AS the news of US President Donald Trump’s executive order on tariffs settles in, businesses and consumers around the world are scrambling to understand how this would impact them.
On April 2, president Trump, through the International Emergency Economic Powers Act of 1977 (IEEPA), introduced a sweeping tariff policy.
This includes a 10% tariff on imports from all countries (effective April 5), and a higher reciprocal tariff on countries with which the United States has significant trade deficits (effective today).
As the United States has a trade deficit with Malaysia, exports from Malaysia will be subject to a reciprocal tariff of 24%.
What this means is – except for goods listed in Annex-II, goods subject to Section 232 tariffs under the Trade Expansion Act of 1962, and certain prescribed excluded categories – all Malaysian exports to the United States will face an additional 10% ad valorem duty rate starting April 5, and 24% ad valorem duty rate from today.
What are tariffs?
On a Malaysian context, tariffs are akin to the import duties levied on goods imported into Malaysia.
It serves as a protective measure, making similar foreign goods more expensive and giving local producers a comparative advantage.
Like Malaysia’s system, US tariffs are paid by the importer at the point of entry.
This cost is then absorbed by the importer or passed on to consumers.
As an example, if a Malaysian product previously cost a US importer US$100, the cost could soon rise to US$124, all else being equal.
It is important to note that this new tariff under the IEEPA, is imposed in addition to the existing duties and taxes imposed upon importation into the United States.
What could happen next?
Generally, when cost increases, buyers will try to renegotiate pricing, source for cheaper alternatives elsewhere, or shift production back to the United States (as it will then not be subject to this tariff).
This could then result in lower demand from the exporting country with the higher tariff.
When that happens, producers from the exporting country will need to find other markets to sell their products or risk a decline in its productivity, resulting in lower profits or even worst, cost-cutting measures such as job cuts.
Additionally, supply chains may be disrupted as businesses assess cost implications, explore alternative sourcing, and adapt to new trade requirements to remain competitive.
For Malaysia, although the reciprocal tariff rate is at 24%, it is not the highest around the region neither is it the lowest.
Depending on the product types and assuming other factors remain constant, there are two possible outcomes:
> Less competitive: If overseas competitors enjoy a lower rate from Malaysia’s 24% (for example 17% applied to the Philippines), US buyers may opt to shift their orders away from Malaysia.
> More competitive: If overseas competitors face a higher reciprocal rate than Malaysia’s 24% (for example the 46% applied to Vietnam), Malaysia may emerge as the preferred supplier for potential US buyers.
These shifts are likely to reshape global trade dynamics in the coming months.
What can businesses do?
While Malaysia is already addressing the US tariffs with proactive measures such as diversifying its export markets to countries such as Kenya, Oman and Namibia, as well as actively engaging in free trade agreements with various countries, businesses must also act swiftly to stay competitive – especially those currently exporting to or eyeing the US market.
As a start, here are several immediate steps Malaysian businesses can consider:
> Check for exclusions: Verify whether your products fall under annex-II (for example electronic integrated circuits: processors and controllers under HTSUS 85419000). If your products are found in annex-II, generally the landscape is likely to remain neutral to US buyers, but businesses should still monitor for any changes.
> Assess competitiveness: If your products are not excluded under annex-II, compare the rates applicable to your foreign competitors under annex-I, to determine if potential US buyers may have a preference to place orders with Malaysian producers or elsewhere.
> Monitor developments: For Malaysian businesses that are not exporting to the United States, it is still prudent to stay informed and be prepared, as global market dynamics may shift in response to the new tariffs.
Competitors that lose market share in the United States are likely to redirect their exports to other regions, potentially intensifying competition in markets such as Malaysia.
In such cases, Malaysian businesses should remain vigilant and be aware of available trade remedies – such as anti-dumping, countervailing, or safeguard measures – to protect against unfair trade practices and safeguard domestic industries.
While still pending further developments, businesses can explore one or more long-term measures to reduce tariffs payable in the United States, all within the legal ambit of the law, including:
> “First sale for export”: Reduce duty costs by declaring Customs value based on manufacturer’s initial sales price rather than final price paid by the importer, if there are multiple sales taking place involving one or more bona fide “middlemen”.
> Cost “unbundling”: Remove or “unbundle” non-dutiable elements from the declared Customs value to facilitate a reduction in Customs duties.
> Strategic tariff classification: Ensure accurate and strategic harmonised system code classification to avoid overpayment and capitalise on favourable tariff treatments.
> Supply chain restructuring: Reassess optimising supply chains to benefit from countries with more favourable tariff rates.
> Origin diversifications: plan and manage materials and components sourcing strategically.
> Contract renegotiation: Consider renegotiating existing contracts with suppliers and customers and include protective clauses that allow price changes in response to tariff fluctuations.
These measures, however, may not be straightforward to implement, and will require thorough review as well as collaboration across the business supply chain.
Consumers too, should also prepare for potential economic challenges. It might be a good time to revisit your spending habits – and perhaps start buying more Buatan Malaysia products.
Ng Sue Lynn is the head of indirect taxes at KPMG in Malaysia. The views expressed here are the writer’s own.
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