How Tariff Wars Between US and China Ripple Through Malaysian Markets

Malaysia exported RM1.56 trillion worth of goods in 2024, with the United States and China collectively accounting for approximately 26% of total exports (DOSM External Trade Statistics, 2024). When these two economic giants impose tariffs on each other, Malaysian businesses feel the effects through shifting supply chains, fluctuating demand, and currency volatility. This analysis breaks down the specific channels through which US-China tariff tensions impact Malaysian SMEs and what business owners can do to protect their margins.

The Current Tariff Landscape

The tariff cycle between the US and China has been running since 2018, with multiple escalation rounds. As of early 2026, the US maintains tariffs ranging from 7.5% to 100% on various categories of Chinese goods, with the highest rates targeting semiconductors, EVs, steel, and aluminium. China has responded with retaliatory tariffs on US agricultural products, chemicals, and select manufactured goods.

The Malaysia External Trade Development Corporation (MATRADE) noted in its 2025 Trade Performance Report that these tariffs have reshaped global supply chains in ways that both benefit and challenge Malaysian businesses.

How Malaysian Businesses Are Affected

Channel 1: Trade Diversion Benefits

When US tariffs make Chinese goods more expensive for American buyers, some demand shifts to alternative suppliers, including Malaysia. This trade diversion effect has been particularly visible in:

• Electronics and electrical components: Malaysia's E&E exports to the US grew 14.3% in 2024 (DOSM), partly driven by American importers seeking non-Chinese sources.
• Solar panels and components: US tariffs on Chinese solar products have benefited Malaysian solar manufacturers, with exports in this category growing 28% year-on-year in 2024 (MIDA Investment Report).
• Rubber and rubber products: Malaysian glove manufacturers and rubber processors captured additional US market share as tariffs raised the cost of Chinese alternatives.

For SMEs in these supply chains, the trade diversion effect creates opportunities to win new international customers. Businesses that already use digital platforms for managing orders, customer relationships, and scheduling (like EzFlow) can scale operations more efficiently when new demand arrives.

Channel 2: Input Cost Increases

Malaysian manufacturers heavily depend on Chinese raw materials and intermediate goods. China is Malaysia's largest source of imports, supplying RM218.6 billion worth of goods in 2024 (DOSM). When China faces tariffs on its US exports, surplus inventory can temporarily lower prices for Malaysian buyers. But when China retaliates with tariffs on US goods, global commodity prices shift.

Specific impacts on Malaysian SMEs:

• Steel and metals: Chinese overproduction of steel (driven by reduced US access) has periodically depressed prices in the ASEAN market, benefiting Malaysian construction and manufacturing businesses. However, Malaysia's own anti-dumping duties on certain Chinese steel products create cost floors.
• Chemical inputs: Tariffs on chemical products between the US and China affect global pricing for plastics, adhesives, and industrial chemicals that Malaysian manufacturers depend on.
• Agricultural inputs: Chinese retaliatory tariffs on US soybeans and grains have reshaped global agricultural commodity flows, indirectly affecting feed prices for Malaysian livestock and aquaculture businesses.

Channel 3: Currency Volatility

The Ringgit is sensitive to US-China tensions. When tariff escalations rattle global markets, investors move toward safe-haven currencies (USD, JPY), weakening the Ringgit. Bank Negara Malaysia data shows that during major tariff escalation events in 2024, the Ringgit depreciated by 2-4% against the USD within weeks.

For import-dependent businesses, a weaker Ringgit directly increases input costs. A restaurant owner importing ingredients from Thailand, or a salon owner purchasing products from Korea, faces higher costs denominated in Ringgit even if the supplier's price in their local currency has not changed.

Conversely, exporters benefit from a weaker Ringgit as their products become cheaper for foreign buyers.

Channel 4: Supply Chain Restructuring

The longer-term effect of tariff wars is structural: multinational companies are rethinking where they manufacture. The "China+1" strategy, where companies maintain Chinese operations but establish backup facilities elsewhere, has directed significant foreign investment into Malaysia.

MIDA (Malaysian Investment Development Authority) reported that approved manufacturing investments in Malaysia reached RM129.4 billion in 2024, with a significant portion attributed to companies diversifying from China. Intel's RM30 billion investment in Penang and various Chinese firms establishing ASEAN hubs in Malaysia reflect this trend.

For SMEs, this investment wave creates indirect benefits: more corporate tenants for commercial and residential properties, increased demand for local services, and expanded supply chain opportunities.

Sector-Specific Impact Analysis

Sector	Primary Impact	Net Effect
Electronics manufacturing	Trade diversion to Malaysia, increased FDI	Positive
Food and beverage	Input cost volatility, commodity price shifts	Mixed
Construction	Steel price fluctuations, new industrial projects	Mixed to positive
Retail	Consumer electronics pricing, currency impact on imports	Negative
Tourism and hospitality	Chinese tourist spending patterns, currency effects	Mixed
Professional services	Increased demand from FDI companies	Positive
Agriculture and palm oil	Commodity price shifts, potential retaliatory targeting	Mixed

What Malaysian SMEs Should Do

Diversify Your Supply Chain

If you depend on a single country for critical inputs, you are exposed to tariff and geopolitical risk. Identify alternative suppliers in ASEAN, India, or domestically. Even maintaining a secondary supplier relationship (without immediate orders) gives you optionality when disruptions occur.

Hedge Currency Exposure

For businesses with significant import costs, consider forward contracts or natural hedging (matching revenue and cost currencies). Bank Negara's Guidelines on Foreign Exchange Administration allow SMEs to hedge import commitments. Your bank's treasury desk can structure simple hedging instruments.

Monitor Tariff Updates Actively

Tariff changes can be sudden. Follow MATRADE's trade advisories, MITI's (Ministry of Investment, Trade and Industry) announcements, and industry association updates. Tariff changes that seem irrelevant to your business today may affect your suppliers or customers tomorrow.

Position for Trade Diversion

If you manufacture products that compete with Chinese exports to the US, the tariff war is your opportunity. Ensure your export readiness: quality certifications, competitive pricing, and the operational capacity to fulfil larger orders.

Dr. Shankaran Nambiar, senior research fellow at the Malaysian Institute of Economic Research (MIER), commented in a 2025 analysis: "Malaysian SMEs that position themselves as reliable alternatives within global supply chains stand to gain disproportionately from US-China decoupling. The window of opportunity is open, but it requires proactive investment in capacity and quality standards."

The Malaysian Government's Response

MITI has pursued a balanced approach, maintaining trade relationships with both the US and China while capitalizing on the diversification trend. Key policy responses include:

• Investment incentives: Enhanced tax incentives for manufacturers relocating to Malaysia through MIDA
• Trade facilitation: Streamlined customs procedures and digital trade platforms
• Skills development: Training programmes through HRDF to prepare the workforce for new industries
• RCEP implementation: Using the Regional Full Economic Partnership to strengthen ASEAN trade relationships as a counterbalance to bilateral tensions

Frequently Asked Questions

How do US-China tariffs affect small businesses that only operate domestically?

Even purely domestic businesses are affected through input costs (imported materials become cheaper or more expensive), currency effects (Ringgit movements change the cost of imported goods), and second-order demand effects (if major industries in your area grow or shrink due to trade changes, local consumer spending shifts accordingly).

Is Malaysia benefiting overall from the US-China trade war?

On balance, yes. Trade diversion and foreign direct investment have significantly benefited Malaysia's manufacturing and services sectors. However, the benefits are unevenly distributed, with electronics and manufacturing gaining the most while import-dependent businesses face cost pressures.

Should Malaysian SMEs be worried about being caught in the middle?

Malaysia's policy of maintaining strong trade relationships with both the US and China has so far shielded the country from direct targeting. However, specific sectors (semiconductors, for example) face scrutiny regarding the origin of components. SMEs in sensitive supply chains should ensure compliance with rules-of-origin requirements.

How does the Ringgit respond to tariff escalation events?

Historically, tariff escalation weakens the Ringgit as global risk aversion increases. The currency typically recovers partially once markets adjust. Import-dependent businesses should monitor BNM's daily exchange rate data and consider hedging during periods of elevated tension.

Key Takeaways

• US-China tariffs affect Malaysian businesses through trade diversion, input costs, currency volatility, and supply chain restructuring.
• Malaysia's electronics and manufacturing sectors benefit from trade diversion, capturing demand that previously went to China.
• Import-dependent SMEs face cost pressures from Ringgit depreciation during tariff escalation events.
• Approved manufacturing investments in Malaysia reached RM129.4 billion in 2024, partly driven by the China+1 diversification strategy.
• SMEs should diversify supply chains, hedge currency exposure, and position for trade diversion opportunities.