Malaysia warns of global supply chain disruptions if U.S. ends chip tariff exemptions

Malaysia has warned that removing U.S. tariff exemptions on its semiconductor exports could hurt its global competitiveness and strain interconnected supply networks. The announcement came as the country revealed its budget report for the 2026 fiscal year. 

Washington imposed a 19% tariff on Malaysian goods in August as part of President Donald Trump’s ongoing tariff wars. The August levy on Malaysia exempted certain products, such as semiconductor materials, which are currently being reviewed in the U.S.

Malaysia’s $114 billion budget targets growth as U.S. tariffs weigh on economy

According to the latest economic outlook budget report for Malaysia’s fiscal year 2026, removing the semiconductor exemptions may result in multiple challenges for the country, including reducing its competitiveness and straining sectors closely related to U.S. supply chains.

The country ranks sixth globally as a semiconductor exporter to the U.S. The country hosts multinational chip assembly and testing operations that supply most U.S. chip imports. 

According to a Reuters report, Malaysia’s 2026 economic outlook budget valued expenditures at $114.4 billion, a 14% increase from the 2025 revised spending. Operating expenditures received  338.2 billion ringgit, while development projects received 81 billion ringgit.

Additional investments are expected from state-linked companies. 

Prime Minister Ibrahim Anwar has made several policy shifts since taking office, including the removal of petrol subsidies and a minimum wage hike. He said that the subsidy removal could generate annual savings of up to 15.5 billion ringgit. He noted that this year’s fuel subsidy removal has already saved 5 billion ringgit. Malaysia has reduced its fiscal deficit to 3.5% of the GDP from 3.8% this year. Anwar also highlighted a projected 2.7% rise in revenue to 343.1 billion ringgit. 

The 2026 budget also projected moderate inflation, at 1.3% to 2%, with monetary policy expected to support growth. Malaysia has also faced a slump in the Petroleum industry, primarily due to U.S. tariffs. Petronas, a state-owned firm, confirmed that it will pay a 20 billion ringgit dividend, marking its lowest since 2017. 

Malaysia’s financial report indicated that the tariffs are already weighing on its economic outlook, with projections that gross domestic product (GDP) growth could decline by 0.76 percentage points due to the new trade measures. 

Mealy says Washington should reconsider tariffs on Malaysian semiconductors 

The US-Asean Business Council warned that Washington’s imposition of tariffs on semiconductor materials could disrupt global supply chains and harm American industries.

ASEAN Bernama covered the story two weeks ago, citing remarks by Marc Mealy, Executive Vice President of the US-ASEAN Business Council. Mealy acknowledged that Malaysia is crucial in the semiconductor chip supply chain globally, particularly in testing, assembly, and packaging. He added that many components pass through the country before reaching the U.S. market.

President Donald Trump had proposed imposing 100% tariffs on semiconductor chips. However, Mealy argued that imposing 100% to 300% levies on semiconductor chips could lead to supply disruptions and slow vehicle and electronics production in the U.S. and beyond. The executive VC urged the Trump administration to adopt a targeted, strategic approach rather than blanket tariffs. He also noted that Malaysia’s role in global chip manufacturing makes indiscriminate measures risky for both economies.

According to the ASEAN Bernama report, Malaysia supplied about 15% of the semiconductors used in the U.S. automotive sector, valued at 52.11 billion ringgit in exports last year. According to a report by the American Enterprise Institute,  the U.S. imported about $40 billion worth of chips in 2024, mainly from Taiwan, Malaysia, Israel, South Korea, Ireland, Vietnam, Costa Rica, Mexico, and China.

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