In a simple term, tariff is a form of indirect tax that is imposed by governments on its imports or exports of certain goods. In a technical term, it is called excise duties, often this term is universally used by tax authorities including, the Royal Malaysian Custom when imposing tax to selected goods entering or leaving Malaysia. By virtue of its nature of being a tax, this cost is absorbed by the importers or exporters in Malaysia, and the tax paid to the authority is factored into the final price of the goods. The tax amount is typically calculated by applying the tariff percentage over the CIF value of goods. The incoterm CIF means the value of the goods inclusive of freight, and insurance costs, to the named port (seaport/airport) of destination.
Tariff is one of many economic tools used by the government to restrict the free movements of selected goods. These selected goods are carefully identified before they are selected for taxation purposes. Here are some brief reasons why these goods are taxed.
- In an import situation in Malaysia, selected foreign goods are taxed due to the fact the government is protecting the domestic manufacturing sector of similar goods in Malaysia. By taxing the foreign importation, the foreign products are most likely to be sold in Malaysia at a price higher than the similar product produced or manufactured in Malaysia. This is to ensure that the products that are domestically produced in Malaysia have clear competitive advantage over the foreign importation thus protecting the interest of the domestic manufacturers.
- In an export situation in Malaysia, selected goods leaving the country are taxed, mainly those of unprocessed raw materials. This is to discourage the export of unprocessed raw material often due to its low economic value, thus encourage processing and refinement of the same or similar unprocessed raw material domestically for a larger economic value before exporting.
In this 21st century, tariff is no longer used as rampant as it was back in the 20th century or earlier as many countries have adopted the spirit of globalisation to promote the free movement of goods across its borders. In Malaysia, this is evidenced with the execution of free trade agreements by the government with its trading countries. Trade agreements such as AFTA, RCEP, Malaysia – Singapore FTA and CPTPP were executed for this sole purpose and have contributed significantly to the Malaysian economy in terms of accessibility of goods at incredibly competitive price and promoting active business environment. Most goods that fall within the ambit of these agreements are tariff free, with exceptions of some goods where its tariff are reduced progressively over time. In this case, the reduction of tariff is normally made on gradual basis rather than abrupt basis in conserving the concept of conservatism. This is to avoid economic shock or sudden distortion of the domestic businesses in meeting its domestic demand and supply, couple with keeping good diplomatic relationship with other trading countries.
The recent tariff hike initiated by the United States of America (the US) to its trading partners as early as in April 2025, seems to be a departure from what is being practised by most countries since embracing globalisation. This tariff hike is abrupt, significantly high and difficult to justify with modern economic models. However, what can be established at this moment is the US is generally moving towards establishing a self-sustaining and inward-looking economy on key industrial sectors by attracting complex manufacturing and its supply chain back to its land. In turn, protecting the US Dollar currency against any economic devaluation.
Southeast Asia economy, including Malaysia, relies heavily with the US for its export markets, thus, the tariff hike will have negative implication to its economic growth and prosperity as the goods will no longer be competitive and readily accepted. This is the reality and undeniable! Once the tariff is up and running and investments in the manufacturing sectors are returning to the US, any complete reversal of its tariff seems unlikely in the near or medium term. Therefore, private and listed companies in Southeast Asia with significant exposure to the US must take drastic action before risking losing its revenue in the US. Finding an immediate substitute to replace its existing revenue exposure to the US is unrealistic but it may work for the longer term. If any sensible solution is required in the near term, these private companies must restructure its costs, reassess its pricing strategy and method, eliminate its middlemen by dealing directly with its revenue source in the US, diversify and if required, establish manufacturing unit in the US or at least affected countries to supplement its domestic operation, either on a standalone basis or establishing a joint stock corporation with friendly parties. After all, the US is still a very important trading partner, which cannot be ignored. In the longer term after acquiring the necessary expertise especially on technology advancement, trade within Asia should be intensified, for instance, by way of substituting US export to China that are now considered expensive. Further, moving up in the value chain in the production of goods to reap higher economic reward must be prioritized and factored into the business strategy, thus moving away from production of parts or incomplete products. Ideally, controlling the entire value chain within the same geographical location should be promoted. Equally important, the Government must play its role by offering preferential loans and other incentives to the affected companies until the revenue can be stabilized.
In most cases, losing revenue from any major markets from these abrupt changes in trade dynamics may lead to liquidity and operational failures. Therefore, timely solution and decision are required to address this issue.
Disclaimer:
This article is the personal opinion of the firm and should not be relied upon in making financial or non-financial commitment. Any financial and non-financial losses incurred by the reader/(s) in relying on the content of this article are not the responsibility of the firm. This article is merely expressing the general outlook of tariff issues in Malaysia at the point of writing and tariff issue is a broad subject that can also be caused by many other complex factors that are not explicitly expressed in this article.
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