5 Things Malaysia Must Do in Response to Trump’s Tariffs

Strengthening Productivity and Production

Malaysia must double its efforts to strengthen the country’s productivity and production capabilities. With the 24% tariff imposed by the Trump administration, it is now more critical than ever that we ensure price levels are moderated and the people’s purchasing power remains strong.

Increased production can also serve to dampen any artificial inflationary pressures that might arise, thereby reducing our reliance on imports while supporting domestic consumption. Consumption, especially private consumption, is a crucial component of the Malaysian economy, contributing an average of 49% to nominal gross domestic product (GDP) since 1991.

To ensure this, the government must put in place a comprehensive action plan with the sole aim of increasing national productivity and production. The country’s productivity index currently stands at a disappointing 1.4%. This needs to be markedly increased, especially in key sectors such as construction and manufacturing.

Increasing Exports

A concerted effort must be made to increase exports, including by identifying and developing non-conventional markets that will be able to replace more traditional ones such as the US. Malaysia’s exports to the US last year came to some US$43 billion, with more than half of this coming through the electrical and electronics sector.

The urgency in developing these new markets is not just down to how Malaysian goods will become relatively more expensive in the US, but also in anticipation of how the average American consumer’s purchasing power – especially that of the middle class – will decrease in general.

Strengthening Trade within Asean

Malaysia also needs to look at its immediate neighbours and strengthen trade within Asean and other friendly trading blocs. With intra-Asean trade standing at just 20% by value, there is a massive space for Asean countries to help each other weather this storm.

In fact, the basic infrastructure for increasing intra-Asean trade is already in place and operational. The common effective preferential tariff scheme; the Asean free trade area; and the Asean Economic Community frameworks were designed specifically to facilitate intra-Asean trade in a unified Asean market of over 670 million people with an economic size of over US$3 trillion.

The priority now is to strengthen the trade infrastructure so it can be realised. A long-term plan for Asean economic development must be formulated, with emphasis on industrial development. This is to ensure that Asean will be able to provide for its own population in the long run, with healthy production capabilities to power a largely self-sufficient economy.

Maintaining Interest Rates

Bank Negara’s overnight rate should be maintained for at least another year. This is crucial not only to give the government space to negotiate the full impact of the US tariffs on Malaysia’s economy, but also to ensure the domestic economy continues to be supported.

At the current rate of 3%, it will be able to mitigate inflationary pressures that will ultimately affect consumption. It will also continue supporting the ringgit’s strength against the US dollar, while maintaining its ability to attract foreign capital inflows and encourage savings among the rakyat.

Increasing Gold Reserves

Finally, given that gold is now the most credible alternative to the US dollar as a safe haven, Bank Negara must consider increasing its gold reserves as one of the key components of the international reserve.

As of the fourth quarter of 2024, the country’s gold reserves stood at 38.88 tonnes, equivalent to approximately US$3.3 billion, which is relatively low compared with Malaysia’s total international reserves.

Given the likely volatility in global currencies over the next few years, it stands to reason that gold will be able to provide a much more stable support structure for the economy in terms of safety, liquidity, and rates of return, as we work to mitigate the effects of Washington’s actions.

Conclusion

In conclusion, Malaysia needs to take concrete and determined steps to safeguard the nation and the economy in response to Trump’s tariffs. By strengthening productivity and production, increasing exports, strengthening trade within Asean, maintaining interest rates, and increasing gold reserves, we can mitigate the impact of the tariffs and ensure a stable and prosperous future for the country.

FAQs

Q: What is the current tariff imposed by the Trump administration?
A: The Trump administration has imposed a 24% tariff on Malaysia.

Q: What is the current productivity index in Malaysia?
A: The current productivity index in Malaysia stands at a disappointing 1.4%.

Q: What is the current gold reserve in Malaysia?
A: As of the fourth quarter of 2024, Malaysia’s gold reserves stood at 38.88 tonnes, equivalent to approximately US$3.3 billion.

Q: Why is increasing gold reserves important?
A: Increasing gold reserves is important because gold is now the most credible alternative to the US dollar as a safe haven, and it can provide a much more stable support structure for the economy in terms of safety, liquidity, and rates of return.