RAM’s Trade Unpacked Series Part 2: Malaysia’s gains from trade diversion likely modest

Published on 01 Jul 2025.

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RAM Ratings has published Part 2 of its Trade Unpacked series to analyse the impact of the ongoing global trade war and Trump tariffs on Malaysia.

While the US and China rolled back some of their steep tariffs, tariff levels between the two economic giants remain significantly higher than those with other countries, leading to potential trade substitution and demand diversion. Many have touted this as an opportunity for countries like Malaysia to benefit from trade diversion effects. The question is, how significant are these potential gains? Using a revealed comparative advantage (RCA) analysis, we attempt to answer this question.

China and the US represent markets with much export potential for Malaysia. The unrealised export potential is relatively higher with China at about USD52 bil than with the US (USD19 bil), data from the International Trade Centre showed. This is also consistent with the share of goods that Malaysia has comparative export strength (as denoted by RCA values). Approximately 29% of Malaysia’s exports to China hold a competitive RCA, including electronic components and medical instruments, while 12% of Malaysia’s exports to the US enjoy a higher RCA, including apparel and scientific equipment.

Even after factoring in potential demand from China and the US, benefits from trade diversion will likely only cover about 5.2% of our total exports. This is unlikely to fully offset the negative impact from US tariffs, which could affect up to 26.4% of Malaysia’s exports. Simulating likely US tariff scenarios on Malaysia and China, we estimate that the overall diversion gains to Malaysia’s exports to be negligible, with no upside to national GDP. In contrast, we project direct impact from US tariff on Malaysia may shave off about 0.3 ppts to 0.5 ppts from Malaysia’s 2025 GDP growth. As such, we retain our earlier GDP growth forecast at 3.5% to 4.5%, leaning to the upper range on news flow of positive negotiation outcomes.

Substitution exists for certain exports where Malaysia holds a strong RCA. This includes products like electric filament lamps, medical and optical devices, and industrial glass, which may see increased demand as the US and China seek alternative suppliers. Malaysian exporters would do well to quickly scale up capacity in such products.

RAM’s report series Trade Unpacked is available for download at www.ram.com.my

 

Analytical contacts Nur Nadia Mazlan  (603) 2708 8287 nadia@ram.com.my		Media contact Sakinah Arifin (603) 2708 8212 sakinah@ram.com.my
Woon Khai Jhek, CFA  (603) 2708 8286 khaijhek@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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