More Than Trade: How the Malaysia–US ART Could Reshape Development

US, Kuala Lumpur deal, October 2025.

By Dr. Anisa Muzaffar

Malaysia’s Agreement on Reciprocal Trade (ART) with the United States will shape more than the terms of bilateral trade. Its biggest effects are developmental. It influences what Malaysia can realistically secure from powerful multinational exporters, how far the state can steer learning and supplier deepening, and how much room Malaysia keeps to diversify technology and investment partners as geopolitical considerations increasingly shape supply chains.

Trade deals are often judged at the border—tariffs, quotas, and headline export gains. For late-industrialising economies like Malaysia, the decisive effects are internal and cumulative. They show up in which learning tools remain usable, which forms of coordination become harder, and which production roles become “locked in” once firms reorganise around new rules.

Semiconductors make this structure easy to see. Many of the largest export platforms operating in Malaysia are led by multinational firms, including major U.S. companies. Many Malaysian firms sit in downstream roles—packaging, assembly, testing, and specialised equipment supply. Malaysia’s three largest listed semiconductor firms—Malaysian Pacific Industries (MPI), Unisem, and Inari—average about US$394 million in annual revenue and about US$60 million in annual capital spending each (around 15% of revenue). This is a meaningful domestic presence, but it remains small compared with the foreign lead firms that anchor the industry.

The US semiconductor firms that operate in Malaysia exemplify this. In 2024, Intel reported about US$53.1 billion in revenue and roughly US$23.9 billion in capital spending, which is used here to estimate reinvestment. Texas Instruments reported about US$15.6 billion in revenue and about US$4.8 billion in capital spending. Put differently, Intel’s 2024 capital spending is roughly 400 times the annual capital spending of a typical top Malaysian listed semiconductor firm. Texas Instruments is roughly 80 times.

This gap changes how “tariff wins” should be understood. Where exports are produced through multinational-led platforms, tariff relief first accrues to the lead firms that ship the final product and capture rents from design, standards, and customer control. Jobs and activity in Malaysia still matter. But without strong learning and linkage policies, the commercial gains concentrate at the top while domestic upgrading remains slow.

It also changes the conditions under which firms can move into higher-value stages of production. With modest capital spending, deeper upgrading is unlikely to emerge from “automatic spillovers.” It requires coordination—through standards, procurement, infrastructure, skills, and sequenced incentives. That coordination relies on policy tools. These include the ability to bargain for learning when investors enter or expand, to steer digital infrastructure and data rules that now underpin production, and to use state-linked anchors to build supplier capabilities. The ART matters because it directly affects how usable those tools remain.

1) Technology and process learning: narrower bargaining space (Article 3.4)

Industrial policy is often a mix of practical policy choices. It is about bargaining for learning at entry and expansion: training intensity, supplier-qualification pathways, process transparency, and localisation of higher-value functions as firms scale.

Article 3.4 matters because it rules out a class of entry conditions aimed at securing access to specific technologies, production processes, and operational know-how from U.S. firms. In high-tech sectors, lead firms have strong incentives to keep roadmaps, tooling know-how, and core process knowledge centralised. Late-industrialising economies shift that balance through negotiations tied to new projects, expansions, and major procurement cycles, locking in structured learning such as deeper engineering roles, supplier-upgrading pathways, and wider diffusion into domestic firms.

If Malaysia cannot credibly bargain for deeper engineering functions and supplier upgrading at these points, the likely outcome is predictable. Malaysia remains attractive as a production location, but higher-control functions stay elsewhere, and local firms struggle to move beyond servicing the platform.

2) Digital rules: slower policy learning in a fast-moving area (Articles 3.1–3.3)

Upgrading now depends on digital infrastructure. Data, cloud services, cybersecurity standards, and cross-border integration shape productivity in factories, logistics, finance, and small firms.

Articles 3.1–3.3 matter because they constrain how Malaysia can combine taxation, regulation, procurement, and standards in the digital economy, and they route future digital trade choices through consultation requirements tied to U.S. interests. The practical risk is slower policy iteration. Countries build digital capability by trying tools, learning fast, and adjusting rules as technology and security demands change. Commitments that lock in narrower options can make it harder to build domestic capability in cloud, cybersecurity, and industrial data systems while still staying open.

3) Third-country alignment: narrower diversification routes (Articles 5.1–5.2)

Economic security is now part of industrial strategy. Export controls, entity restrictions, and “trusted” supply-chain expectations increasingly shape electronics, advanced manufacturing, and critical inputs.

Articles 5.1–5.2 matter because they create pathways for Malaysia to mirror U.S. security-linked trade measures and align on export controls, limiting Malaysia’s ability to trade or invest with partners restricted elsewhere. This can raise the cost of diversification. Firms and agencies may treat non-U.S. partnerships as higher-risk, even when those partnerships could deepen local capability.

Indonesia’s nickel strategy shows what policy discretion can enable. By tightening export rules and steering investment terms, Indonesia pushed processing capacity and downstream projects rather than remaining a raw-ore exporter. The approach has trade-offs and controversies, but the mechanism is clear: industrial deepening relied on room to shape who could participate and on what terms.

4) State-linked coordination: constraints on ecosystem building (Article 6.2)

Malaysia’s development model has long relied on coordination through state-owned enterprises and government-linked companies. In late development, these actors can function as capability anchors when they set standards, coordinate demand, qualify suppliers, and sustain long-horizon investment that private capital often underprovides.

Article 6.2 matters because it pushes state-linked firms to act on “commercial considerations” in commercial activities, limits discrimination against U.S. goods and services, and constrains forms of non-commercial assistance beyond public service obligations. The concern is not a defence of inefficiency. The concern is that strategic procurement and supplier development—key tools for building domestic ecosystems— may be constrained if  “commercial” is interpreted narrowly and external disciplines tighten the state’s coordination role.

What late developers did with flexibility—and why the ART narrows it

Countries that moved from “production sites” to “capability centres” combined openness with disciplined discretion. South Korea used targeted credit and export discipline, then pushed negotiated upgrading across sectors. Taiwan built public technology institutions and translated external technology inflows into domestic capability. Singapore relied heavily on foreign investment but still steered skills, infrastructure, and supplier development to raise local value capture.

Malaysia does not need to copy any single model. But it needs the same ingredient: room to steer learning within firms, across supplier networks, and across borders. The ART narrows that room across several levers at once.

Conclusion: the ART institutionalises a development ceiling

The ART risks institutionalising a development ceiling. It narrows the tools Malaysia needs for learning, supplier deepening, policy experimentation, and strategic diversification. These are not ancillary concerns. They are the core mechanisms through which late-industrialising economies build production capabilities.

On development grounds, the ART therefore warrants challenge. Its disciplines reflect a model of integration that privileges lead-firm control and regulatory lock-in over domestic capability building. Accepting such constraints risks locking Malaysia into a subordinate position without assured developmental gains.

This does not imply disengagement from trade or technology partnerships. It implies that agreements governing production and upgrading must be assessed against their developmental consequences. Where those consequences undermine long-run learning and autonomy, the agreement itself—not merely its implementation—must be contested.

1 January 2026

Dr. Anisa Muzaffar is a Research Fellow at the School of African & Oriental Studies (SAOS) University of London. Her academic background is related to Development Economics.

She is also a member of the International Movement for a Just World.