates compared to most key manufacturers of these products, which would help moderate the impact of import substitution of these sectors.

Despite the challenges posed by rising trade tensions, there are opportunities for Malaysia. This can be in the form of trade diversion and improved cost competitiveness because of the relatively small increase in US tariffs compared to other major exporters. This will primarily benefit Malaysia’s non-E&E exports (~40% of total exports to the US) as the 24% reciprocal tariffs faced is lower than many of our ASEAN peers such as Vietnam, Thailand and Indonesia, respectively at 46%, 36% and 32%. China also faces a higher tariff of 34%, which will be on top of the existing 20% tariff already in place, bringing the cumulative tariff rate to 54%.

As of this afternoon, Ministry of Investment, Trade & Industry (MITI) has made an announcement that is it seeking to actively engage with the US to uphold the spirit of free and fair trade and retaliatory tariffs are not being considered.

 

Analytical contact Woon Khai Jhek, CFA (603) 3385 2512 khaijhek@ram.com.my

Media contact Sakinah Arifin (603) 3385 2500 sakinah@ram.com.my

 

About RAM Rating Services Berhad (RAM Ratings)

Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Credit Rating Agencies. In addition to the provision of credit ratings for corporate bonds and sukuk and their issuers, RAM Ratings also provides research and publications on Islamic finance, fixed income and macro-economic and industry analysis as well as data analytics relating to credit risk, counterparty assessments and other related domains. 

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