In Depth: Trump’s Tariffs a Mixed Bag for Malaysia’s Chip Sector

The United States’ three-month suspension of increased tariffs on over 75 countries provides temporary relief to Malaysia, particularly in its critical semiconductor industry and export sector. While a 10% tariff remains in place, the U.S. has exempted Malaysia from additional reciprocal tariffs. However, Malaysia still faces uncertainties due to ongoing geopolitical tensions and trade disruptions, especially as the U.S. has excluded China from the tariff suspension and further increased duties there to 145% [para. 1][para. 2][para. 3].

Malaysian Prime Minister Anwar Ibrahim confirmed the temporary pause as a positive development, while Trade and Investment Minister Tengku Zafrul Aziz highlighted the volatility threatening ASEAN’s export-reliant economies. Despite being a significant beneficiary of tariff postponements, Malaysia's semiconductor and electronics sectors remain vulnerable to trade policy shifts. A survey by the Malaysia Semiconductor Industry Association (MSIA) revealed that 65% of its members expect long-term adverse effects from U.S. trade policies, with 74% stating that these policies make Malaysia less attractive to investors. The country’s electrical and electronics (E&E) sector, which makes up half of Malaysia’s exports to the U.S., could suffer substantial losses if tariffs are reinstated [para. 4][para. 5][para. 6].

Malaysia exported 601 billion ringgit ($136 billion) worth of E&E products in 2024, constituting 40% of its total exports. Of this, exports to the U.S. accounted for 20%, with semiconductors alone comprising nearly half. Malaysia remains critical in global semiconductor production, hosting giants like Intel and many Chinese firms aiming to bypass U.S. trade barriers. Penang, often referred to as the "Silicon Valley of the East," plays a central role, with over 50 Chinese-funded firms and more than 350 multinational corporations deeply rooted there. In May 2024, Malaysia launched a national semiconductor strategy to attract foreign investment, but U.S. tariff policies have disrupted these plans and led businesses to consider relocating or adjusting supply chains [para. 7][para. 8][para. 9].

Compounding the issue, Malaysia faces stiff competition from Vietnam and Mexico. Vietnam’s recent talks with the U.S. to establish a reciprocal trade agreement could redirect investments toward Vietnam, while Mexico, exempt from recent U.S. tariffs, also poses a competitive threat. Malaysia’s relatively lower tariffs offer slight leverage, but experts highlight the necessity of genuine localization efforts rather than superficial adjustments such as “origin washing.” Failing to secure recognition as a U.S. supply chain partner could weaken Malaysia’s position, especially in emerging advanced manufacturing sectors. The worst-case scenario is a deepening rift between the U.S. and China, forcing Malaysia to choose sides and undermining its balanced trade policy [para. 10][para. 12].

To mitigate risks, Malaysia aims to diversify its exports and reduce dependence on the U.S. market. It is exploring intra-ASEAN trade opportunities and expanding into newer markets, including the Middle East, Africa, and South America. However, without access to critical industries and technologies reshaped by U.S.-led alliances, Malaysia risks losing its standing as a regional manufacturing hub. Experts emphasize that diversifying trade and upgrading its manufacturing capacity will be pivotal in strengthening Malaysia’s resilience amid evolving global trade dynamics [para. 13][para. 14][para. 15][para. 16].