This article first appeared in Forum, The Edge Malaysia Weekly on April 7, 2025 - April 13, 2025

US President Donald Trump’s sweeping tariffs, although dogged by questions about his administration’s calculations of trade imbalances, is having a global impact. Even the smallest of nations have been hit by the US-imposed tariffs that will come into effect this week.

China, which has been slapped with an additional tariff of 34% on top of the 20% imposed earlier, has vowed retaliatory action. The European Union (EU), which has been slapped with a 20% tariff, has also said it will take countermeasures.

The question is, what kind of retaliatory action can be expected from these economic powerhouses?

Raising tariffs on US imports into their countries in a tit-for-tat move will not do much to help global trade. In fact, it will only worsen the current trade war.

Some economists expect the emergence of a currency war to counter the hefty tariffs. By devaluing the renminbi and the euro respectively, China and the EU can mitigate the impact of the tariffs. This will only invite rebuke from the US, but it has been done before.

While this is also an option for Malaysia, it is not likely to happen.

For instance, a 14% depreciation of the ringgit could help mitigate the impact of the 24% tariff that the US has imposed. This is after taking into account a global flat tariff of 10% imposed on all countries.

But in reality, a 14% depreciation of the ringgit will have a lot of unintended consequences on the economy and the political situation. For instance, a weaker ringgit leads to more expensive imports, especially of food and other essentials.

Politically, a weaker ringgit would not bode well for the government of Prime Minister Datuk Seri Anwar Ibrahim. This is because a weak currency would be construed as a sign that the government is not managing the economy well. Moreover, Malaysians as a whole would not like to see the ringgit depreciate as it would have a negative impact on their wealth.

As for China, the People’s Bank of China (PBoC) has always managed the renminbi within a tight band. At the moment, it is about RMB7.20 against US$1. Speculation is rife that the central bank will allow the currency to gradually weaken to 7.50 against the US dollar to mitigate the effect of the tariffs.

If China allows its currency to weaken, it would not be the first time that the country is doing so to help overcome tariffs imposed by the US. In 2018, during Trump’s first term in office, China allowed the renminbi to depreciate to cushion the blow from US-imposed tariffs.

However, at the time, China’s total trade impacted by the tariffs was small, unlike now when they apply across the board.

As for Europe, the EU is more inclined to impose reciprocal tariffs on goods from the US. However, for now, it has opted to conduct trade negotiations with the US, and the bloc has given itself four weeks to come to an agreement with the Trump administration.

If nothing happens, the EU is most likely to take some form of trade action against the US, and a gradual weakening of the euro cannot be discounted.

A currency war is not healthy as nobody wins. Hence, trade negotiations are the only way.

One possibility is a coordinated action by all of the world’s economic powerhouses to weaken the US dollar and strengthen their respective currencies. It happened in 1985 when Germany and Japan had a persistent trade deficit with the US.

It led to the Plaza Accord where five economic powerhouses sold the dollar and bought the German deutsche mark and the Japanese yen. The coordinated approach was aimed at deliberately weakening the greenback and improving the US’ export competitiveness.

However, there are unintended consequences to such actions. The Plaza Accord led to the appreciation of the yen against major currencies, causing Japanese domestic manufacturers to shift to cheaper places of production such as Malaysia.

By the 1990s, it had caused a slowdown in the Japanese domestic economy, prompting the government to undertake a huge stimulus programme. The stimulus measures in turn led to asset price inflation and a bubble economy that bogged down the Japanese economy for years.

In the current tariff tempest, Malaysia is a small player in a big fight among major economic powerhouses.

It should be noted that Malaysia depends on the US for the health of its domestic economy, even though China is its biggest trading partner. The US is a crucial market for the manufacturing sector, particularly the electrical and electronics (E&E) industries.

To the uninitiated, the bedrock of the country’s exports is the manufacturing sector, which accounted for 85% of total exports in 2023. Within the manufacturing sector, the E&E segment constituted 40% of total exports that year.

Malaysia is the world’s sixth largest exporter of electronics and semiconductors, and accounted for 7% of global semiconductor trade flows in 2023. It is also responsible for 13% of back-end operations globally, including chip testing and packaging.

What happens in the US impacts Malaysia’s exports, particularly in the E&E sector, which is the largest employer of workers locally.

According to the 2025 Economic Report from the Treasury, a 1% change in China’s gross domestic product will influence Malaysia’s exports by 1.13%. Meanwhile, a 1% change in the US’ GDP will have a bigger impact on Malaysia’s gross exports, at 1.71%.

This is because Malaysia is a net exporter to the US and a net importer with China.

So, countries such as Malaysia, which are essentially trading nations, will just have to bite the bullet and seek a respite from the US, just like Mexico did, and hope that China, the US and EU will come to some kind of compromise.

M Shanmugam (m.shanmugam@bizedge.com) is a contributing editor at The Edge

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