Second Trump presidency to impact Malaysian economy

KUCHING (Nov 7): Donald Trump’s 2024 US election win has left the market abuzz with concerns and theories on how a second Trump presidency will play out and how it will affect the global markets and economy.

Locally, however, the question on everyone’s mind is how will a Trump presidency affect Malaysia?

According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) the key objectives and goals of Trump’s proposed trade policies for his presidential term are driven by three main goals, reducing trade deficits, protecting US jobs, and challenging unfair trade practices.

To achieve these objectives, Trump has proposed a range of specific measures and strategies such as a general tariff increase on all imports into the US to incentivise domestic production, a 60 per cent targeted tariffs on goods from China, retaliatory tariffs on companies moving production out of the US, renegotiation of trade agreements and bilateral agreements, and stricter enforcement of intellectual property (IP) laws.

According to MIDF Research, these proposed measures and strategies have sparked significant debate and concern amongst global leaders, economist, and internal businesses.

“His ‘America First’ approach, characterised by high tariffs and aggressive renegotiation of trade agreements, is expected to have far-reaching implications for global trade dynamics and international relations,” opined the research arm.

It guided that there is potential that Trade War 2.0 will come about as China will likely respond to Trump’s proposed 60 per cent tariff on Chinese goods with its own set of retaliatory tariffs and escalate ongoing trade tensions between the two superpowers.

China is not the only country expected to retaliate as MIDF Research notes that the European Union (EU) has previously been at odds with Trump’s trade policies, particularly regarding his tariffs on steel and aluminium.

“If Trump reinstates or increases these tariffs, the EU is likely to respond with its own tariffs on American goods. This could lead to a series of trade disputes and negotiations aimed at protecting European industries,” they shared.

Meanwhile, other countries like Mexico, Canada, and the rest of the world may be pushed to form new alliances and agreements that exclude the US which could lead to a realignment of global trade networks and a shift in economic power dynamics.

Medium-term pain, long-term boon to trade outlook

When this ‘Trade War 2.0’ occurs, MIDF Research reckons that Malaysia will stand to benefit as a re-direction of trade flows could encourage greater re-exports through Malaysia as multinational companies (MNCs) may increase their investment into Malaysia as one of the destinations to relocate their operations.

In the longer run, the research arm expects the US’ move to tighten its trade rules to promote greater integration with the Global South in terms of trade, investment, and financial flows.

“In other words, Malaysia’s trade outlook will benefit from growing final demand from the regional countries and other emerging economies.”

Taking a more cautious approach however, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) guided that they instead believe a Trump presidency will pose significant medium-term challenges to Malaysia’s trade environment.

Noting that Trump has previously shown disdain towards the Indo-Pacific Economic Framework for Prosperity (IPEF) launched by US President Joe Biden by likening it to the Trans-Pacific Partnership (TPP), which Trump famously withdrew from back in 2017, Kenanga Research argues that a Trump presidency will likely see potential US withdraw or disengage from the IPEF and other similar partnerships.

“This will likely weaken this multilateral supply chain pact just as it takes shape, and with Malaysia’s heavy reliance on Electrical & Electronics (E&E) exports, trade uncertainties could rise from disrupted supply chains and constrained export diversification,” the research arm said.

In the long-term however, they share a similar view with MIDF Research that Malaysia may sustain export gains similar to those witnessed during the 2018 US-China trade war.

However, in order to safeguard growth, Kenanga Research cautions that Malaysia may need to expand regional trade partnerships, build resilience against geopolitical shifts, and capitalise on intra-Asian trade alliances.

Increased FDIs in the longer-term

Besides this, MIDF Research guided that they expects increased China-US trade tensions could also further boost foreign direct investments (FDIs) within Malaysia as they noted that from 2016 to 2023, approved FDIs within the country had soared from RM21.6 billion to RM128.4 billion.

Opining that this was largely due to escalating China-US trade tensions, it said Malaysia’s strategic location and efforts to improve its infrastructure and business environment made it an attractive destination for companies relocating from China.

“The period of Trump and Biden’s presidency also saw a steady increase on FDI from China. Given that President Biden did not reverse any of the tariffs enacted by Trump and even added to it, we postulate that first US-China trade war played a major factor for this increase.

“In fact, we should note that there was significant increase from other countries as well. We believe that we might see a continuation of this FDI trend going forward and may accelerate with the possibility of trade war 2.0,” the research arm opined.

A weaker ringgit

Unfortunately, under a Trump presidency, Kenanga Research reckons that the US Fed will begin to respond more cautiously by limiting rate cuts due to the fiscal expansion Trump would likely pursue.

The market had previously banked in on more robust rate cuts as the US Fed continued to turn more hawkish, which resulted in the ringgit rallying strongly against the US dollar to a multi-year low of 4.1 at the end of September.

However, the rally rebounded sharply back to its current 4.4 level leading up to the US election results as a Trump victory became clearer over time.

While analysts like MIDF Research had previously opined that the ringgit would continue rallying to below 4.0 by 2025, Kenanga Research believes that the ringgit will now likely depreciate back to around 2.57 by the end of 4.57 and only recovery up to 4.45 in 2025 if market tensions ease.

“US dollar strength would also reflect heightened investor demand for US assets amid global uncertainty, potentially weighing on emerging market currencies as capital flows to the safe-haven greenback,” the research arm shared.

While many of Trump’s aforementioned potential policies may only be enacted by the second half of 2025 (2H25), Kenanga Research guides that markets will likely to respond pre-emptively and position early for anticipated impacts on trade, fiscal expansion, and interest rates.

The research arm highlighted that Trump’s agenda is also not set in stone and may likely see opposition from fiscal hawks that oppose unchecked spending.

“Nonetheless, investors may brace for rising yields and global capital shifts, setting the stage for potential volatility across assets as market adjust to the likelihood of a more assertive fiscal direction,” it concluded.