How Malaysia deals with brutal US tariffs

Once a cog in the Malaysian economy, the solar industry profited from Chinese investment. Now it’s becoming a case study of what happens when the United States closes its markets, write Alexandra Stevenson and Zunaira Saieed from Kuala Lumpur

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It's become a familiar strategy in Southeast Asia. Companies from China, coveting the American market but blocked by tariffs, do an end run. They pour into a country, opening factories and filling supply chains. They invest billions of dollars and create jobs and business opportunities. The local economy prospers.

President Donald Trump wants to stop that trade. On Friday he unveiled a new layer of tariffs — set at a global rate of 40% — on all goods that move through a third country before they get to the United States. The tariffs are aimed at stopping transshipment, a practice the administration says has allowed Chinese-made goods to skirt punitive tariffs.

The policy landed with a thunderbolt in Southeast Asia, where Chinese investment has helped the economies of poorer neighbours grow more quickly. A crackdown on transshipment will be an economic blow. It also complicates the supply chain in Southeast Asia, which depends heavily on Chinese raw materials and components. From Vietnam to Cambodia to Indonesia, officials and executives are rushing to assess the consequences.

The new tariffs raise hard questions for countries that have long used Chinese components to make the final products they ship to the United States. Does the Trump administration, which has yet to detail how it would enforce the new transshipment tariffs, want to tax it all?

One country offers a case study others could follow for what to do next: Malaysia.

Over the past decade, Malaysia rose to become one of the world’s biggest makers of solar panels. Ten companies, most of them Chinese, shovelled $15 billion into factories around the country, creating tens of thousands of jobs. Then, under President Joe Biden, the United States put tariffs on solar equipment coming from Malaysia of as much as 250%. Today, just two solar panel makers remain and one of them has ceased much of its production.