PETALING JAYA: Malaysia is still in the sweet spot to benefit from the China+1 strategy despite the United States and China reaching a truce and de-escalating from their trade war that has caused much volatility in the capital markets and caused much worry for the global trade system.
The tariff de-escalation between the two economic powerhouses earlier in the week had thrown the China+1 diversification strategy in question as some have questioned whether the temporary truce may become permanent and reduce the need or urgency among businesses, both Chinese and foreign-owned, to diversify their supply chains out of China.
Nonetheless, experts said businesses are not expected to reconfigure their supply chain and investment decisions anytime soon. They may instead ramp up diversification efforts through the China+1 strategy given the lingering risks of uncertainties.
iFAST Capital research analyst Kevin Khaw Khai Sheng said it may be “quite difficult” for the United States and China to reach a concrete consensus following the 90-day period.
“While there is a 90-day grace period, we expect tariff levels to remain elevated over the next couple of years ultimately. The possibility of returning to pre-trade war tariff levels is quite tough. Hence, the China+1 strategy still remains relevant for the multi national corporations (MNCs),” he told StarBiz.
On Monday, both countries agreed to suspend most tariffs on each other’s goods for 90 days, reducing reciprocal tariffs between the two nations to 10% from 125%. The United States, however, would maintain its 20% duties on Chinese imports relating to fentanyl, keeping total tariffs on China at 30%.
Khaw said there was a similar phase of optimism during US president Donald Trump’s first stint in the White House, when the United States and China called a truce in the trade war during the Group of 20 summit in Argentina in 2018, before trade negotiations broke down the following year.
“It quickly became evident that it was very difficult for both sides to finalise a lasting deal, as each had wanted to maintain a dominant position in negotiations. While the current 90-day pause is a good start for markets, the time frame is too short for the United States and China to achieve a lasting agreement,” he said.
Malaysia’s strategic geographical location, a relatively weak ringgit and affordable labour makes the country an attractive destination for MNCs looking to diversify their operations, Khaw noted.
He said foreign direct investment (FDI) inflows to Malaysia may be volatile over the next few quarters due to prevailing uncertainties. However, over the longer term of three to five years, he expects FDI to remain on a positive trajectory, as the benefits from the China+1 strategy begin to materialise.
“FDI levels in the country may see some declines this year. Although the official FDI data for the first quarter of financial year 2025 (1Q25) is not released yet, it is expected to register a softer figure, as companies remain cautious on their expansion plans.
“For 2Q25, while the 90-day grace period provides some breathing room, businesses are still awaiting clearer signals from both the United States and China. As a result, most are likely to hold back on aggressive spending in the near term,” Khaw said.
UOB senior economist Julia Goh also concurred that while the recent US-China tariff de-escalation paves the way for further negotiations and more durable agreements, it is nowhere near certain.
As such, firms would still consider diversifying to other markets to mitigate risks in supply chains.
Nevertheless, Goh pointed out that while Malaysia remains a compelling FDI destination, external headwinds and tariff uncertainties would weigh on the growth and investment outlook this year.
“There are signs that Malaysia could benefit from front-loading activities, broadening of supply chains, shifts to lower-tariff nations, and efforts to boost intra-regional trade.
“Cumulative FDI inflows from the United States at RM219bil since 2018 is a testament of Malaysia’s compelling advantages for US companies. Some of these could be part of the US+1 strategy or broader regional supply chain,” she said.
But experts doubt that the shifting of production back to the United States as part of Trump’s push to bring manufacturing back remains a significant feat and would not take place in the foreseeable future.
“Some companies have taken steps to move certain operations to the United States. For instance, Taiwan Semiconductor Manufacturing Co Ltd has set up a chip fabrication plant in Arizona, which is more of a political move.
“However, most companies are adopting a wait-and-see approach especially in sectors like semiconductor and healthcare, as relocating manufacturing back to the United States does not make much sense from a cost and operational perspective,” Khaw said.
On the other hand, Tradeview Capital chief investment officer Nixon Wong said the impact on Malaysia’s FDI would depend on the confirmed tariff rates imposed on Putrajaya.
Only then companies can assess whether the benefits of setting up operations here outweigh the costs of operating in the United States or other countries.
“Should Malaysia be slapped with a higher tariff, (which we do not see as the base case), then FDI may slow as MNCs may consider other markets as their China +1.
“For now, we still think FDI remains healthy as there are more local supportive policies to attract inflows or interest among firms to set up their plants here,” he said.
Looking ahead, Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Dr Mohd Afzanizam Abdul Rashid said regardless of the outcome after the 90-day period, factors like improving access to global trade, deeper integration with the global supply chain and enhancing competitiveness would remain key considerations for effective global trades.
“I doubt there will be a sudden change in how businesses would reconfigure their supply chain and investment decisions.
“I believe they have learnt their lesson well and recognise the need to diversify their supply chain and procurement sources.
“The positive takeaway from the current developments is that perhaps the situation would be less hostile and would facilitate global trade.
“Hopefully, global trade would be based on the rules as stipulated and enshrined within the World Trade Organisation purview,” he said.
Source: https://www.thestar.com.my/business/business-news/2025/05/15/malaysia-still-prime-location-for-supply-chain-diversification