THE election of Donald Trump as the next president of the United States will move the country towards protecting itself in the trade arena and, without any doubt, its borders. He has made it clear that he will introduce tariffs and taxes that will bring manufacturing back to the US. This will certainly have an impact on the rest of the world, including Malaysia.
Although China and Singapore are the number one and two trade partners of Malaysia followed by the US, in terms of value to the economy, the US is far more important to Malaysia than China is. Malaysia is a net exporter to US while Malaysia is a net importer from China. Most of the products exported to the US are from the electrical and electronics products (E&E) sector.
Impact of tariffs
Trump made it clear in his election campaign that he is planning to impose a 60% tariff on all imports from China and between 10% and 20% on all other imports. Even worse is the plan to target a tariff increase of 100% on Mexico because he believes that manufacturers from China and Europe are using Mexico as a conduit to manufacture goods and export them to the US using preferential treatment accorded under the North American Free Trade Agreement.
There will be no exception for Malaysia. If the US imposes tariffs of 10% to 20%, this will increase the cost and this is a form of indirect taxation on Malaysian goods exported to the US. This tax is collected by the US.
Malaysia, unlike China, is not a huge domestic market that imports substantial goods from the US and, therefore, the room for Malaysia to introduce counter tariffs on US goods will be ineffective and will only be detrimental to Malaysia.
Impact of the other proposed changes
Immediately after the elections, the US dollar has risen, which is good for our exporters whose revenues will increase, resulting in a corresponding rise to in Malaysia’s tax coffers. The downside is, of course, the increase in the cost of imports. All these fluctuations in the currency have an impact on Malaysia’s tax collections.
There is another proposal by Trump that he will lower corporate income tax rates from 21% to 15% for companies that make their products in the US. This will be a continuation of the policy that was already in place during Joe Biden’s administration whereby substantial grants were given to companies relocating their operations back to the US. The consequence of such a policy will certainly lead to multinationals to move investments from countries such as Malaysia to the US to cater to the large market there.
The manufacturing sector contributes 23% to Malaysia’s gross domestic product, and the E&E industry makes up 40% of total exports and it is the backbone of the country’s manufacturing sector. Any relocation of such manufacturing will not only have an impact on the local manufacturing sector but will certainly have an indirect impact on both employment and tax collections in the country.
Many multinational corporations that invested and enjoyed tax incentives in Malaysia in the early years have stayed on and continued to pay their taxes in the country. In the current climate, they may be forced to move to the US if Trump’s protectionist policies go beyond tariffs and tax incentives. The US could introduce other measures that increase the cost of selling products into the US market, which again is a form of indirect taxation although it is invisible.
We must watch closely the policies that the new administration will be introducing after the Trump’s inauguration as the 47th US president in January 2025.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
