When the United States launched its sweeping tariff overhaul in 2025, global attention gravitated toward its implications for China and Mexico. Yet the deeper, more troubling story lies elsewhere in how these trade measures are disproportionately impacting developing and least-developed countries.
Malaysia’s decision to enter
negotiations with the U.S. for sectoral exemptions reveals how middle-income
nations are trying to preserve trade stability in a rapidly shifting global
system. However, for countries without strategic leverage or economic heft, the
path forward is far more precarious.
Malaysia will host the ASEAN
Leaders Summit from October 26 to 28, where its trade minister, Tengku Zafrul
Aziz, is scheduled to meet with U.S. Commerce Secretary Howard Lutnick. The
goal is to hammer out a bilateral tariff agreement that could exempt certain
high-value Malaysian exports including semiconductors, agriculture products,
and processed manufacturing goods from the newly imposed tariffs.
As Reuters reported,
Malaysia has found itself in the crosshairs of Washington’s latest trade
actions, which slapped a 19% general tariff on Malaysian goods in August, with
some carve-outs for critical sectors like chips. These exemptions are
temporary, however, pending the outcome of a broader U.S. review that may
impose levies as high as 100% on imported semiconductors.
For Malaysia, the world’s
sixth-largest semiconductor exporter such a move would be deeply destabilizing,
not only for its domestic economy but also for global supply chains.
While Malaysia enters
negotiations from a position of relative strength, many of its ASEAN neighbours
are faring much worse. Countries like Myanmar and Laos are already grappling
with 40% tariffs, while Singapore despite its deep trade links with the U.S.
has been hit with a flat 10% duty.
This reflects a broader strategic
shift in how the U.S. is using tariffs: not simply as protective tools, but as
leverage in bilateral negotiations. Tariffs are now bargaining chips, and
countries with valuable export sectors or geostrategic relevance may get
exemptions. The rest may be left behind.
The United Nations Conference on
Trade and Development (UNCTAD) has issued a stark warning. According to its
October 2025 report, developing countries, particularly Least Developed
Countries (LDCs), are now facing unprecedented tariff burdens.
Trade-weighted average tariffs on
exports from some of these nations have surged from a modest 2.8% earlier this
year to well over 25%, with several island and landlocked nations confronting
rates that may exceed 40% or even 50%.
These countries contribute little
to the U.S. trade deficit as many represent less than 0.3% of total U.S.
imports yet they are among the hardest hit. The sectors most affected: agriculture,
garments, and light manufacturing are the ones in which these economies have
built fragile but vital export footholds.
UNCTAD highlights a disturbing
trend: the resurgence of “tariff escalation.” This occurs when raw materials
face lower tariffs, while processed or value-added goods are taxed at higher
rates. For example, raw cocoa may enter the U.S. with minimal duties, but
processed chocolate products from the same country could face tariffs five or
six times higher.
This practice not only
discourages industrial development in the Global South but also entrenches a
trade hierarchy eerily similar to colonial-era models, where wealthier
countries extract resources and dominate value-added production.
The return to tariff escalation
and selective protectionism also signals a fundamental departure from
rules-based trade. Previously, multilateral frameworks especially under the
World Trade Organization (WTO) offered smaller economies a degree of stability
and predictability. Now, the system appears to be shifting toward transactional
arrangements dominated by bilateral negotiations and unilateral decisions.
Countries like Malaysia can, and
are, negotiating favourable terms due to their strategic position in sectors
like semiconductors. But smaller, less diversified nations lack that leverage.
They face a stark binary: accept punitive tariffs or attempt to diversify into
already competitive, saturated markets elsewhere.
Beyond trade theory, the human
and developmental costs are severe. Export-led growth, a central pillar of
economic policy across the Global South depends on reliable access to major
consumer markets like the U.S. As UNCTAD points out, the new tariffs threaten
to derail this model by raising costs, reducing demand, and ultimately shrinking
export revenues.
Foreign direct investment could
decline as well, especially in manufacturing and agro-processing sectors that
now face uncertainty. Small and medium enterprises (SMEs) often the lifeblood
of employment and innovation in these economies may no longer be able to
compete. The result could be widespread job losses and a slowdown in poverty
reduction.
What can be done? For Malaysia
and similar economies, the immediate priority is negotiating comprehensive
sectoral exemptions. The upcoming ASEAN summit provides a critical opportunity
to secure carve-outs for not only semiconductors but also agriculture and
intermediate goods that anchor Malaysia’s export economy.
The Malaysian government must
also guard against clauses that pressure firms into relocating operations to
the U.S. in exchange for tariff relief. Any such conditions must be negotiated
transparently and without compromising national industrial policy goals.
For more vulnerable countries
especially those already facing 40% or higher tariffs, the options are narrower
but urgent. UNCTAD recommends the U.S. reconsider its blanket approach and
exempt LDCs that pose no threat to its trade balance.
Additionally, regional blocs such
as the African Continental Free Trade Area (AfCFTA) and ASEAN could advocate
collectively for special treatment or global exemptions for their poorest
members. These countries must also begin diversifying both their markets and
their production capabilities to reduce over-reliance on any single trading
partner.
At the systemic level, the
erosion of the WTO’s authority and the sidelining of multilateral trade rules
present a long-term risk. If the trade regime becomes one in which major powers
impose tariffs and exemptions based on political calculus rather than rules,
the very idea of trade fairness collapses.
The WTO and its dispute
resolution mechanisms need revitalization not only to restore faith in global
governance but to protect the development trajectories of countries with no
real say in tariff negotiations.
Ultimately, Malaysia’s talks with
the U.S. are more than a bilateral trade dispute as they are a bellwether for a
new era in global commerce. If exemptions are handed out only to those with
strategic exports or geopolitical clout, then the rules-based order is no
longer functional.
Developing nations, especially
those without bargaining power, risk becoming collateral damage in a system
that increasingly rewards strength over fairness.
24.10.2025
Kuala Lumpur.
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