By Ahmad Ibrahim
2 April – a historic day for global commerce.
The US, as promised, announced sweeping tariff hikes. No country is spared, including Malaysia. How such a move will affect our export business will no doubt be up for debate.
The question before everyone is how such tariff measures will eventually play out. Will they bring back manufacturing to the US, as envisaged by the current administration? Or will they backfire on the US economy?
The biggest fear is whether they will escalate into a trade war, reminiscent of the 1930s.
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Experts agree the current tariff wars and escalating trade tensions, particularly between the US, China and the EU, have raised fears of a global recession, drawing comparisons to historical precedents like the 1930s Smoot-Hawley tariffs and the 1970s trade conflicts.
Is today’s situation different? In the 1930s, the US imposed the Smoot-Hawley Tariff Act, raising tariffs on over 20,000 imported goods. Other countries retaliated, and global trade collapsed by about 65%, worsening the Great Depression.
There are parallels today: rising US-China tariffs and EU-China trade disputes. Retaliatory measures include China’s export controls on rare earths, and EU tariffs on US goods. Declining global trade growth is widely forecasted.
The stagflation of the 1970s can be a lesson. The oil shocks, inflation and trade barriers then led to stagflation. The US and Europe imposed steel and auto tariffs, hurting growth.
The parallels today include the inflationary pressures experienced from supply chain disruptions (post-Covid and arising from the Ukraine war). Industrial policies such as the US Chips Act 2022 (Creating Helpful Incentives to Produce Semiconductors for America Act)and the EU Green Deal have led to subsidy wars.
There are key differences today. It might not be as bad. Global supply chains are now more deeply integrated, unlike in the 1930s, making a full-scale trade collapse less likely.
Furthermore, central banks are more experienced in managing inflation and recession risks, though tightening cycles still pose risks. Institutions like the World Trade Organization (WTO), though flawed, can help mediate disputes.
Will the tariffs cause a global recession?
Yes, if they escalate further, if supply chains fragment more and if investor confidence collapses due to prolonged uncertainty.
No, if negotiations prevail (eg US-China talks resume) and if domestic demand stays strong.
The risks are real, but the world now is more resilient than in the 1930s.
However, if tit-for-tat tariffs continue, we could see stagflationary pressures, slower growth and financial instability, echoing past mistakes.
The US tariff hikes, especially on Chinese goods, could have spillover effects on Malaysian exports, given Malaysia’s role in global supply chains.
Here is how Malaysia might be affected though potential strategies are available to mitigate risks.
Electronics and semiconductors (about 40% of Malaysia’s exports to the US) may be negatively affected. If the US imposes higher tariffs on Chinese technology, Malaysia could face supply chain disruptions (eg chips and solar panels).
But if China is forced to divert exports, Malaysia may gain as an alternative manufacturing hub (eg through Intel and Tesla expansions).
US tariffs on biodiesel or sustainable palm oil could hurt exports.
There are indirect risks via China. China is Malaysia’s top trading partner (about 18% of total trade).
If China’s economy slows due to US tariffs, Malaysia’s commodity exports (liquefied natural gas, palm oil, natural rubber and metals) could weaken.
Supply chain rerouting may happen. Some firms may shift from China to Malaysia (China+1 strategy), boosting foreign investment.
Malaysia could respond in a number of ways. One is through trade diversification. Expand markets in Asean, India and the Middle East (and reduce reliance on US and China). Push for RCEP (Regional Comprehensive Economic Partnership) benefits and lower tariffs in Asia.
There is a need to attract high-value foreign direct investments. We should leverage neutrality in the US-China rift. Position Malaysia as a semiconductor and electric vehicles hub.
Offer tax incentives for multinational companies relocating from China. Also strengthen domestic industries by upgrading local suppliers to meet US and EU standards. And boost green exports including sustainable palm oil.
Meanwhile, pursue diplomatic and trade negotiations with the US. Lobby for exemptions (eg semiconductor parts may avoid tariffs) and accelerate free trade agreement talks with the US.
In a worst-case scenario, if US-China tariffs escalate into a full-blown trade war, more multinational companies may move production to Malaysia.
But the risk is that a global demand slump would hurt exports, weaken the ringgit and raise inflation.
Malaysia has options but must act fast.
Malaysia is not as vulnerable as China-dependent economies, but it must diversify exports beyond electronics and palm oil and capitalise on supply chain shifts (eg semiconductors and electrical vehicles). Avoid being caught in the US-China crossfire through smart trade diplomacy.
Whatever it is, businesses will face more uncertainties, which is not good for the economy.
Prof Dato Ahmad Ibrahim is affiliated with the Tan Sri Omar Centre for STI Policy Studies at UCSI University and is an associate fellow at the Ungku Aziz Centre for Development Studies at the University of Malaya.
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