Malaysia Faces Economic Pressure as Indonesia Secures Lower US Tariffs

Malaysia is grappling with mounting economic challenges as Indonesia secures a significant reduction in US tariffs, positioning itself as a more competitive exporter to the world’s largest consumer market. The new deal, which slashes Indonesia’s tariff rate to 19% from a previously threatened 32%, intensifies pressure on Malaysia, now burdened with a steeper 25% tariff rate compared to its regional neighbors. With Vietnam also cutting its rate to 20% and ongoing negotiations for Singapore and Thailand, Malaysia risks losing ground as a manufacturing hub if it fails to renegotiate its standing with Washington.

Regional Tariff Disparities Threaten Competitiveness

The latest round of trade negotiations with the United States has reshaped South East Asia’s economic landscape. Indonesia’s agreement, finalized in early July 2025, not only lowers its tariff burden but also includes commitments to purchase US$15 billion in American energy, US$4.5 billion in agricultural products, and 50 Boeing jets. In return, US exports to Indonesia face no tariffs or non-tariff barriers, a move that enhances Jakarta’s appeal to investors eyeing the US market.

Vietnam, similarly, has reduced its tariff from 46% to 20%, while the Philippines faces a slight increase to 20% from 17%, still lower than Malaysia’s rate. Singapore, currently at a favorable 10% tariff, and Thailand, facing a hefty 36%, are in active discussions with Washington. Thailand recently proposed zero levies on many US imports, signaling urgency to improve its position. These developments, set to take effect on August 1, 2025, underscore a regional race for tariff relief that Malaysia appears to be lagging in.

The disparity in tariff rates poses a direct threat to Malaysia’s export competitiveness. As a key player in high-value sectors like electronics and precision engineering, the country has long been a magnet for foreign direct investment (FDI) under strategies like China+1, where companies diversify supply chains beyond China. However, with neighbors securing better access to the US market, Malaysia risks losing out on new manufacturing investments.

Expert Warnings on Economic Fallout

Industry analysts are sounding the alarm over the potential consequences of Malaysia’s higher tariff burden, and have emphasized the urgency for Malaysia to engage with the Trump administration. SPI Asset Management managing director Stephen Innes warned that if the 25% tariff remains unchanged, Malaysia could become “collateral in a region that is rapidly aligning itself for tariff relief.”

Innes further highlighted the broader implications for FDI, noting that foreign investors assessing South East Asia will factor in tariff burdens when deciding where to channel funds. “If Malaysia ends up with the highest US tariffs in the region, the knock-on effects could be significant. From a trade perspective, Malaysian exports will become less competitive” he added. He pointed to Vietnam’s past success in attracting investment due to faster trade deals and responsive policies as a cautionary tale for Malaysia.

Economist Geoffrey Williams offered a stark projection, estimating that a sustained 25% tariff could slash Malaysia’s exports by 20 billion Malaysian Ringgit (~US$4.2 billion) and shave 1% off gross domestic product growth. His recommendation is clear: Malaysia should eliminate all tariffs on US goods and reduce non-tariff barriers to secure a more favorable deal.

Challenges in Matching Regional Concessions

Sunway University economics professor Dr. Yeah Kim Leng suggested that Malaysia could mirror Indonesia’s approach by offering zero tariffs on US imports, noting that the country’s current import tariffs on American goods are relatively low at around 6.1%. However, he acknowledged significant hurdles in meeting other US demands, such as government procurement policies, halal certification requirements, and investment commitments in the United States. “Given that Malaysia’s exports to the United States are broadly similar to Indonesia’s, the latter’s lower tariffs will create a price disadvantage to Malaysian exporters” he explained on July 17, 2025.

Dr. Yeah also cautioned that a loss of market share in the US could dampen trade, investment, and manufacturing activity in Malaysia unless offset by increased exports to alternative markets. Yet, with the United States remaining the world’s largest consumer market in terms of purchasing power and demand, diversification may not fully compensate for restricted access. Innes echoed this sentiment, describing efforts to redirect exports to intra-ASEAN markets as insufficient. “It is a case of selling more into a pond when you’ve just been priced out of the ocean” he remarked.

A Glimmer of Optimism Amid Concerns

Not all experts are pessimistic about Malaysia’s prospects. Kevin Khaw Khai Sheng, a research analyst at iFAST Capital, argued that while a higher tariff may lead to short-term dips in trade, capital flows, and manufacturing competitiveness, these effects are likely temporary, lasting up to a year. “In the longer term, Malaysia’s role as a manufacturing base will remain intact, given the country’s political stability, multilingual workforce, and geographic advantages” he said on July 17, 2025. He noted that shifting supply chains away from Malaysia is not an easy feat despite tariff pressures.

Khaw also pointed out that countries like Vietnam and Indonesia made significant concessions by granting full market access to US goods, a move that could harm their domestic economies. In contrast, Malaysia is pursuing a balanced approach. Recent measures by the Investment, Trade and Industry Ministry (Miti) to tighten rules on US-origin chips demonstrate an effort to reach a mutual understanding with Washington without fully opening the domestic market. “A win-win solution does not mean we have to open up our market entirely” Khaw emphasized.

Strategic Considerations and WTO Benefits

Dr. Mohd Afzanizam Abdul Rashid, head of economics, market analysis, and social finance at Bank Muamalat Malaysia Bhd, urged caution in liberalizing the local economy. “We need to be clear on our existing industrial policies, especially when there is an element of protectionism” he stated on July 17, 2025. He warned against succumbing to peer pressure on US tariffs without thorough due diligence.

Meanwhile, Universiti Tunku Abdul Rahman economics professor Wong Chin Yoong highlighted a silver lining through World Trade Organization (WTO) rules. He explained that when Indonesia imposes zero tariffs on US goods, it must extend the same treatment to Malaysian exports under the most favored nation principle. “Malaysia still benefits as long as WTO rules are upheld” he noted on July 17, 2025. This mechanism could mitigate some adverse impacts on domestic exports by keeping other markets accessible.

Path Forward for Malaysia

As the August 1 deadline for new tariffs looms, Malaysia faces critical decisions. Innes advised pushing for exemptions in sectors where the country offers clear value, such as semiconductors, green technology, and palm derivatives, through targeted bilateral talks. Domestically, he stressed the need to enhance investor incentives, streamline regulations, and upskill the labor force to maintain a competitive edge. “Malaysia cannot just rely on legacy advantages” he warned.

The unfolding tariff saga in South East Asia underscores the delicate balance between national interests and global trade dynamics. For Malaysia, the challenge is not only to secure a better deal with the United States but also to adapt swiftly to a shifting regional landscape. As negotiations continue, the economic implications of these tariffs will likely shape investment flows and trade patterns for years to come. Whether Malaysia can reclaim its competitive footing remains an open question, with stakes high for its role as a regional manufacturing powerhouse.