Saving Malaysia’s AI Dream Amid Shifting US Tech and Trade Policies

Malaysia launched its National Artificial Intelligence Roadmap 2021–2025 in 2022 to drive AI integration across key sectors, spur R&D, and foster innovation for economic growth and better public services. The roadmap prioritises the use of AI in supply chains, and in selected sectors such as agriculture and forestry, medical and healthcare, smart cities and transportation, education and public services. In 2024, the National AI Office (NAIO) was established to build Malaysia’s AI ecosystem, including Micro, Small, and Medium enterprises (MSMEs) as another priority area.

AI in Malaysia remains in its early stages. According to the Minister of Science, Technology and Innovation, only 13 per cent of MSMEs, which make up 97 per cent of the business landscape in Malaysia, have adopted AI, and the AI startup ecosystem is at its nascent stages. These startups apply machine learning, computer vision, and robotics to develop and commercialise new AI‑powered solutions.

However, the roadmap and NAIO’s focus on increasing AI adoption implicitly assume that AI chips will have to be imported, since Malaysia’s semiconductor sector continues to operate at the assembly, packaging and testing segments. Malaysia does not manufacture AI chips but imports them from China, Taiwan, and the US. Restrictions on exports from the US can constrict the supply of AI chips, especially advanced AI chips currently produced by Nvidia, and hinder AI adoption in Malaysia.

Legacy chips might remain accessible, but a persisting blockade on state-of-the-art AI chips, which are more cost effective for AI applications or required for state-of-the-art AI systems, would be detrimental to Malaysia.

Efforts to curb semiconductor diversion to China appear to be underway. On 5 July 2025, Bloomberg reported that the US Commerce Department plans to require US export licenses for shipments of Nvidia’s advanced AI chips to Malaysia and Thailand, to prevent China from accessing them through third countries or smuggling. To date, however, there is no formal issuance of the new rule. The proposed US export ban to Malaysia is prompted by an earlier report of a Chinese company trying to build AI models in Malaysia’s data centres using Nvidia chips. The case is being investigated by Malaysian authorities, but Nvidia has been allowed to resume exports from the US to China since July 2025, as part of the trade agreement to access rare earth from China. It is unclear how long this resumption will last, and whether this US-China export channel will affect the US’ emphasis on the issue of transhipment of chips into China via Southeast Asian countries like Malaysia.

Meanwhile, on 8 July, Trump sent a letter to Malaysia announcing the imposition of tariffs of 25 per cent from 1 August, leading Malaysia to accelerate its trade negotiations with the US. The tariff was subsequently lowered to 19 per cent on 31 July 2025. Semiconductors are currently exempted from tariffs, but the exemption list does not include Nvidia advanced AI chips. Again, not much is known about the terms being brokered, such as the list of demands from the US in exchange for the tariffs, and how long the agreed tariffs will last.

Amid the uncertainty on tariff rates and sectoral exemptions, Malaysia faces a potential double whammy of possible export curbs on AI chips and a tariff hike to 19 per cent from 7 August 2025. An export curb will affect the supply of AI chips to Malaysia and subsequently slow down AI adoption. Legacy chips might remain accessible, but a persisting blockade on state-of-the-art AI chips, which are more cost-effective for AI applications or required for state-of-the-art AI systems, would be detrimental to Malaysia. If the US’s escalation of tariffs achieves its objective of relocating manufacturing to the US, the simultaneous increase in input costs would trigger an upward spiral of higher US export prices, including AI chips sold to Malaysia. This would compound the slowdown of Malaysia’s AI adoption.

For Malaysia to advance in its AI ambitions, it must diversify AI‑chip suppliers, implement supply chain vigilance to avoid “transhipment” risks, and leverage compliance to attract more investments from the US and its allies, while also courting investments from China on the basis of neutrality.

To diversify supply chain participation, Malaysia could expand its engagement with ARM, a UK-based company that is majority-owned by Japan’s Softbank. Indeed, recent initiatives could spawn future domestic production of AI chips. In March 2025, Malaysia signed a ten‑year deal with ARM, in which the company will be paid US$250 million to license seven of its high‑end intellectual property cores and train 10,000 engineers in chip design. This would lay the groundwork for indigenous AI‑chip assembly or fabless startups, which focus on design while outsourcing fabrication.

Open‑source alternatives, such as RISC‑V, which is royalty-free, are gaining traction. However, it faces hurdles in terms of technical support, standardisation across extensions, and achieving the performance of proprietary advanced AI chips.

Japan and Korea are jumping onto the AI chip bandwagon; each country is providing financial support for domestic production in the wake of the tech war between the US and China. This would open up more suppliers in the future and could reduce Malaysia’s dependence on the US for sourcing AI chips.

To reduce transhipment risks, Malaysia has issued a new directive whereby exports, tranships, and transits of high-performance AI chips of US origin will require a 30-day prior notice to the Ministry of Investment, Trade and Industry (MITI) before exporting, transhipping or transiting. MITI hopes that this will restrict the use of Malaysia as a transhipment location. Supply chain vigilance is also necessary to retain the existing realised and approved American investments in Malaysia.

Malaysia’s enhanced compliance on point-of-origin certification and MITI’s new directive, could also be leveraged amid geopolitical realignment to attract more investments from the US and its allies, such as Japan and South Korea, in addition to China.  

Regardless of future changes in Trump’s tariffs on Malaysia, chip supply diversification and vigilance are imperative to shield Malaysia from the ongoing disruptions and to position its economy for future growth. Malaysia must act urgently and decisively to keep its AI dream alive.

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