This article first appeared in Forum, The Edge Malaysia Weekly on November 11, 2024 - November 17, 2024

Historically, the ratio of Malaysia’s trade to its gross domestic product (GDP) has always been more than 100%, showing how a healthy global economy with a free flow of goods and services is important to the country.

Malaysia’s biggest trading partner is China, followed by Singapore and the US. However, in terms of value to the economy, the US is far more important to the Malaysian economy than China.

Malaysia is a net exporter to the US, which is the destination for many products manufactured by Malaysia’s vital electrical and electronics (E&E) industry. When exports are higher, generally, income levels in the country also rise.

To the uninitiated, Malaysia’s E&E industry makes up 40% of its total exports and is the backbone of the country’s manufacturing sector. The manufacturing sector contributes 23.2% to Malaysia’s GDP, the second biggest component of the domestic economy after the services sector.

These numbers should give us an idea of how important the manufacturing sector and exports are to Malaysia.

China is an important trading partner to Malaysia as well. However, according to the Treasury Report, the balance of trade is in China’s favour. This effectively means that Malaysia is a net importer of goods from China.

Among the reasons for this is that Malaysia receives intermediate goods from China, which are further processed for export and consumption. The import of capital goods by Chinese companies undertaking large infrastructure works in Malaysia also contributes to a trade deficit with China.

For instance, in the multibillion-ringgit East Coast Rail Link (ECRL) project, the contractor from China is said to be sourcing even toiletries from its country. The project is worth more than RM60 billion but local construction companies get a pittance in terms of contracts from the main contractor.

Post Covid-19, Malaysia’s exports to the US have grown significantly compared to exports to China. In terms of value, total exports to the US have increased almost 50% from RM98 billion to RM156 billion while similar numbers to China moved up from RM146 billion to RM198 billion, a rise of less than 35%.

In the last 30 years, Malaysia’s E&E industry has benefited immensely from American technology. The industry now accounts for 7% of semiconductor trade flows and 13% of global back-end operations, which include testing of chips and packaging.

Another area that has benefited from exports to the US is the healthcare industry. A growing number of Malaysian companies are enjoying the benefits of exposure to that country.

During the presidency of Donald Trump, the US would not be as accommodating of global trade as it has been in the past four years. It will be a new world order. Trump is obsessed with imposing tariffs on onshore manufacturing and rectifying a trade imbalance with China.

In his campaigns, Trump clearly stated his intention to impose a 60% tariff on all imports from China and a 20% tariff on all other imports. His tariff target for Mexico is even worse — 100%. In his first term as president from 2016 to 2020, Trump’s tenure was tainted by an acrimonious trade war between the US and China, which affected global trade.

While the two economic giants slug it out on tariffs and counter tariffs, the collateral damage will be felt by countries such as Malaysia. In the last few years, Malaysia has positioned itself as one of the havens for manufacturers trying to take shelter from this trade war. Companies have been relocating to the region as a way to circumvent any trade disputes between China and the US.

Nobody doubts that Trump will walk the talk on imposing tariffs and escalate the trade war with China. The question is, how badly will a tariff, whether it is 20% or more, impact global trade? And, more importantly, how badly will Malaysia’s exports be affected by such tariffs?

It will all boil down to the details of the protection measures. For now, nobody has an inkling of how Trump version 2.0 is going to pan out.

The silver lining is probably the fact that the US economy itself is in a period of uncertainty. The Federal Reserve (Fed) has been cutting its borrowing rates with the hope of seeing the economy head for a soft landing instead of a recession.

In its latest move, the Fed cut another 25 basis points to bring the rate to a range of 4.5% to 4.75%. Going forward, the Fed will probably cut rates further to preserve the economy as it feels that inflation is coming down and job creation needs a boost.

What’s perplexing is that Trump’s policy measures are on a collision course with the objectives of the Fed, which wants to tame inflation to 2%.

Trump’s measures of imposing tariffs, cutting corporate taxes and deporting millions of immigrants are seen as inflationary. They will increase the cost of goods and services in the US.

Considering the current state of the US economy, it is highly unlikely that Trump will want to bet against the Fed. That will end up with him putting the US economy at risk.

The tariffs will come, but probably, it will be a gradual process, after 2026 when the Fed sees a change in leadership with Jerome Powell’s term coming to an end.

In the meantime, Malaysia has to reposition itself to face a trade war. Putrajaya needs to play its cards right. This is because Malaysia’s exports, which have a big implication for Malaysian economic growth, are more sensitive to the state of affairs in the US than what happens in China.

While a trade war is bad for global trade, it does not mean it has to be all gloom and doom for Malaysia.

M Shanmugam ([email protected]) is a contributing editor at The Edge

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