MALAYSIA’S export sector could face near-term challenges from direct tariffs, a slowing global economy, and the threat of recession, but the long-term outlook remains positive thanks to global supply chain diversification, according to Franklin Templeton.
Liao Yi Ping, portfolio manager and senior research analyst for Franklin Templeton Emerging Markets Equity, said that trade protectionist measures from the United States may particularly affect Malaysia’s electrical and electronics (E&E) industry, which is deeply integrated into complex global supply chains and is sensitive to economic cycles.
“In particular, what I’m watching for Malaysia is the implementation of the Artificial Intelligence (AI) Diffusion Rule, which may come in next month, and any potential additional semiconductor tariffs to be introduced. I think we have to be cautious,” she said during a Franklin Templeton webinar titled “Tarrif-ed”? Trump’s First 100 Days.
The AI Diffusion Rule, introduced under former US President Joe Biden’s administration on 13 January, classified Malaysia under Tier 2 of its Export Control Framework for AI Diffusion. This status restricts Malaysia’s access to advanced AI chips, such as GPUs, capping imports at 50,000 units over two years.
Despite these restrictions, Liao noted there are areas where Malaysia could benefit. “Relatively higher tariffs on gloves from other locations could benefit Malaysia,” she said, pointing out that in the technology sector, Malaysia already hosts many multinational companies and benefits from strong network effects due to established capacity.
Turning to ASEAN, Liao cautioned that if reciprocal tariffs are enforced and not successfully negotiated down, the region could face reduced attractiveness for foreign direct investment, particularly among companies seeking to diversify their manufacturing bases.
“If imposed, it would run the risk of reducing the attractiveness of foreign direct investments by companies that had sought to shift manufacturing into these countries to try and diversify their production footprints,” she said.
“Vietnam may face particularly more challenges given its combination of a high contribution of US exports as well as a high contribution of Chinese investments to foreign direct investments,” she added.
She noted that the Philippines and Indonesia might be more resilient, as exports comprise a smaller share of their overall GDP.
“That being said, ASEAN is a very dynamic region. Indonesia is one of the most populous countries in the world. We continue to find bottom-up opportunities here as well amidst the selloffs that we have seen in the last few weeks,” Liao said.
Franklin Templeton also views the broader US-China trade conflict as a continuation of the decoupling trend that began during Donald Trump’s presidency. Liao emphasised that while this remains a drag on China’s economic outlook, investment opportunities still exist.
“We see the ongoing trade war as a headwind to the Chinese economy and are cautious on broader Chinese equities. That said, we continue to find high-quality bottom-up investment opportunities due to China’s large domestic market, strong investment in human capital, and scope for monetary and fiscal easing,” she said.
She added that the firm sees particular promise in China’s domestically focused companies and technology firms with minimal exposure to the US market. - April 23, 2025
