Tariffs reshape trade for the vulnerable

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.

https://www.malaysiakini.com/columns/758972