Malaysia-US Agreement on Reciprocal Tariffs: Calm Before Another Storm?

On 25 October 2025, Malaysia and the United States signed a Reciprocal Tariff Agreement (ART) after several months of negotiations, following the Trump administration’s tariffs imposed under the International Emergency Economic Powers Act (IEEPA). Tariffs were set at 19 per cent for non-exempt goods, while 1,711 tariff lines were granted zero tariffs, primarily covering aerospace, pharmaceuticals, and selected industrial inputs. These zero-rated lines accounted for approximately 12 per cent of Malaysia’s exports to the US, with benefits concentrated in aerospace-linked electronics, chemicals, and oleochemicals. It also covered non-tariff barriers, digital trade and technology, state-owned enterprises, and labour and environmental standards.

Importantly, the agreement extended beyond conventional trade disciplines (Table 1). It incorporated provisions on economic and national security, covering export controls, investment screening, critical minerals, and national security-sensitive technologies — reflecting the US shift toward the securitisation of trade policy.

Table 1. Core Provisions in the Malaysia-US Reciprocal Tariff Agreement, 2025

Market Access Provisions	Economic Security Provisions
– Tariffs and Quotas – Non-Tariff Barriers and Related Matters – Digital Trade and Technology – Rules of Origin	– Economic and National Security

Although signed, Malaysia has not ratified the agreement, as the domestic backlash was great due to the imbalances in the agreement and its implications on national sovereignty. In response, Tengku Zafrul, who led the negotiations of the ART, pointed out that the agreement included a termination clause, prior to ending his tenure as Minister of Investment, Trade and Industry on 2 December 2025, following the expiry of his Senate term.

Subsequently, in December 2025, newly appointed MITI minister Johari Abdul Ghani signalled the intent for renegotiations, as the agreement included provisions for modifications and amendments. Prime Minister Anwar Ibrahim echoed the same sentiments in January 2026.

The situation shifted significantly in February 2026 when the US Supreme Court ruled that IEEPA does not authorise the President to impose tariffs. While US authorities, including the Office of the United States Trade Representative (USTR), expressed confidence that bilateral arrangements would remain valid, Malaysia is the first and only partner country of such agreements to declare the ART as “null and void”, as Johari did on 16 March 2026. Johari appeared to retreat from the statement the next day by stating that Malaysia had not heard from the US on the cancellation of the agreement.

It is debatable whether the Supreme Court decision invalidates the entire agreement, considering the ART’s non-tariff provisions and economic security articles (Table 1) were not grounded in IEEPA and arguably remain intact. Washington can invoke the agreement’s modification clause to replace the IEEPA tariffs with alternative tariffs while keeping the rest of the agreement unchanged.

To fill the legal void undergirding the tariffs, the US invoked Section 122 of the Trade Act of 1974 to impose a 10 per cent global tariff as a replacement for the now-invalidated IEEPA rate. This was not a reduction from 19 per cent, but the imposition of a new instrument after the original tariff rate had legally collapsed. Section 122 addresses fundamental international payment problems such as trade deficits, but its authority is time-limited to 150 days, placing its expiry at approximately 24 July 2026, unless extended by Congress.

On 11 March 2026, the USTR initiated Section 301 investigations into Malaysia and 15 other  economies for excess manufacturing capacity, which leads to excess supply. A separate investigation, launched the following day, targets 60 economies, including Malaysia, for their alleged failure to take effective action against forced labour practices.

A new agreement might seem better, given the backlash to the initial ART, but uncertainty is likely to persist due to the US’ continued use of investigative and punitive trade instruments.

The investigations provide opportunities for public comments on the investigations, which were open until 15 April, with hearings scheduled for 28 April for forced labour and 5 May for excess capacity. The compressed timeline is by design: Section 301 tariff determinations are structured to be in place before Section 122 authority expires in July 2026, ensuring tariff continuity regardless of the IEEPA ruling’s legacy.

Excess capacity investigations are reportedly focusing on electronics, machinery and steel. Of the three, the government is addressing the oversupply in steel by imposing a two-year “production capacity suspension order” in July 2025. Prior to the IEEPA ruling, the US had increased tariffs on aluminium and steel imports from 25 per cent to 50 per cent in June 2025. Section 301 can therefore be used to reinstate the 50 per cent tariff ruling. The US is, however, not a major export destination, having an 8 per cent share of total exports from Malaysia in 2024.

For forced labour, since there are reported incidences of human rights violations, including forced labour from some multinationals in the plastics and electronics sectors, it appears highly unlikely that Malaysia will escape unscathed from this investigation.

Looking ahead, Malaysia faces three plausible scenarios. First, the original agreement (ART 1.0) is preserved, particularly its economic security provisions, which represent the core of what Washington secured from Kuala Lumpur. The IEEPA tariffs can be replaced with the tariffs from section 301, which can be broadened or narrowed depending on the outcomes and justifications of the investigations. The second scenario, which can be termed “ART 1.0 Minus”, sees Malaysia using the legal reset to push for reduced tariff rates and fewer intrusive geo-economic security obligations, and renegotiating to correct the agreement’s original imbalances. A third possibility, “ART 1.0 Plus”, swings in the opposite direction. In this scenario, the US leverages both the legal reset and active investigations to demand deeper commitments that would increase the US’ influence on Malaysia’s trade and geo-economic policies.

A new agreement might seem better, given the backlash to the initial ART, but uncertainty is likely to persist due to the US’ continued use of investigative and punitive trade instruments. The cumulative uncertainty creates compounding risks for Malaysia’s investment environment precisely when stability is most needed. Foreign direct investment is critical to delivering on the New Industrial Master Plan (NIMP) and Malaysia’s semiconductor ecosystem ambitions. Supply chains face further fragmentation if US investigations extend to firm-level mapping, forcing multinationals to reconfigure production networks and directly threatening Malaysia’s standing in global electronics value chains.

Responding effectively requires engagement on three fronts simultaneously: (1) proactively differentiating Malaysia in the forced labour investigation by showcasing its reforms and enforcement track record, and clarifying that it is not dumping cheap manufactured exports; (2) pushing in bilateral negotiations for binding consultation mechanisms that reduce the scope for unilateral US tariff action; and (3) accelerating export market diversification to reduce structural dependence on US demand.

The question is not whether Malaysia can weather the current turbulence, but whether it can convert this moment of legal and geopolitical disruption to rebalance what is deemed a lop-sided agreement, while reducing its exposure to the US market.

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