Malaysia in the Splash Zone of Trump’s Semiconductor Tariff

Malaysia’s strategic recalibration amid shifting semiconductor geopolitics

by Justin Hoo, External Contributor

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The opportunities presented in Trump’s first term may be reversed in his second term. Malaysia has been capitalizing on US tariffs and trade restrictions on China by offering itself as a neutral base for Chinese firms to invest and maintain offshore manufacturing for US clientele. Owing to the country’s mature ecosystem in semiconductor manufacturing (though densely concentrated in the back-end processes), Malaysia emerged as a favorite under the China+1 (C+1) strategy in the context of semiconductors. But Trump’s threat of an impending 100 percent tariff on all chips going into the US (possibly as high as 300 percent) might pop Malaysia’s C+1 bubble.

The irony is that Trump’s tariff may not even achieve its intended purpose domestically. Taiwan Semiconductor Manufacturing Company’s wafer fab in Arizona dispatched 50 percent of its employees from Taiwan, creating what was called a “mini-Taipei” in Arizona. This is because the Taiwanese workforce brought specialized semiconductor expertise lacking in the US. Homeshoring manufacturing is pragmatic, but the problem lies with imposing it without first cushioning companies and building a sustainable talent base. It also remains unclear how Trump’s attempt to re-bifurcate a globally integrated and interdependent semiconductor supply chain will play out.

Yet even if Trump’s homeshoring push fails to deliver on its jobs narrative domestically, its global consequences are unavoidable. Malaysia supplies around 15 percent of the United States’ total semiconductor imports. The US, in turn, accounts for roughly one-fifth of Malaysia’s semiconductor export value. This positions Malaysia squarely within the splash zone of the proposed tariff. Trump’s semiconductor tariff will test Malaysia on four fronts, i.e., firms, the economy, consumers, and geopolitical positioning.

The sectoral tariff is expected to contain a carve-out excluding companies that have manufacturing capabilities in the US or those that have pledged to invest in production facilities there. Some analyses suggest that such a tariff’s impact on Malaysia will be minimal. Nearly two-thirds (sixty-five percent) of the country’s semiconductor exports to the US originate from US firms operating in Malaysia, and a portion of the remaining 35 percent from firms with US affiliation – thus qualifying them for the exemption and remaining immune to the tariff. Some outsourced semiconductor assembly and test (OSAT) players also report less than 1 percent direct US exposure. Local firms with diversified clients and limited US dependence remain insulated, but this is no reason for complacency.

Many Malaysian semiconductor firms—including automation and testing equipment makers, several OSAT players, and those in the Electronics manufacturing services (EMS) segment—derive a substantial portion of their revenues from US clients. These players risk losing this key market overnight if clients reshore production or substitute suppliers elsewhere.

Although Trump’s main target is likely front-end processes such as wafer fabrication and design, where China has been making inroads, Malaysia could face collateral damage. It remains uncertain whether the tariff will apply only to finished chips or also to equipment and semi-products in assembly, testing, and packaging. If the latter, local OSAT firms with major US exposure would be hit hard.

It’s not all doom and gloom. While much of the discussion focuses on risks, Malaysia could also find itself in a position to seize new opportunities. There is also an angle for local equipment and automation makers. As Trump’s tariffs force foreign firms to pour billions into new fabs and facilities in the US, demand for non-Chinese testing, packaging, and automation tools will rise. However, local suppliers that are part of multinational corporations’ operations and supply chains in Malaysia will feel the impact if those pause capital expenditures and new investments in the country, scaling back local operations as they shift their focus back to the US.

It is important that Malaysia views the tariff as both a threat and a potential catalyst in shaping its response.

C+1 once channeled Chinese investments into Malaysian firms and built local capabilities, but that might be changing. In a bifurcated “Made in US for US, Made in China for China” world, Malaysia stands to lose its edge as a shock-proof middle ground. Foreign direct investment (FDI) may slow or be redirected. While back-end projects may continue, high-value research and development and advanced processes are exposed to tariff pressure and shifting. That also means losing out on the technology transfers, skills upgrades, and supplier development that are often spillovers from meaningful FDI. Without this external push, opportunities to move up the value chain become limited. Moreover, the electrical and electronics sector is among the biggest export earners of Malaysia’s manufacturing economy. A slowdown here will quickly translate into weaker growth, reduced tax revenues, and weak economic spillover effects across the economy.

In the short term, even if it proves commercially viable for local firms to expand manufacturing to the US, it will take time. The ones most vulnerable would be Malaysian firms with major US clients. It is also not strategic for back-end firms to relocate to the US, given their sensitivity to cost and scale. The expectation is that Washington recognizes these OSAT processes will have to remain anchored in Asia and refrain from imposing tariffs on them, as replicating them at scale would be self-defeating. This reality may also be Malaysia’s leverage to maintain its position as an indispensable partner in a resilient global supply chain.

Jobs may also take a hit. There is a potential employment shock arising from supply chain recalibration, especially among export-oriented companies. A significant number of Malaysians are employed in the semiconductor industry and its supporting ecosystem (including suppliers and related sectors). If multinational corporations shift their focus away from Malaysia, not only will job opportunities be lost, but the country’s manufacturing ecosystem might also come under strain.

The tariff could hit consumers in the pocket as firms may pass tariff costs onto buyers, making some consumer electronics more expensive. On the supply end, a tariff shock may also delay product launches and tighten the availability of new consumer electronics. Nonetheless, these impacts may be more apparent in the US, whereas the effect on Malaysian consumers would vary depending on whether firms absorb the added costs or if devices are assembled locally.

Geopolitically, Malaysia has always pursued strategic non-alignment with both the US and China to its advantage. That equidistance allowed the country to serve as a reliable, neutral node in the global semiconductor supply chain, by being a beneficiary of the China+1 strategy while still hosting American multinational corporations. But if Trump’s tariff forces homeshoring and clearer alignments, this neutrality will be put to the test. Malaysia needs to therefore reassess its approach by blending hedging between the two global superpowers, diversifying to new markets, and investing in capabilities that would make it indispensable beyond cost and neutrality.

While ASEAN was a collective beneficiary of the C+1 diversification, with Vietnam, Thailand, and Singapore also emerging as important nodes in the global semiconductor supply chain, a blanket US tariff would alter that dynamic as countries would be affected to varying degrees depending on the extent of exposure to the US or China. Realistically, ASEAN is unlikely to respond collectively as each member state differs in scale, industrial depth, politics, immediate strategic interests, and risk appetites. Countries competing for the same footloose investments, like Vietnam, Malaysia, and Thailand, will likely pursue bilateral carve-outs.

The EU has struck a deal with the US to cap its tariffs on semiconductors at 15 percent (that will not be overwritten by other tariffs like one under Section 232 of the US Trade Expansion Act) and guaranteed zero-for-zero tariffs for semiconductor equipment makers. Can Malaysia negotiate a similar carve-out? The EU brings to the table the Netherlands-based Advanced Semiconductor Materials Lithography (ASML) lithography giant, one that the US cannot replace or do without. Even so, Malaysia’s bargaining chip is not insignificant. Any negotiation should map out the indispensable role of Malaysian OSATs for US firms and demonstrate the risks arising from any disruption to Malaysian operations. While it is to be seen how a deal for Malaysia would be brokered, if at all, the approach should be data-driven.

Malaysia’s vision of moving beyond a low-cost back-end base by leveraging foreign investments may now be undermined. The country must brace for impact and reposition to capitalize on emerging opportunities while awaiting Trump’s announcement. This time, it may neither be the cheapest nor the most secure location for semiconductor manufacturers, losing its previous advantage. Malaysia needs to rethink its strategy to innovate, enhance manufacturing capabilities and productivity, and move up the value chain to remain competitive.

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Edited by Thant Thura Zan, Frontier Analysis Editor

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