By: Assoc. Prof. Dr. Caroline Geetha A/P B. Arokiadasan, 

Research Fellow, Centre for Economic Development and Planning,

Faculty of Business, Economics and Accountancy, Universiti Malaysia Sabah

When the United States announced sweeping new tariffs on all imports, including a 24% levy on Malaysian goods, the immediate reaction here was alarm. After all, the U.S. is Malaysia’s third-largest trading partner.

But beneath the fear lies a deeper question, is this just a threat to our economy or a long-overdue wake-up call? The U.S. justifies the new tariffs as a response to unfair trade practices, and Malaysia is in the radar due to various reasons. 

For one, Malaysia has become a popular hub for transshipping Chinese goods to avoid existing U.S. tariffs. Some Chinese companies were caught routing products through Malaysia to dodge duties. While not illegal under local laws, this practice has raised eyebrows in Washington.

Then there’s Malaysia’s booming semiconductor and electronics industry and U.S. is our largest customer in this sector. U.S. officials worry that our exports to China and our role in global supply chains might indirectly support their trade rivals.

Moreover, Malaysia's expanding export market in electronics and electrical goods presents significant competition to U.S. manufacturers. This substantial export volume underscores Malaysia's growing influence in sectors traditionally dominated by U.S. companies. This poses competitive challenges to American manufacturers.

Lastly, the ongoing concerns about environmental and labour practices in the palm oil industry. The U.S. has imposed restrictions and higher tariffs on Malaysian palm oil exports due to alleged human right issues and environmental degradation, leading to increased U.S. restrictions and tariffs on Malaysian exports. This has put Malaysia under pressure.

On paper, the numbers look threatening. Malaysia’s exports to the United States particularly in high-value sectors like semiconductors and electronics are predominantly driven by foreign direct investment (FDI) and multinational corporations (MNCs) operating within the country, rather than by wholly Malaysian-owned companies.

Many of these high-tech exports, including semiconductors, electrical and electronic (E&E) products, and medical devices, are produced by major U.S., Japanese, German, or European MNCs that have established manufacturing bases in Malaysia. Companies such as Intel, AMD, Texas Instruments, and Broadcom have long operated in regions like Penang and Kulim, using Malaysia as a strategic hub for production and assembly to supply their global value chains, including the U.S. market.

In addition, joint ventures between Malaysian firms and foreign partners, especially in the electronics, palm oil, rubber, and automotive sectors, enable local players to ascend the value chain by leveraging foreign technology and market access.

Meanwhile, fully Malaysian-owned companies are more dominant in commodities such as palm oil, rubber gloves, furniture, and food products, with firms like Top Glove, Hartalega, Sime Darby, and various furniture exporters from Johor playing key roles. These local companies are more exposed to tariff shocks, as they lack the geographic flexibility of MNCs.

MNCs are drawn to Malaysia for its lower production costs, skilled workforce, mature supply chain infrastructure (particularly in Penang and Selangor), political stability and incentives provided by the Malaysian Investment Development Authority (MIDA).

However, the imposition of U.S. tariffs could prompt some of these firms to reconsider their operations in Malaysia, potentially shifting production to other Southeast Asian countries or back to the U.S., while Malaysian exporters may suffer directly due to limited relocation options—ultimately affecting job creation and GDP contributions in Malaysia.

This exposes a long-standing issue that Malaysia has become overly dependent on foreign direct investment (FDI) to drive exports, jobs, and growth. And while FDI creates employment and boosts productivity, the benefits often don’t stick.

Research shows that technology and innovation rarely trickle down. FDI has contributed to labour productivity growth, its impact on Total Factor Productivity (TFP), a better measure of efficiency and technological diffusion by FDI has been limited, particularly in low- and mid-tech sectors. High-value spill overs are largely confined to specific clusters like the E&E sector in Penang, with limited national diffusion.

Furthermore, technology and managerial know-how transfers remain shallow, as most MNCs keep R&D and innovation functions in their home countries, relegating Malaysia to low-to-mid value assembly roles. The situation is compounded by transfer pricing practices that erode Malaysia’s tax base.

Profits are often repatriated. R&D stays offshore. Malaysia does the work—but others reap the rewards. It creates a deficit in the current account in the balance of payment, eventually draining the foreign reserves and weakening the Ringgit.

From a human rights and environmental standpoint, MNCs often relocate polluting industries to developing nations like Malaysia, exploiting weaker labour and environmental regulations, only to later impose ESG-related barriers on Malaysian exports, creating an uneven global playing field.

In this light, rather than fearing U.S. tariffs, Malaysia should treat them as a strategic opportunity to reassess its FDI dependency. It’s tempting to view these tariffs as pure punishment.

But there’s a bigger game at play. Economic tools are used to shape alliances, control technology, and protect strategic industries. If Malaysia remains overly exposed to one or two large markets, it becomes easy prey in such games.

That’s why we must diversify trade relationships, deepening ties within ASEAN, strengthening pacts like the Regional Comprehensive Economic Partnership (RCEP) and exploring new markets in Africa, the Middle East, and Latin America.

Instead of chasing more FDI at any cost, Malaysia can use this moment to strengthen from within. The government could pivot toward empowering small and medium-sized enterprises (SMEs), especially in tech and sustainable industries. Rather than assembling parts for others, we could start building our own.

We should also invest in food and energy security, cutting our reliance on imports of essentials like rice, beef, onions, and fuel. Developing agro-tech and scaling up renewable energy could not only reduce vulnerabilities but create new growth sectors.

Reforming education is another crucial step. A system that encourages creativity, entrepreneurship, and research — not just rote learning — can nurture a generation ready for high-value jobs in green tech, biotech, and AI.

It’s time to move from just producing workers to producing innovators. At the same time, we must meet international expectations. That means cleaning up labour practices in our plantations, enforcing environmental protections, and aligning our industries with ESG (Environmental, Social, and Governance) standards. This isn’t about pleasing others — it’s about creating an economy that is fair, sustainable, and respected globally.

Malaysia stands at a crossroads. We can resist change, or we can seize this moment to build something better. A more resilient, inclusive, and sustainable economy—one that is less about pleasing global giants and more about protecting national dignity. Instead of fearing tariffs, we can treat them as a signal. A signal that it’s time to invest in ourselves.