US trade wars may slow global growth, minimal impact on Malaysia

Mounting trade wars between the United States and its largest economic partners could slow global growth but Malaysia, being an open economy, may experience a minimal impact, economists said.

The US on Tuesday started imposing the blanket 25 per cent tariffs on imports from major trading partners Canada and Mexico, and putting an additional 10 per cent tariff on goods from China.

The move sparked swift retaliation from Beijing and Ottawa.

OCBC senior Asean economist Lavanya Venkateswaran said the direct impact of the US tariffs against Mexico and Canada particularly on Malaysia could be limited.

She said the shares of Malaysia's exports to Mexico and Canada are small at 1.3 per cent and 0.3 per cent of total exports respectively in 2023.

"Higher tariffs on US imports from China could further support the ongoing supply chain diversification, as relative tariffs imposed by the US are lower for Malaysia presently," she added.

Lavanya said there is a push by Malaysia to diversify trade and investment sources away from the US to other partners within Asean and the BRICS alliance.

"There is merit in broadening the trade and investment sources to better mitigate risks from relying too heavily on certain trading partners," she added.

The economist said the uncertainties surrounding the direction of US trade and tariff policies are high and it would weigh on sentiment and heighten market volatility.

"Whether the trade policies will ultimately benefit the Asean region remains to be seen considering we believe the region may also be susceptible to tariffs," she added.

Lavanya said for Malaysia, the sector which has a 10 percentage point or higher tariff differential with the US is the plastics and rubber sector, making it vulnerable to sector specific tariffs.

"The memo from the White House on 'Reciprocal Trade and Tariff' suggests that the US president could be adopting a more nuanced approach to tariffs compared to the blanket tariffs discussed on the campaign trail.

"This suggests that some crucial sectors such as electrical and electronics may see a more limited impact than it would have under circumstances of blanket tariffs," she said.

Lavanya added that more tariffs are being planned, and ongoing discussions on the matter indicate that uncertainties remain high.

"The (Malaysian) authorities are hitting the right notes by focussing on expanding trade and investment channels to mitigate risks of relying on certain key markets; boosting medium-term growth prospects through crucial reforms in the manufacturing sector; while also, bolstering avenues of services sector such as tourism," she said.

Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid told Business Times the continuation of tariffs will heighten uncertainty.

"The one that pays the tariff is the US businesses. Apart from that, there could be retaliation from the affected countries such as Canada, Mexico and China which can be in the form of tariff and non-tariff measures.

"Essentially, the trade war could slow the global and the bond market in the US seems to have priced in such risk with the two-year US Treasury yields dropping 40 basis points to 3.96 per cent between Feb 12, 2025 to March 3, 2025," he said.

Afzanizam said the recent Institute for Supply Management (ISM) Index for manufacturing showed its sub-index on new orders had dropped from 55.1 points in January to 48.6 points in February while the sub-index on prices jumped to 62.4 points in February from 54.9 points in January.

"Based on this survey, it suggests the US economy could slow down while at the same time prices could stay elevated. So, we are looking at the risk of a global growth slowdown and given Malaysia is such an open economy, it could affect us.

"On the impact on Malaysia's exports such as electronics, palm oil and manufacturing, it will depend upon whether the Trump administration would impose any tariff on us.

"Thus far, we have yet to see any direct tariff import on Malaysian goods by the US," he added.

Afzanizam said the government has been proactively establishing new free trade agreements recently with the United Kingdom and United Arab Emirates.

"The European Union and Malaysia have recently resumed renegotiating the Malaysia-European Union Free Trade Agreement. I believe the trade dynamics are shifting to more friendlier parties and that may include China and other BRICS countries as well," Afzanizam added.

The economist said countries across the globe would seek to establish ties with friendlier counterparts and that would include investment as well.

"It is quite a delicate balancing act as we are dealing with the US which seems to be isolating itself from the rest of the world and certainly there would be implications from the geopolitical standpoint," he added.

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