KUALA LUMPUR (July 9): Economists now expect Malaysia’s growth to be lower than previously thought after the US announced a 25% tariff on Malaysian goods starting Aug 1, likely forcing the government to cut its growth forecasts more sharply.

Most economists had earlier expected a 10% tariff, based on updates on the status of Putrajaya’s trade talks with the US.

Malaysian government officials had said they would revise the 4.5%-5.5% gross domestic product (GDP) growth forecast once trade talks with the US became clearer.

TA Securities economist Farid Burhanuddin said the 25% tariff announcement came as a surprise, especially since the Malaysian government had suggested trade talks were going well.

He said if the 25% tariff were fully enforced, it could lower Malaysia’s 2025 GDP to between 3.7% and 4.2%, compared to his earlier projection of 4.4%, based on a 10% tariff scenario.

In the early hours of Tuesday (July 8), the White House officially notified Malaysia that a 25% tariff would be applied to all Malaysian goods starting August 1, 2025. In letters dated July 7, US President Donald Trump wrote to Prime Minister Datuk Seri Anwar Ibrahim and Yang di-Pertuan Agong Sultan Ibrahim Sultan Iskandar, explaining that the tariff aims to reduce the US’ trade deficit with Malaysia. The letters were also posted on Trump’s Truth Social platform.

Trump said the US wants a more balanced trade relationship and blamed Malaysia’s tariffs, non-tariff policies and trade barriers for the current imbalance. He warned that any goods transshipped to avoid the tariff would still be subject to the 25% rate.

However, Trump offered an incentive: Malaysian companies that move their production to the US would be exempt from the tariff, with the US promising fast approvals for such investments.

He also warned that if Malaysia were to retaliate by raising its tariffs, the US would match this increase, on top of the 25%.

Trump left room to negotiate the 25% tariff, saying that this could be adjusted with future cooperation as he encouraged Malaysia to further open up its markets.

The Ministry of Investment, Trade and Industry in a statement, in response to the tariff announcement, said it will continue to engage with the US to resolve outstanding issues, clarify the tariffs scope and work toward a mutually beneficial outcome before the Aug 1 deadline.

AmBank chief economist Firdaos Rosli said Malaysia must continue negotiating with the US, though talks appear complicated and uncertain. He noted an extension of the current situation is possible, but less likely now due to various factors.

The US has been Malaysia’s third-largest trading partner for years, making up 11% of exports in 2024. Despite the new tariff hurting Malaysia’s competitiveness, economists said the country still has strong fundamentals and policy tools.

Kenanga Investment Bank’s economist Wan Suhaimie said with Malaysia’s GDP still above 4%, businesses should focus more on the domestic market, instead of just exports. He also noted that while the 25% tariff is higher than Vietnam’s 20%, it is still lower than Thailand’s 36% and Indonesia’s 32%, though this could reduce Malaysia’s advantage in attracting regional business relocations.

Meanwhile, Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid warned that the higher cost burden on US buyers could reduce demand for Malaysian exports. “There is a need for direct policy intervention to stabilise economic growth in the second half of the year,” he said, suggesting a combination of monetary easing and accelerated development spending.

Trump’s announcement weighed on the 30-stock benchmark FBM KLCI, which opened nearly eight points or 0.5% lower at 1,529.69 and fell as much as 11 points, before rebounding to 1,529.95 by midday. The benchmark index eventually closed at 1,530.14 — a two-week low — down 7.4 points or 0.48%.

“The market decline was milder than anticipated, as investors largely viewed the tariff as a negotiating tactic — especially with the new deadline,” said Khoo Zing Sheng, fund manager at Pheim Asset Management.

Still, Hong Leong Investment Bank (HLIB) cautioned that selling pressure may persist, driven by renewed foreign outflows and continued uncertainty over the US’ evolving trade posture — including possible restrictions on AI chip exports and a proposed 10% tariff on BRICS-aligned nations.

The ringgit also weakened to 4.2460 against the US dollar — its lowest level since June 24 — trimming its year-to-date gains to about 5%, though it remains among Asia’s best-performing currencies.