KUALA LUMPUR: Malaysia must maintain its neutral foreign policy stance to steer clear of US-China conflicts while strengthening trade relationships with all nations to mitigate the negative impacts of protectionist measures under the incoming Donald Trump administration.
Economists said Malaysia can leverage its Asean chairmanship to strengthen regional economic integration and expand the bloc's cooperation with all nations in pursuing common development goals and mutual gains from cross-border trade and investment.
Sunway University economics professor Prof Dr Yeah Kim Leng told Business Times that there are risks and opportunities given the sizeable presence of US multinationals in Malaysia's trade-dependent economy.
"The risk of US firms onshoring or returning home may be limited by their long presence and established supply chains in the country.
"The onshoring risk is also less for market-seeking foreign direct investment tapping into favourable growth prospects of Malaysia and Asean member countries.
"However, a likely escalation of US tariffs against China or any trade partners, including Malaysia, will dampen trade and result in slower growth for all countries due to both direct and indirect trade linkages," he added.
Yeah said while reconfiguration of supply chains arising from Trump's trade policy changes targeted at China may benefit the Malaysian economy in the short run, the resulting fragmentation of the global trade and financial systems would likely harm global growth prospects.
He said to mitigate a possible deterioration in the global trade environment, Malaysia should continue its fiscal, trade and other structural reforms to strengthen its international competitiveness, productivity and economic resilience.
"The thrusts to reduce deficit and debt while raising spending efficiency, rationalising subsidies and plugging leakages are in the right direction.
"These initiatives will provide the government with greater flexibility to mount counter-cyclical spending in the event of a global slowdown or downturn," Yeah added.
Malaysia, he said, will need to pursue more vigorously export promotion and trade facilitation measures under the various regional trade agreements such as the Regional Comprehensive Economic Partnership.
"These initiatives will help to reduce the negative impact of potential disruptions in the US and Chinese markets in the event of an escalation of tariff wars and trade sanctions between the world's top two economies," he said.
For Malaysia to remain competitive in a more fragmented global trade environment, Yeah said the strategic focus on industrial and skills upgrading, productivity and quality improvements and competitiveness across all industries nationwide assumes greater significance in the event the global economy turns turbulent.
"These long term strategies to raise the quality and productivity of the country's human capital and industrial competitiveness while addressing vulnerabilities such as low wages, over-dependence on unskilled foreign labour and income inequalities and regional disparities will ensure that the economy will continue to thrive in a more fragmented global economy," he added.
Malaysia Benefitting From US Market
IDEAS Malaysia economist and assistant research manager Doris Liew said as one of Malaysia's largest trading partners, the US plays a critical role in the nation's economic trajectory, with robust foreign direct investment (FDI) inflows further cementing its significance.
"In the face of the accelerating US-China trade tensions, Malaysia stands to benefit from its strong position in the US market, particularly as the economy grows and seeks to diversify its trading partners.
"To safeguard Malaysia's economic interests, prioritising strategic trade negotiations with the US will be essential, enabling the country to minimise potential negative impacts while maximising new opportunities," she said.
Liew said Malaysia's continued success hinges on its ability to hedge against external shocks through diversified partnerships within Asean and with other global players.
"The Asean region, with its multilateral and minilateral trade frameworks, provides an ideal platform for Malaysia to cement economic relationships.
"The past year has seen the formation of key bilateral trade agreements with countries such as Germany, New Zealand and Russia - partnerships that foster trust and strengthen economic interconnectivity," she added.
Liew said the upcoming Asean-Gulf Cooperation Council free trade agreement is another pivotal opportunity, aligning Malaysia and the wider Asean region into broader Asean+ partnerships, positioning the country to capitalise on new growth avenues.
Looking ahead, she emphasised the importance of Malaysia staying committed to its trade development agenda to maintain a competitive, resilient, and adaptable economy.
"This involves focusing on strengthening its economic foundation and improving its economic complexity.
"The upcoming 13th Malaysia Plan should be seen as a critical roadmap in driving sustainable, long-term growth, with an emphasis on nurturing future industries and enhancing the country's capacity to respond to global economic shifts.
"It points for a need for Malaysia to reinforce its position as a key player in both regional and global trade to remain a dynamic, forward-looking economy," Liew explained.
Violatile Regional Markets
According to Kenanga Research, the Asean markets are exopected to remain volatile, similar to what was observed during the trade war, based on insights from Trump's first presidential term.
"From the time threats of trade war started, the first quarter of 2018, we saw Asean was overall weak for over six months. Indeed, this scene is repeating and thus we think the first quarter of 2025 may likely start more cautiously.
"Asean markets have slowed down since Trump won the election, where Thailand, Indonesia and the Philippines were lower by up to 6.0 per cent (local currency basis). Malaysia joins Singapore and Vietnam as relatively insulated, and still marginally higher than the level during the US election day," the note said.
Kenanga Research views that president-elect Trump may use tariffs as a bargaining chip more than a concrete policy.
"The move is to help to alleviate trade imbalances and thus we see the urgency for Trump to close trade "loopholes", as we have seen in the stance towards Mexico and Canada. Looking at the trade deficit between US and countries, Malaysia is also more insulated among Asean countries while Vietnam would be more exposed.
"Save for Malaysia, whose consensus expects flat rates, the region may have to through some rate cuts," it added.
Fiscal and trade policies during Trump's second term could determine which nations emerge as winners or losers, it said.
The firm highlighted that neighbouring Thailand had previously mitigated the economic impact of potential overcapacity from China by adjusting tax regulations on small goods.
"Malaysia should remain more insulated in our view. Anecdotally, the largest drawdown in Asean during the period of trade tension, which we define to be the first quarter of 2018 to January 2020 when first phase agreement was signed, would be most severe in Vietnam and the Philippines, and least severe in Indonesia.
"We think that markets will be better at anticipating Trump this time around.
"Extending that analysis to the local market, a sharp weakness was seen in construction, and even financials, although that would have been more reflective of local election outcomes where contracts were being reviewed by the incoming new government," it added.