ANN/THE STAR – The April 2 tariffs unveiled by United States (US) President Donald Trump have shocked the world and represent a departure from the globalisation policy of previous US administrations.
Tariffs are a tax imposed by a government on goods and services imported from another country.
They can be used to raise revenue, affect trade flows or protect domestic industries. The Trump tariffs seek to do all three.
Since the US is Malaysia’s third largest trading partner after Singapore and China, these new tariffs and their strategic implications need to be understood.
First, Malaysia is not being singled out by the US. Nor is the US quibbling with any specific trade policy upheld by Malaysia or any other country.
From April 5, the US levied a minimum 10 per cent tariff on all countries, from allies such as the United Kingdom (UK) to the Heard and McDonald Islands off the coast of Antarctica, uninhabited except for penguins.
From April 9, some 90 other countries, including Malaysia, are facing higher “reciprocal” tariffs. These are not reciprocating high tariffs that Malaysia levies on any US goods (most, in fact, are low).
Rather, what the US is taking issue with is the existence of any trade deficit.
The formula used to derive these higher tariffs seems controversial and borderline spurious.
It is effectively the bilateral trade balance between the US and another country divided by the US imports from that country.
This total is then divided by two to offer a “discounted” rate, with a minimum rate of 10 per cent.
Exacerbating this arbitrary approach is that only 2024 trade data is used.
“Reciprocal. That means they do it to us, and we do it to them,” President Trump said on Wednesday.
But, what is happening here is not “an eye for an eye” or “like for like”. Malaysia’s Trump tariff rate is 47 per cent, with a discounted rate of 24 per cent.
The Office of the United States Trade Representative (USTR) itself acknowledges that Malaysia’s average most-favoured nation tariff rate is 5.6 per cent.
Trump and the USTR are claiming that trade deficits can be corrected with US tariffs and that trade deficits exist because of the domestic policies of its trading partners, with nothing to do with the exorbitant privilege of the dollar being the world’s reserve currency for international trade, the production decisions made by US firms, or consumer demand for goods which cannot be produced within the US.
The USTR claimed that “while individually computing the trade deficit effects of tens of thousands of tariff, regulatory, tax and other policies in each country is complex, if not impossible, their combined effects can be proxied by computing the tariff level consistent with driving bilateral trade deficits to zero.
“If trade deficits are persistent because of tariff and non-tariff policies and fundamentals, then the tariff rate consistent with offsetting these policies and fundamentals is reciprocal and fair,” it said.
However, countries such as the UK with which the US enjoys a trade surplus are also facing the 10 per cent minimum tariff hike.
Fairness has already left the stage.
The mercantilist logic operating here is that the US trade deficit with any given country must be paid for out of tariffs on its exports.
For a country to reduce its Trump tariffs, it would either need to cut its exports to the US or buy enough US goods to even out its trade balance.
However, it may not be Malaysia or any other country that may ultimately pay for these tariffs. Their costs can be passed down to US consumers.
Trump’s tariffs will impose higher prices on US consumers, increasing inflation, depressing demand for goods, and courting the risk of a recession.
These latter effects may reduce exports to the US, and consequently its trade deficit, rather than promote the return of manufacturing.
While Trump is on record as being most concerned with “reshoring” manufacturing to the US, the April tariffs target all goods, including agriculture and commodities, except copper, pharmaceuticals, semiconductors and lumber, energy, certain minerals not available in the US, bullion, and steel/aluminium and autos/auto parts already tariffed.
Goods such as bananas and coconuts, which are not readily grown in the US, are thus targeted because they may contribute to deficits.
Electrical and electronic goods comprise the bulk of Malaysia’s exports to the US, with semiconductors making up the largest share.
While currently exempted from Trump’s tariffs, US officials have said that measures on semiconductors are coming.
Reshoring chip production from Taiwan is a particular goal. It remains unclear what the US intends for Malaysia in this regard.
With a discounted tariff rate of 24 per cent, Malaysia remains competitive versus regional alternatives such as China (34 per cent), India (26 per cent), Thailand (36 per cent) and Vietnam (46 per cent).
Except for Trump, US presidents of the past 30 years have supported the globalisation of manufacturing via multinational corporations, with China, Mexico and Canada being the primary trade partners, along with Japan and Germany to a lesser extent.
It is popularly believed in the White House that China has taken manufacturing jobs away from the US.
However, there is also evidence to support that increasing labour productivity and technology adoption have reduced manufacturing employment in the US, while lower-skilled production is offshored to Asia.
