Malaysia and the United States: The rise and fall of a reciprocal trade agreement
PIPER STOCK |
For a brief moment in late 2025, Malaysia appeared to have navigated the worst of the United States’ tariff offensive. It had not. Within four months of signing a bilateral trade agreement with the United States, a Supreme Court ruling stripped away its legal foundation, leaving both countries to navigate an increasingly uncertain relationship. Malaysia’s experience is already being watched across Southeast Asia, a region that faced some of the strongest effects of Donald Trump’s reciprocal tariff policy, and Malaysia has now become the first country in the region to formally walk away from a deal struck under it.
When the Trump administration imposed tariffs under the International Emergency Economic Powers Act (IEEPA) in April 2025, Malaysia faced rates as high as 47%. That was an enormous shock for an economy deeply integrated into global supply chains. The United States is Malaysia’s third largest trading partner, after Singapore and China. By 2024, the United States had surpassed China to account for 13% of Malaysia’s total exports. Electronics, semiconductors, palm oil, and machinery were among the key sectors exposed. Lower-tariff competitors such as Mexico and the Philippines also threatened to capture Malaysia’s share of the United States market in overlapping segments.
Under these conditions, securing tariff relief became economically urgent. The Agreement on Reciprocal Trade (ART), signed on 26 October 2025 by Prime Minister Anwar Ibrahim and President Donald Trump, reduced tariff rates from 47% to 19% for most goods, while a further 1,711 tariff lines covering aerospace-linked electronics, pharmaceuticals, chemicals, and oleochemicals received zero tariffs, accounting for roughly 12% of Malaysia’s exports to the United States.
The price of that relief was steep. Malaysia made significant commitments on market access, digital trade, labour standards, and provisions affecting its relationships with third countries. The deal faced substantial domestic backlash and was never ratified. Even Tengku Zafrul, Malaysia’s Trade Minister at the time, acknowledged before leaving office that the arrangement was lopsided.
How the legal foundation collapsed
The agreement’s legal foundation did not erode gradually. It collapsed in a single ruling. On 20 February 2026, the United States Supreme Court ruled that IEEPA does not give the president authority to impose broad tariffs. That ruling did not just complicate the ART. It removed the legal instrument on which the entire agreement rested. The following month, Malaysia’s newly appointed Minister of Investment, Trade and Industry, Johari Abdul Ghani, declared the ART “null and void,”
To fill the tariff gap, the United States invoked Section 122 of the Trade Act of 1974, imposing a flat 10% global tariff. But Section 122 authority is time-limited to 150 days, placing its expiry around 24 July 2026 unless the United States Congress moves to extend or replace it. Separately, the United States launched Section 301 investigations into Malaysia on 11 March 2026 over manufacturing overcapacity and forced labour concerns, signalling that trade pressure has not eased.
What comes next?
Malaysia’s experience is a case study in the risks of negotiating under duress. A deal reached under significant tariff pressure turned out to rest on contested legal ground, and its collapse shows that bilateral arrangements built around executive tariff powers can be fragile.
Although Malaysia is the first country to formally exit the United States’ reciprocal tariff framework, it is unlikely to be the last. Other Southeast Asian nations that signed similar deals will be watching closely, and Malaysia’s willingness to walk away may lower the threshold for others to follow. The immediate question is what comes after the Section 122 tariff, which expires on 24 July 2026, and how both sides navigate the active Section 301 investigations.
Anwar Ibrahim and Johari Abdul Ghani have both signalled that renegotiation remains on the table, and Economy Minister Akmal Nasrullah Mohd Nasir has indicated that Malaysia is also looking to broaden its market access and reduce over-reliance on any single trading partner. Malaysia’s experience has already demonstrated that trade agreements built on contested legal foundations carry risks that no amount of negotiation can fully insure against.
AUTHOR
Piper Stock is a Bachelor of Laws (Honours) and a Bachelor of Political Science/ International Relations student at Griffith University and Research Assistant at the Griffith Asia Institute.