Malaysia’s semiconductor industry, a cornerstone of the nation’s economy, faces a new and formidable challenge as the United States intensifies its export-control measures. According to recent reports, the US has embedded location-tracking devices in shipments of advanced AI chips from Malaysia to prevent their diversion to restricted countries such as China or Russia. This move, while aimed at safeguarding sensitive technology, places Malaysia in a precarious position, balancing compliance with American demands against its own economic interests and regional relationships.
A US senator introduced a Bill calling for location-tracking on AI chips to “limit China’s access” The Bill, called the ‘Chip Security Act,’ calls for AI chips to be controlled under export regulations, and products containing those chips, to be fitted with location-tracking systems to help detect diversion, smuggling or other unauthorized use of the product. “With these enhanced security measures, we can continue to expand access to U.S. technology without compromising our national security,” Republican Senator Tom Cotton of Arkansas said.
A High-Tech Surveillance Strategy
The use of tracking technology in export-controlled shipments is not a novel concept. For decades, the US has employed various methods to monitor the movement of sensitive goods, from aircraft components to scientific equipment, particularly those with dual-use potential for civilian and military applications. However, the stakes have escalated with semiconductors—often dubbed the oil of the digital age—becoming central to advancements in artificial intelligence, quantum computing, and military systems. 
Malaysia, a global hub for semiconductor assembly, testing, and packaging, plays a critical role in this high-stakes supply chain. The country serves as a vital link between upstream chip design, often led by US firms, and downstream integration into consumer and industrial products. This strategic position makes Malaysia both an indispensable partner and a potential vulnerability in the eyes of US policymakers, who are increasingly focused on preventing advanced technology from reaching adversaries.
The latest measure, as revealed by trusted international sources, involves embedding trackers in shipments of high-end AI chips. These devices enable US authorities to monitor the location of shipments in real-time, ensuring they do not end up in prohibited destinations or unauthorized hands. For Malaysia’s semiconductor sector, this adds a layer of scrutiny beyond traditional export licenses and supply-chain audits, transforming compliance into a technologically enforced mandate.
Economic and Trade Implications
The economic implications of this development are significant. Malaysia has recently secured a reduction in US tariffs on its semiconductor exports, from 25% to 19%, following negotiations led by the Ministry of International Trade and Industry (MITI). This reduction was a critical win, aimed at maintaining the competitiveness of Malaysia’s chip industry on the global stage. However, the US has made it clear that any violation of export controls—such as a shipment diverted to a restricted country—could trigger punitive tariffs as high as 45%, even on exports previously exempt under the trade deal.
Such a penalty would have far-reaching consequences. Malaysia’s semiconductor industry, particularly concentrated in areas like Penang’s electronics corridor, supports thousands of jobs and attracts substantial foreign investment. A sudden tariff hike could disrupt this ecosystem, deterring future investment and undermining Malaysia’s reputation as a reliable hub for electronics manufacturing. The financial ripple effect could be felt across the nation, impacting not just industry stakeholders but also the broader economy.
Moreover, the surveillance element introduces a new commercial risk. With trackers embedded in shipments, a single misstep—whether a faulty shipment, a breach by a distributor, or a grey-market sale—could jeopardize the entire sector. Compliance is no longer just a matter of paperwork; it has become a high-stakes gamble where the cost of failure is prohibitively high.
Geopolitical Balancing Act
Politically, Malaysia finds itself navigating a delicate tightrope between two global powers: the United States and China. The US views these tracking measures as essential to its broader technology containment strategy, aimed at curbing China’s access to cutting-edge semiconductors critical for next-generation applications. Frameworks like the US CHIPS Act and initiatives such as The Clean Network project underscore Washington’s determination to seal every potential leak in the global supply chain.
In response to these pressures, Malaysia has made strategic concessions to align with US expectations. Notably, the country suspended its collaboration with Huawei, a Chinese tech giant, on 5G infrastructure—a significant move given China’s status as Malaysia’s largest trading partner. This decision was intended to signal compliance with American export-control frameworks and bolster confidence in Malaysia as a trusted partner.
However, the embedding of trackers in Malaysian shipments could strain relations with Beijing, which may perceive this as a sign of Malaysia’s growing alignment with US strategic priorities. For Kuala Lumpur, maintaining neutrality in this tech rivalry is increasingly challenging. The government must craft a clear and consistent policy on technology exports to avoid alienating either side while protecting national interests.
Malaysia’s Strategic Response
While Malaysia cannot alter the presence of US trackers in its semiconductor shipments, it can take proactive steps to safeguard its industry’s credibility and autonomy. Establishing a robust domestic compliance monitoring system is paramount. This would involve rigorous vetting of customers, end-use verification, and supply-chain audits that exceed the minimum standards set by the US. Such measures, led by MITI and the Malaysian Investment Development Authority (MIDA), could preempt enforcement actions and demonstrate Malaysia’s commitment to transparency.
Additionally, Malaysia could leverage its position within regional platforms like ASEAN and the East Asia Summit to advocate for a multilateral dialogue on semiconductor supply-chain security. By framing compliance as a shared standard rather than a unilateral imposition by the US, Malaysia might mitigate the perception that it is merely enforcing Washington’s agenda. This approach could foster greater regional cooperation and reduce geopolitical friction.
Diversifying semiconductor markets is another critical strategy. While compliance with US conditions remains essential, expanding trade relationships with other regions—such as Europe or non-aligned countries—could reduce Malaysia’s dependence on any single power’s policy decisions. This diversification would not undermine US rules but rather ensure that Malaysia’s economic future is not overly tied to the fluctuations of US-China relations.
Broader Context of Technology Competition
The US decision to embed trackers in AI chip shipments reflects a broader reality of the current geopolitical landscape: trust in strategic technology competition is increasingly enforced through hardware as much as through diplomacy. Semiconductors, as the backbone of modern innovation, have become a battleground where economic and national security interests intersect. For the US, preventing China from accessing advanced chips is a matter of maintaining technological supremacy. For China, securing such technology is vital to its own ambitions in AI and military modernization.
Malaysia’s role in this dynamic is both a privilege and a burden. As a key player in the global semiconductor value chain, the country benefits from its strategic niche, which brings economic opportunities and international relevance. However, this position also exposes Malaysia to the risks of geopolitical rivalry, where the actions of larger powers can directly impact national industries.
Looking Ahead
The challenge for Malaysia extends beyond mere compliance with US export controls. It lies in preserving the viability of its semiconductor sector under the weight of intensifying tech wars. Tracking technology, though not new, carries heightened political and economic consequences in today’s tense climate. The Malaysian government, industry leaders, and regional partners must work collaboratively to ensure that the country remains a reliable partner to the US while safeguarding its own economic resilience.
As the global landscape of technology competition continues to evolve, Malaysia’s semiconductor industry stands at a crossroads. The decisions made in the coming months—on compliance, diversification, and regional engagement—will shape not only the sector’s future but also Malaysia’s broader standing in the international arena. How Kuala Lumpur navigates these choppy waters remains an open question, with implications that could resonate far beyond its borders.
