Tariff madness forces world to rethink economic planning — Ahmad Ibrahim

MAY 13 — The world is now in a state of volatile, uncertain, complex and ambiguous — VUCA. Volatility and uncertainty are most dreaded by the economy and business. Decisions to invest are negatively impacted. The economic repercussions are devastating, to say the least.

Recent tariff madness by the US has rattled markets around the world. Top economists around the world do not see the 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 needs a serious rethink on the global economic order and execution. Malaysia included.

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. 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. The obvious challenge is higher costs, slower growth in infrastructure, and policy readiness in the alternatives.

A shift to regionalisation over globalisation is touted. This involves strengthening regional trade blocs (e.g., USMCA in North America, RCEP in Asia, African Continental Free Trade Area) to reduce geopolitical risks. This presents the opportunity towards faster logistics, aligned regulations, and political cohesion. There is, however, the risk towards fragmentation into competing blocs (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 allies (e.g., US CHIPS Act, EU’s subsidies for battery production). But there is a trade-off between security vs. cost. Reshoring raises prices but mitigates supply chain risks.

Currency and settlement systems diversification may result. The much-talked-about strategy is to reduce reliance on the US dollar in trade settlements (e.g., China-Russia yuan/ruble trade, 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 new strategy. Compete in strategic tech (AI, quantum, green tech) via subsidies (US IRA, EU Green Deal) and export controls (e.g., ASML’s EUV bans to China). The risk is a duplication of R&D efforts, and slower global innovation.

There have been suggestions to reform or even replace the WTO. The strategy calls for reforming the WTO to address tariff abuses and subsidies, or build alternative dispute mechanisms (e.g., plurilateral agreements). Then again, the reality is the US-China tensions make consensus unlikely. This is where regional deals may fill the gap.

There is also talk of climate-led trade alliances. Link trade to climate goals (e.g., EU Carbon Border Tax, US-EU “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. Winners will be countries that can offer stable manufacturing alternatives (India, Vietnam, Mexico), lead in critical technologies (US, EU, 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 while 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. The NIMP has rightly called for more focus on design and branding. This call was in fact made way back during IMP2. Unfortunately, our execution has been dismal. Time to change.

* Prof Datuk Dr Ahmad Ibrahim is affiliated with the Tan Sri Omar Centre for STI Policy Studies at UCSI University and is an associate fellow at the Ungku Aziz Centre for Development Studies, Universiti Malaya.

** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.