The ART of Rescuing an Unintended Trade Deal While Safeguarding Malaysia’s Multilateralism

On the sidelines of the 2025 ASEAN Summit in Kuala Lumpur in October, the US began negotiating comprehensive trade agreements, referred to as Agreements on Reciprocal Trade (ARTs), starting with Cambodia and Malaysia. ARTs with other Asian countries are currently being pursued. The debate in Malaysia has centred around issues of national sovereignty. This article examines the economic aspects of the Malaysia-US ART, focusing on how Malaysia’s interests can be best served. In particular, how can Malaysia rescue a seemingly lopsided agreement and avoid potential erosion of its long-standing commitment to multilateralism and open regionalism, while still preserving access to its most important market.

Those concerned about national sovereignty see the ART curtailing Malaysia’s freedom to negotiate new deals and even aligning with the US interests enforced through pressure or sanctions. These apprehensions are holding up ratification of the ART. On the other side, proponents insist that the deal is necessary as insurance against an unpredictable and potentially “reckless”, yet critically important, trading partner.

The ART requires tariffs and non-tariff barriers (NTBs) on 98.4 per cent of US imports to be reduced or removed. The NTBs to be reformed or dismantled include accepting US emission standards for automobiles (which takes on new potency following the recent decision to eliminate federal emission standards), recognising US safety standards for food and halal certification, and streamlining import licensing for various industrial goods.  A host of other similar measures affect digital trade, critical minerals, technology, and supply chain resilience. Many of these measures are designed to serve US security interests and may not serve Malaysia’s geoeconomic or other interests. In addition to facilitating USD70 billion in investments, Malaysia has also “committed” to purchasing USD150 billion in technology equipment, aircraft, energy and other commodities. These quotas would highly distort trade and capital flows; if possible, they should be discounted.

In return, the US will provide duty free access for 1,711 tariffs lines mainly in the aerospace, electronics and chemicals sectors, as well as various meat, dairy and agricultural items. The reduction in the post-Liberation Day reciprocal tariff rate from 25 to 19 per cent is also being linked to the ART, even though it had come into effect on 1 August 2025.  With product-specific variations in rates and various exemptions, including those on semiconductors and pharmaceuticals, the average effective rate faced by Malaysian exporters between March – September 2025 was much lower at 8.6 per cent (i.e. total tariff revenue divided by total import value). This adds to the perception that the agreement is lopsided in favour of the US.

Malaysia should look carefully at any measure that simply advances, or could be construed as advancing, US geostrategic interests in the region. Granted, many of the NTBs that Malaysia must remove will benefit the country in the long run, because these reforms would improve economic efficiency and are easily multilateralised. Extending preferential terms to one country, however, would cause trade to be determined by these terms rather than efficiency. Such outcomes, known as trade diversion, potentially harm consumers and producers.

All of this points to the need and urgency for Malaysia to hedge its bets after signing a highly discriminatory and potentially distortionary trade agreement with an increasingly erratic and unreliable partner.

The way to avoid these costs is to multilateralise the exclusive tariff preferences negotiated in the ART. That is, to extend them to all trading partners, ensuring fair and equal treatment. This would restore Most Favoured Nation (MFN) treatment through unilateral action, a project that countries may need to undertake individually in the absence of a well-functioning World Trade Organisation (WTO). While the benefits would be increased if other countries followed suit, unreciprocated multilateralisation is still superior to retaining these preferences, because Malaysia, like the other original ASEAN members, has been pursuing the multilateralisation approach with its ASEAN tariff preferences, so doing the same with ART is neither unreasonable nor exceptional.

Multilateralisation would ensure the best welfare outcome from the ART and avoid the artificial increase in trade concentration with the US, when reducing dependence on an increasingly unreliable trade partner is the risk-minimising option. Multilateralisation of preferences would not violate the terms of the ART but would eliminate the potential for welfare-reducing trade diversion. It could even be an improvement compared to Malaysia’s situation prior to the ART.  This would be possible if the benefits from reducing NTBs are not eaten away by preference-driven trade diversion.

There is also the broader concern that deals such as these, negotiated hurriedly and under duress, may jeopardise existing agreements and even bring into question Malaysia’s long-standing commitment to open, non-discriminatory trade. Article 5.1 of ART has been widely interpreted as requiring Malaysia to mirror US sanctions against third-parties, which would impinge upon its independence.

Proponents who argue that the clause is unlikely to be exercised must consider the recent threat by Trump to impose a 100 per cent tariff on Canada if it concludes a trade deal with China. The threat comes despite the United States-Mexico-Canada Agreement being in place, which also does not contain such a clause. And those who feel that the risk is worth taking to appease the US and ensure long-term access to its market, especially for electronics, should be wary of the Commerce Secretary Lutnik’s threat of a 100 per cent tariff on semiconductors if exporting countries do not produce them in the US. This has led several European leaders at the 2026 World Economic Forum to question the efficacy of appeasement.

All of this points to the need and urgency for Malaysia to hedge its bets after signing a highly discriminatory and potentially distortionary trade agreement with an increasingly erratic and unreliable partner. On the economic front, it can do this through voluntary, unilateral actions that counter the discriminatory bilateral concessions and restore MFN principles, without infringing the terms of the ART. This approach to implementing the ART also provides Malaysia with an opportunity to further its trade reform program to a level higher than it ever was. Malaysia has always embraced multilateralism and need not abandon it in trying to appease an important trade partner.

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