This article first appeared in The Edge Malaysia Weekly on July 14, 2025 - July 20, 2025

THE 25% tariff imposed on Malaysia’s exports to the US came as quite a shock, considering that the government had been saying its negotiations with US trade officials had been progressing well. Prime Minister Datuk Seri Anwar Ibrahim on July 7 received a letter from the White House informing him of the even higher tariff, from 24% previously, that would be effective from Aug 1.

Malaysia is not alone in having a higher tariff slapped on its exports. Japan and South Korea are also bracing for the same 25% tariff.

Vietnam seems to have had a more favourable negotiation outcome since the US decided to impose only a 20% tariff on its exports — a huge cut from the 46% reciprocal tariff announced in April. Vietnam had offered to drop all tariffs on US imports in its response to the reciprocal tariff announcement.

Notably, the tariff on Malaysia’s exports to the US is still lower than the 36% and 32% imposed on the exports of Thailand and Indonesia respectively.

At a press conference last Wednesday, Minister of Investment, Trade and Industry Tengku Datuk Seri Zafrul Abdul Aziz explained that Malaysia stood by certain “red lines” during trade talks with the US, with non-tariff barriers — such as digital trade and government procurement — being key issues in talks with the US, apart from industrial and agricultural products. However, he stressed that the trade negotiations had not failed and that the government would need more time to broker a deal that benefits Malaysia.

Meanwhile, President Donald Trump warned against any tariff retaliation, saying that the US would add the same amount on top of the tariff rate that was announced if any countries raise their tariffs on US exports.

With less than a month to the Aug 1 deadline, can Malaysia negotiate a lower tariff for itself, following in Vietnam’s footsteps? Economists are of the view that there may not be a huge downward revision of the 25% rate imposed on Malaysian goods, with 20% being the baseline.

UOB Global Economics and Markets Research senior economist for Malaysia Julia Goh says the latest outcome on US tariffs likely reflects a more complex and uncertain negotiation process. “As Malaysia continues to negotiate with the US ahead of the extended Aug 1 deadline, we think some additional concessions will have to be made to secure a lower tariff rate.”

She points out that going by the tariff rates on other Asean countries, it does not appear that the rate imposed on Malaysia can be lowered significantly.

“The best case is to score a lower rate compared with some of our regional peers in order to safeguard Malaysia’s competitive tariff advantage,” she tells The Edge, adding that this is unlikely to derail the diversification efforts of most companies.

CGS International economist Nazmi Idrus opines that Vietnam is a “template” for not only Malaysia, but also the region in general. It implies the extent of the concessions a country would need to make to get a favourable deal with the US. “So far, the details [of the US-Vietnam deal] are not out yet, so it’s hard to see what exactly was agreed. But the headline somewhat set a standard on how much tariff other countries should expect, as well as what other countries would need to do to match that tariff or try to get even lower than Vietnam.

“We can definitely discuss concessions, but for a small trade-dependent economy like Malaysia, it really depends on the whims of its much larger partner. In this case, the whims of a single person. That is hard to predict. I do hope we can get it lower than 25%, but nothing seems guaranteed at this moment.”

OCBC senior Asean economist Lavanya Venkateswaran is of the view that there is no clear template for Malaysia and the best outcome would be to get a deal like Vietnam’s, with a lower tariff rate of 20%, alongside securing an exemption from the tariff on semiconductor exports.

She says the way forward is far from certain. “Although the extension of the deadline from July 9 to Aug 1 was taken as a positive signal, we see the level of uncertainty as higher than after April 2 because three months of negotiation have yielded limited tangible outcomes in terms of lower tariff rates.”

On the likelihood of securing a better deal with the US, Lavanya says it will depend on whether Malaysia views the non-tariff issues as important enough to protect from a national welfare standpoint. “The agriculture sector is a more sensitive area of discussion as it impacts farmers already dealing with volatile elements such as the weather.”

Sunway University Business School professor of economics Dr Yeah Kim Leng says Malaysia should not be discriminated against by the US, but should be treated fairly.

“The US-Vietnam deal provides a reference point for other Asean countries, including Malaysia, to further negotiate with the US for a lower tariff. As an economic bloc, Asean can be supportive of the current US policies in terms of reducing the trade deficit and reviving the manufacturing sector in the US based on the free market and cost considerations. It’s up to the private sector to respond to the incentives provided by the US government,” he says.

Following US Secretary of State Marco Rubio’s recent visit to Malaysia to attend high-level talks held in conjunction with the 58th Asean Foreign Ministers’ Meeting here, as well as Trump’s potential participation in the Asean Summit in October, Yeah is hopeful of a better deal between Malaysia and the US, with a tariff baseline of 20%.

Although the 25% tariff on Malaysia’s exports to the US is higher than the 20% on Vietnam, Nazmi thinks the 5% difference at cost level will not lead to a significant advantage for the latter. Furthermore, Malaysia does not really compete with Vietnam for US market share due to the different product mix exported.

Last year, the US was Malaysia’s third-largest trading partner and second-largest export destination. Total trade between the two countries rose nearly 30% to RM324.9 billion. Malaysia’s exports to the US jumped 23.2% to a record high of RM198.65 billion, of which 60% comprised electrical and electronics (E&E) goods valued at RM119.86 billion.

Meanwhile, Vietnam’s exports to the US totalled US$136.6 billion in 2024, up 19.3% from a year earlier. The US is the largest export market for Southeast Asia’s third-largest economy. Among the key export items were computers and electronics, machinery and equipment, garments and textiles, smartphones, wood products and footwear.

Although Vietnam could get a competitive advantage in sectors of production that overlap with those of Malaysia such as furniture, clothing and footwear, Lavanya points out that Malaysia’s production capabilities and depth of supply chain in the E&E sector are relatively unique in Asean and difficult to be replaced in the near term.

To mitigate any potential slowdown in Malaysia’s exports to the US, Yeah suggests a tax break from the government for affected industries, as well as to look at ways to diversify the country’s export markets.

“Although it may seem difficult to secure some concessions while continuing the negotiations, we should see how we can expand our trade relations with other countries, especially those in Europe, Africa and the Middle East, in order to maintain our sovereignty and reduce our dependence on the US market,” he says.

Yeah does not foresee the US being able to maintain such high tariffs over the longer term as the move will have a major impact on inflation in the country and strong downward pressure on its economy.

When asked about the implications for regional manufacturing hubs as well as the global supply chain arising from the tariffs on Asean countries, Nazmi believes that the US has a “near impossible task” of integrating into the global supply chain if it wants to reshore or bring manufacturing back to the country. “Asean countries have spent decades building this. So, it is unlikely that it will unravel fairly soon.”

For manufacturing activity to move to the US, the products could end up catering to only the US market, as the tariffs will create a price difference and production will only make sense when the goods are sold within its borders, says Nazmi. “The products will be too expensive to be sold outside of the US. This is where I think it will go.”

Having hugely benefited from the “China Plus One” strategy, friendshoring and offshoring policies, Malaysia would need to review the regional supply chain of goods directed to the US, says Lavanya. Also, she notes that the definition of transshipments, once made official, will need to be assessed carefully to fully understand the impact on companies that add lower value to their final products before export.

Note that while the tariff on Vietnam’s exports to the US is currently 20%, its goods that are transshipped will be slapped with a 40% tariff. The policy is seen as targeted at China, which has circumvented the US’ trade restrictions via shipments through third countries.

“The broader message is that the efforts of trade and investment diversification need to continue to reduce the region’s reliance on the US as a final consumption destination,” says Lavanya.

In a July 8 note, UOB says Malaysia will continue to be a potential beneficiary of onshoring trends, particularly as multinational corporations pursue “plus one” diversification strategies. “While we remain cautious due to the possibility of additional sector-specific tariffs — especially in semiconductors — it is encouraging that these are not cumulative with existing sectoral tariffs.”

MIDF Research is hopeful of a lower tariff of about 15% under a potential trade deal with the US, following Vietnam’s latest trade agreement with the US, even though goods that are transshipped through Vietnam, particularly from China to evade US tariffs, will still be subject to a duty of 40%. The research house is of the view that Malaysia will remain competitive relative to its regional peers even if it were to face a combined tariff of up to 35% — derived from the current 25% rate plus potentially an additional 10% BRICS-related tariff.

Transshipment rules could be a big factor in Asian countries’ trade talks with the US. Nomura Global Economics says Asia’s imports from China have accelerated since February this year when Trump imposed a higher tariff on China.

“Ultimately, the ability of many Asian countries to strike a trade deal with the US, which requires plugging third-country circumvention, and negotiate lower tariffs remains a delicate act: both economically and geopolitically. This is especially true for Asean,” it says in a July 11 report.

Nomura observes that the increase in imports from China was most notable for India, Indonesia, Malaysia and Thailand, while remaining high for Vietnam. Nevertheless, it says, Asian policymakers have begun to address the transshipment problem.

For Malaysia, the Ministry of Investment, Trade and Industry has been the sole issuer of certificates of origin for exports to the US since May 6.

Despite the tariff challenges, Yeah expects the Malaysian economy to grow at 4% to 4.5% this year, supported by domestic consumption and investments, as well as Bank Negara Malaysia’s decision to cut the overnight policy rate (OPR) by 25 basis points to 2.75% last week.

In a report released last Friday, MARC Ratings Bhd had pencilled in 4.4% economic growth in 2025 against 5.1% in 2024, given that external trade uncertainties had dampened export momentum. However, domestic demand remains resilient, driven by labour market improvements, accommodative policy settings and tourism recovery.

UOB has a lower gross domestic product (GDP) growth projection of 4% for Malaysia this year after taking into account the direct impact from the US reciprocal tariff and secondary effects from tariffs on major trading partners.

The Department of Statistics Malaysia is scheduled to release the advance GDP estimates for the second quarter of this year on July 18. In 1Q2025, the economy expanded at a slower pace of 4.4% year on year on lower export contribution despite resilient household spending and business investments. On a seasonally adjusted basis, GDP rose 0.7% quarter on quarter.

See also “The impact of US tariffs is relatively muted this time round” on Page 51 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.