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

MALAYSIA’s ambitious drive to climb the semiconductor value chain and establish itself as a regional artificial intelligence (AI) and chip design hub faces mounting pressure from intensifying geopolitical tensions and the Trump administration’s increasingly aggressive trade policies.

In separate letters dated July 7, the White House formally notified the King of Malaysia and Putrajaya that a sweeping 25% import tariff will be imposed on all Malaysian products entering the US effective Aug 1.

This marks a step-up from the previously threatened 24% reciprocal tariff, which saw a 90-day pause from April 9 to July 8. Back then, semiconductors were among the goods that were exempted from the “Liberation Day” reciprocal tariff announced by US President Donald Trump on April 2.

Semiconductors were not specifically mentioned in the letter notifying Malaysia of the 25% tariff.

Malaysia Semiconductor Industry Association (MSIA) president Datuk Seri Wong Siew Hai says the local chip firms are still awaiting clarity on the tariff by the US, hoping that the Trump administration would continue to exempt semiconductors from the tariff beyond Aug 1.

Malaysia is the world’s sixth-largest exporter of semiconductors, commanding 13% of the global market for semiconductor packaging, assembly and testing, while contributing 40% to the nation’s exports.

The US is Malaysia’s third-largest destination for semiconductor exports. Last year, the country shipped US$16.2 billion worth of chips to the US, making up almost 20% of all US semiconductor imports.

While the tariff is technically paid by US importers, the higher duty is expected to hurt Malaysian exporters by eroding their price competitiveness in one of their most important markets, especially in electronics and semiconductor goods.

Compounding the concern is that Bloomberg, citing sources, on July 4 reported that the Trump administration was drafting a fresh round of AI chip export controls, which will explicitly name Malaysia and Thailand as part of a new list of jurisdictions requiring tighter scrutiny. If implemented, the curbs could limit US chip giants such as Nvidia Corp from shipping certain high-end chips to Malaysia, on fears that they could be diverted to China or used in sensitive applications.

To recap, former US president Joe Biden on Jan 13 — a week before he left the White House — released the AI Diffusion Rule, which placed Malaysia in Tier 2, restricting access to advanced AI chips such as graphics processing units (GPUs) to a maximum of 50,000 units over two years.

In May, the Trump administration scrapped the AI Diffusion Rule, dismissing it as “overly complex” and “overly bureaucratic”.

However, Washington is now reportedly drafting a new rule aimed at preventing China — which is already barred from buying Nvidia’s advanced AI chips — from accessing these components via intermediaries in Southeast Asia, particularly in Malaysia and Thailand.

Trump’s measures — though not yet confirmed — come at a delicate time for Malaysia, which has been positioning itself as a neutral, pro-investment destination in the global chip supply chain.

Recent developments have cast a shadow on that positioning, including the unverified report in The Wall Street Journal in June that Chinese engineers were flying suitcases of hard drives to Malaysia to train their AI models at data centres equipped with advanced Nvidia chips.

Earlier, at end-February, three men were charged in Singapore for illegally transferring Nvidia’s AI chips from the island republic to China. Singapore prosecutors in March told a court that the case, in which Singapore-based firms had been accused of fraudulently supplying US servers to Malaysia, involves transactions worth US$390 million (RM1.7 billion).

Last week, Trump further warned of an additional 10% tariff on countries seen to be aligning with the BRICS (Brazil, Russia, India, China and South Africa) bloc and adopting “anti-American policies”.

Malaysia joined BRICS as a partner country in October last year. A partner country is basically an observer state that receives support from BRICS members, even though it is not yet an officially accepted member.

While Malaysia is not a full member of BRICS and maintains a neutral foreign policy stance, the perception of leaning too closely to China — especially in the tech space — could have economic consequences.

Professor Dr Chris Miller, author of Chip War: The Fight for the World’s Most Critical Technology, opines that Trump’s new rule will primarily focus on preventing the smuggling of chips from Southeast Asian countries into China, as well as trying to limit the capabilities of companies to establish data centres in Southeast Asia, and then serve Chinese customers.

“I suspect that the final rule might still permit the construction of these data centres in Southeast Asia, but there will be a mandate that they will have to be operated by companies that are certified by the US government,” he tells The Edge.

Miller, an economics historian with a Master of Arts and Doctor of Philosophy in history from Yale University and a Bachelor of Arts in history from Harvard University, believes the likes of Amazon Web Services (AWS), Microsoft and Google will still be able to build “fairly capable” AI data centres in Southeast Asia. “I don’t think we should see this as a rule that will impact the ability of Southeast Asian countries to build and deploy data centres, but it will make it harder for them to serve customers from China.

Can Malaysia remain a trusted supplier in the global supply chain? “I think this is a real challenge because there are two major countries that Malaysia wants to be seen as a trusted partner,” he remarks.

Miller goes on to say that the more trusted Malaysia is seen to China, the less trusted it will be seen to the US, and vice versa.

“Certainly, a lot of Chinese firms see Malaysia as a neutral ground to be able to package and sell to Western markets. From the US perspective, that looks like a transshipment of Chinese products to foreign markets.

“There are some tough trade-offs that Malaysia has to consider. The reality is that both Washington and Beijing see a lot of these trade dynamics as zero-sum terms. The more investments you have from one side, the more the other will raise its eyebrows. The more you impose limits on Chinese firms, the less happy Beijing will be.”

Damien Dujacquier, managing partner of Roland Berger Southeast Asia, acknowledges that while Trump’s new controls are simpler and more likely to be more rigorously enforced to target specific nations, it is important for Malaysia and Thailand to play the game if they hope to maintain access to critical technologies.

“Outright exclusion is unlikely given Malaysia’s strategic role in the global tech supply chain and its strong economic ties with the US. The most likely outcome? Malaysia will remain part of the global AI chip diffusion network, but under tighter export controls and heightened monitoring, particularly for high-end AI chips,” he tells The Edge.

Dujacquier warns that if the US views Malaysia as aligning with China, Malaysia could face significantly tighter US export controls and higher tariffs, greatly impacting its tech sector, including semiconductors.

“Its critical role in global semiconductor supply chains could deteriorate, prompting Western tech firms and investors to reconsider their reliance on Malaysia. Diplomatic relations with the US and its allies would suffer, reducing Malaysia’s regional and global influence. Lastly, Malaysia’s reputation as a neutral trading partner could erode, leading foreign companies to shift investments to other Asean nations perceived as more reliably neutral,” he says.

Chris Ong, principal and operations lead for Roland Berger Southeast Asia, is of the view that diplomacy, economic diversification and Asean alignment may reduce the reliance on the US-Malaysia relationship.

“The worst-case scenario for Malaysia would be severe economic isolation, loss of critical foreign investments and geopolitical marginalisation, triggered by being perceived as openly aligning with China against the US and its allies,” he says.

Nevertheless, Ong believes such an extreme outcome is “highly unlikely” given Malaysia’s approach historically, as well as the deep integration and investments of US-headquartered companies in Malaysia. “Summing up, Malaysia needs to put in the relevant controls to continue to build trust and become the preferred trading partner,” he suggests.

John Lee, director of East-West Futures, a consultancy specialising in China’s political economy and high tech sectors, concurs that some US companies are already heavily invested in Malaysia.

“That means there will be negative impact from interrupting this business and Malaysia’s role in the global sector. Hopefully, the US government will consider these factors,” he tells The Edge.

“Nothing is set in stone yet. The US government is still working towards Aug 1 for national tariff decisions, and Trump still seems sensitive to US inflation and financial market fluctuations.”

Lee also says countries such as Malaysia and Singapore are significant locations in the global chip supply chain. So, to cut them out completely would be highly disruptive.

“Remember that US companies are now dominant only in some parts of the semiconductor supply chain. There are companies from many other countries to work with in this industry,” he says.

Economist Samirul Ariff Othman points out that Trump’s revocation of Biden’s AI Diffusion Rule initially appeared to open space for broader US chip exports globally. However, reports that his administration is now drafting new targeted export controls aimed at Malaysia and Thailand suggest a pivot — widening the front door for exports, but sealing off potential back doors for China.

Samirul, who is an adjunct lecturer at Universiti Teknologi Petronas and a senior consultant with Global Asia Consulting, admits that Malaysia is increasingly being viewed — fairly or not — as a leaky node or weak link in US-led export control chains.

“This perception risks Malaysia being sidelined from any future AI diffusion regime that favours trusted tech ecosystems. Unless Malaysia tightens operational enforcement, enhances transparency and aggressively dispels ambiguity over its alignment, exclusion from diffusion frameworks or secondary sanctions risk is real,” he warns.

Yet, he says, this moment could also be a pivotal point. “If Malaysia acts decisively — with coordination, transparency and enforcement — it can move from being a perceived risk to a model of compliance in the Global South. But the window to act is closing. Malaysia should double down on neutrality, not just in speech, but in transparent enforcement and supply chain traceability.”

UOB Kay Hian Wealth Advisors head of investment research Mohd Sedek Jantan predicts that Trump’s proposed export controls will be narrower in scope but sharper in intent.

“Unlike Biden’s broad-based AI Diffusion Rule, which applied to over 40 jurisdictions, Trump’s draft policy targets specific rerouting risks — notably chip leakage to China via Malaysia and Thailand. This more surgical approach is likely to reduce procedural complexity for US firms and lower compliance costs by up to 50%, according to industry estimates,” he says.

Commenting on US tariffs, Mohd Sedek says the worst-case scenario would involve a broad-based tariff of 25% to 60% targeting BRICS and associated economies, including Malaysia.

“Such measures would have severe macroeconomic consequences. Under a hostile tariff regime, Malaysia could experience a 15% to 20% decline in exports to the US, triggering manufacturing contractions, industrial retrenchments in Penang and Johor, and a collapse in private investment,” he warns.

Mohd Sedek says if Washington interprets Malaysia’s BRICS engagement as alignment with China — despite its official non-alignment posture — the country could face selective tariffs, export ban or financial restrictions akin to secondary sanctions.

“However, full market exclusion is unlikely. Malaysia’s indispensable role in the global chip ecosystem would incentivise Washington to retain conditional engagement,” he opines. 

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