This article first appeared in The Edge Malaysia Weekly on January 20, 2025 - January 26, 2025

THE past week was a tumultuous one for trade and the technology sector as US President Joe Biden made the most of his final days in the Oval Office by unleashing a barrage of trade restrictions, which sent the local stock market reeling.

Unprecedented for any outgoing US president, the Biden administration announced plans to introduce new export restrictions on advanced semiconductors and artificial intelligence (AI) technology on the grounds — some say guise — of national security.

The proposal aims to put export restrictions on AI chips under a three-tiered system by country, where Malaysia has been classified as a Tier 2 country — permitted to import only 50,000 graphics processing units (GPUs) over two years — and data centre operators restricted to deploying a maximum of 7% of their computing capacity in any single Tier 2 nation.

Assurances by the government and companies related to data centre operators in Malaysia that they will be unaffected by the proposed export restrictions did little to allay market fears.

Construction stocks succumbed to selling pressure, with the likes of Gamuda Bhd (KL:GAMUDA), Sunway Construction Group Bhd (KL:SUNCON) and IJM Corp Bhd (KL:IJM) — proxies to the data centre play — falling at least 14% over the one-week period.

SunCon was the most affected among the three, shedding about 24% last week.

Biden did not stop at export restrictions either, as his administration also announced that it is planning to ban Chinese software in vehicles — which essentially means barring Chinese vehicles from the US market. On top of that, officials said they were adding more than two dozen Chinese entities to the US restricted trade list.

This also raises the question of whether the outlook for exports and foreign investment, especially in the data centre space, could be far worse than anticipated.

Incoming US president Donald Trump’s inauguration is set to take place on Monday (Jan 20) and he could opt to retract Biden’s proposals, but the consensus view is that he is unlikely to rock the boat too much.

As it stands, the latest export restrictions could dampen investor sentiment at a time when Malaysia is working to position itself as a regional powerhouse for data centres.

CGS International Securities research head of economics Ahmad Nazmi Idrus opines that the proposed export restriction on AI chips means that US technology companies will need to play a greater part in the careful dissemination of technologies to non-US allies.

Nazmi is of the view that being in the “Tier 2” category would mean that foreign investment by US technology companies could turn more selective and potentially put Malaysia at a disadvantage compared with US allies in the region like Taiwan and South Korea.

“In the bigger picture, we think Malaysia may need to start reviewing its AI and semiconductor ambitions in the environment of potentially more stringent efforts by the US to cap the dissemination of high-tech goods. We think that the US wants the rest of the world to be dependent on its technology, and the US could also use this as a tool to bargain, weaponise or potentially threaten the growth of a country’s semiconductor and AI industry,” he cautions.

The Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre (SERC) executive director Lee Heng Guie takes the view that the restrictions may backfire as it is the large US technology giants that have committed billions of dollars to setting up data centres in Malaysia.

“With the restriction, it hurts US corporations the most. Hence, the US must come to sanity in implementing this restriction, which will severely cripple the development of AI,” he says.

Lee thinks the restriction is intended to safeguard against trade circumvention as firms and industries reroute through third parties in the midst of the ongoing trade war between the US and China. This, he says referring to the trade war, is likely to intensify under Trump’s administration.

CGS’ Nazmi says that in his base case scenario, impact on exports and foreign investment could be very limited.

“What is crucial is to secure the validated end user (VEU) status, which perhaps requires some diplomatic manoeuvring. In the worst case, the requirements of the VEU may include more stringent audits on the supply chain which would lead to added costs. There could also be an impact on the appetite of US technology companies to invest in Tier 2 countries, which could affect Malaysia’s long-term appeal,” he adds.

On the other hand, there are those who also do not see the export controls on AI chips as a surprise, given that the US Foreign Direct Product Rule has been reported to affect advanced chip equipment since 2024.

UOB Malaysia senior economist Julia Goh says that at this juncture, there is still uncertainty as to how Trump intends to handle this new ruling. There is a 120-day comment period for the proposed export restriction.

Despite the added uncertainty, economists are holding on to their forecast on exports at this juncture.

Goh has kept her base case scenarios and forecast for Malaysia’s exports, with the latter coming in at 4.5% in 2025.

The UOB economist’s base case, with a 55% probability, projects an additional 25% tariff imposed on China and a 10% universal tariff imposed on economies that have increased in trade surplus with the US due to trade diversion from China.

“So far, the comments and news seem to be leaning towards our base case for a more measured approach, particularly on gradual tariff increases that are aligned to the views of Trump’s advisers, who support his trade agenda but prefer to use it in a targeted manner for negotiating leverage,” she says.

Goh is expecting front-loading of exports to take place in the coming months before the tariffs kick in.

SERC’s Lee is taking a more cautious view on Malaysia’s export performance this year, given the potential spillover effects from the trade war onto trade, income and investment channels.

“Overall, the direct and indirect impact of the trade war on Malaysia’s economy and exports are largely dependent on the substitutability of the affected products, reconfiguration of supply chains and production, transshipment and Malaysian firms’ product cost and price competitiveness,” he explains.

In his base case, he is assuming that the global economy will still expand by 2.9% in 2025 amid a “gentle” tariff war with a gradual implementation schedule, where exports under this scenario will grow by 4% in 2025 compared to an estimated 5.1% in 2024.

Under his worst-case scenario, where severe trade retaliation occurs between US and China resulting in substantial disruption in the supply chain and a sharp pullback in the global economy, trade and investment flow, exports are expected to grow by 2% this year.

Meanwhile, RHB Research’s black swan scenario, with a 30% probability, assumes a 60% or more tariff imposition by the US on China and a subsequent tit-for-tat retaliation by China as a response. This assumption also includes 20% tariffs on the rest of the world.

Under such circumstances, RHB anticipates a “near-recessionary global economic environment” where the US economy will see no growth or a 1% growth in 2025 while China’s growth decelerates to 2.8%.

As for Asean, RHB Research says that it will be labelled as a China supply route and targeted by US sanctions, which will eliminate the positive feedback loop from re-routing Chinese-centric manufacturing and investment activities to Asean shores. “As such, Asean growth could slow to 2% or less in 2025 from 2024’s estimated 4.8% growth.”

While economies around the world hope for a blue sky scenario, they will have to wait and see how Trump’s administration moves its chess pieces in the coming months. 

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