By Ahmad Ibrahim
The world is now in a volatile, uncertain, complex and ambiguous state.
Volatility and uncertainty are most dreaded by the economy and business. Decisions to invest are negatively affected. The economic repercussions are devastating, to say the least.
The recent tariff madness by the US has rattled markets around the world. Top economists around the world do not see real value from such a move. Instead of coaxing global companies to shift their operations to the US, as envisaged by the administration, it may even backfire on the US economy.
What is more disconcerting is that the US Congress appears powerless in stopping such madness.
The world, Malaysia included, needs a serious rethink on the global economic order and execution.
Few would dispute the fact that the recent escalation of US tariffs, particularly on Chinese goods but also affecting allies like the EU, has disrupted global trade and forced a reassessment of economic strategies worldwide.
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This tariff madness reflects deeper trends, including deglobalisation pressures, geopolitical rivalry and a shift from efficiency to resilience.
Experts have prescribed key strategic options for the global economy in response. The need to diversify supply chains is imminent.
A much-discussed strategy is to reduce dependency on any single country (especially China) by building alternative hubs in Southeast Asia (Vietnam, India), Latin America (Mexico, Brazil) and Africa. But the obvious challenge is higher costs, slower growth in infrastructure and policy readiness in these locations.
A shift to regionalisation over globalisation is touted. This involves strengthening regional trade blocs to reduce geopolitical risks. Examples of these blocs are the US-Mexico-Canada Agreement, the Regional Comprehensive Economic Partnership in Asia, and the African Continental Free Trade Area.
Such a shift presents the opportunity towards faster logistics, aligned regulations and political cohesion. There is, however, the risk of fragmentation into competing blocs, ie US vs China spheres of influence.
Reshoring and friend-shoring have been proposed as a strategy. This would bring critical industries (semiconductors, pharmaceuticals, clean energy) back to home countries or their allies (through the US CHIPS [Creating Helpful Incentives to Produce Semiconductors for America]Act of 2022 and the EU’s subsidies for battery production). But there is a trade-off between security versus cost. Reshoring raises prices but mitigates supply chain risks.
Currency and settlement systems diversification may result. A much talked about strategy is to reduce reliance on the US dollar in trade settlements (eg in China-Russia yuan-ruble trade and through the Brics push for local currencies). A major obstacle is the fact that the dollar’s liquidity and dominance remain entrenched.
Tech decoupling and innovation wars present a new strategy. Compete in strategic tech (AI, quantum and green tech) through subsidies (US Inflation Reduction Act and the EU green deal) and export controls (eg bans on the exports of semiconductor maker ASML’s extreme ultraviolent photolithography equipment, used for making more advanced chips, to China). The risk is a duplication of research and development efforts and slower global innovation.
There have been suggestions to reform or even replace the World Trade Organization (WTO). This strategy calls for reforming the WTO to address tariff abuses and subsidies or building alternative dispute-settlement mechanisms (eg plurilateral agreements). But then again, the reality is that US-China tensions make consensus unlikely. This is where regional deals may fill the gap.
There is also talk of a climate-led trade alliances. Trade can be linked to climate goals (eg the EU’s carbon border tax, the US-EU’s “green steel club”) to create new alliances while penalising carbon-heavy exporters.
There is no denying that all such rethinks would lead to a more fragmented, resilient but costly system. The post-tariff global economy will prioritise security over efficiency, with competing blocs, higher consumer prices and slower growth.
The winners will be countries that can offer stable manufacturing alternatives (India, Vietnam and Mexico), lead in critical technologies (the US, the EU and China), and leverage regional alliances for scale, example Asean for us.
The risk would be a new “cold war” economic divide that stifles growth.
The best path forward may be limited decoupling, keeping trade open in non-strategic sectors and securing supply chains in vital industries.
For Malaysia, we need to restrategise our involvement in manufacturing. For too long, we have been stuck in the lowest of the manufacturing value chain, assembling, thus becoming too reliant on the global supply chain.
Malaysia’s new industrial masterplan has rightly called for more focus on design and branding. This call was, in fact, made way back during the country’s industrial masterplan for 1996-2005. Unfortunately, the execution has been dismal. It’s time to change.
Prof Dato Ahmad Ibrahim is affiliated with the Tan Sri Omar Centre for STI Policy Studies at UCSI University. He is also an associate fellow at the Ungku Aziz Centre for Development Studies at the University of Malaya.
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