Kuala Lumpur – A recently signed trade agreement between the United States and Malaysia is facing scrutiny over concerns it may unduly favour Washington and potentially undermine Malaysia’s commitment to multilateral trade principles. The deal, formalized on the sidelines of the ASEAN Summit in Kuala Lumpur, has sparked debate within Malaysia regarding national sovereignty and the long-term economic implications for the country.
The “Agreement on Reciprocal Trade” (ART) requires Malaysia to reduce or eliminate tariffs and non-tariff barriers on 98.4 percent of U.S. Imports. This includes adopting U.S. Emission standards for automobiles, recognizing U.S. Food safety standards and halal certification processes, and streamlining import licensing for various industrial goods. In return, the U.S. Will provide duty-free access for 1,711 tariff lines, primarily in the aerospace, electronics, and chemicals sectors, as well as certain meat, dairy, and agricultural products. The agreement also includes commitments from Malaysia to purchase $150 billion in U.S. Technology equipment, aircraft, energy, and other commodities.
Critics argue that the ART is lopsided, potentially curtailing Malaysia’s ability to negotiate trade deals independently and aligning it too closely with U.S. Interests, potentially through pressure or sanctions. Ratification of the agreement is currently stalled in the Malaysian parliament due to these concerns. Proponents, however, maintain that the deal is necessary to secure access to the U.S. Market and provide a degree of stability in a potentially unpredictable global trade landscape.
One key point of contention revolves around Article 5.1 of the ART, which has been widely interpreted as potentially requiring Malaysia to mirror U.S. Sanctions against third parties. This provision raises concerns about Malaysia’s independence and its ability to maintain neutral foreign policy positions. Recent actions by the U.S., such as the threat of a 100 percent tariff on Canada should it pursue a trade deal with China, have fueled these anxieties, despite the existing United States-Mexico-Canada Agreement. Similarly, threats of tariffs on semiconductors from countries that do not produce them within the U.S. Have raised questions about the efficacy of appeasement, according to European leaders at the World Economic Forum.
Economists are also examining the potential for trade diversion. The ART’s exclusive preferential terms for the U.S. Could lead to trade being determined by these preferences rather than by economic efficiency, potentially harming both consumers and producers in Malaysia. To mitigate this risk, analysts suggest that Malaysia should consider unilaterally extending the preferential terms to all its trading partners, thereby restoring Most Favoured Nation (MFN) treatment. This approach, mirroring Malaysia’s existing practice with ASEAN tariff preferences, would ensure fair and equal treatment for all trading partners and avoid artificial trade concentration with the U.S.
The move to multilateralize the tariff preferences would not violate the terms of the ART but would eliminate the potential for welfare-reducing trade diversion. It could even improve Malaysia’s economic situation if the benefits from reducing non-tariff barriers outweigh any negative effects from preference-driven trade shifts. Such a move would reaffirm Malaysia’s long-standing commitment to open, non-discriminatory trade and multilateralism.
The agreement also includes a reduction in the post-Liberation Day reciprocal tariff rate from 25 to 19 percent, although this reduction was already in effect as of . The average effective tariff rate faced by Malaysian exporters between and was 8.6 percent, further contributing to the perception that the agreement is skewed in favour of the U.S.
The signing of the ART follows the formal accession of Timor-Leste as ASEAN’s 11th member at the summit, and the signing of a ceasefire agreement between Thailand and Cambodia. The U.S. Also elevated its relationship with Malaysia to a Comprehensive Strategic Partnership (CSP) and signed a memorandum of understanding with Malaysia and Thailand regarding critical mineral supply chains. These developments positioned Malaysia at the centre of ASEAN’s diplomatic and economic agenda.
Analysts suggest that Malaysia must carefully consider any measures that advance U.S. Geostrategic interests in the region, while simultaneously pursuing reforms that improve economic efficiency and are easily multilateralized. The current situation underscores the need for Malaysia to hedge its bets and proactively mitigate the risks associated with a potentially discriminatory and distortionary trade agreement with an increasingly unpredictable partner. Unilateral actions to counter the discriminatory bilateral concessions and restore MFN principles, without infringing the terms of the ART, represent a viable path forward.
