Protectionism is reshaping the global economy, as major powers turn to tariffs, export bans and other trade restrictions not only to protect domestic industries but also to gain political leverage. This shift is creating new uncertainties in international trade, with far-reaching consequences for countries deeply tied to global markets like Malaysia.
Speaking at the 58th Asean Foreign Ministers’ Meeting (AMM) in Kuala Lumpur in July, Prime Minister Anwar Ibrahim described this as “the new weather of our time”, warning that such tools are increasingly “weaponised against weaker countries”. He said the trend has direct implications for Malaysia, whose economy depends on predictable, rules-based trade.
Anwar cautioned that when large economies impose restrictions or escalate disputes, the effects extend well beyond their borders, influencing the price of essential goods, the stability of jobs in trade-dependent industries, and the ability of businesses to expand internationally.
In his words, “power dynamics now define trade more than ever”, a reality that is most visible in the form of trade barriers that shape how goods and services move across Malaysia’s borders.
What are trade barriers?
Almost all countries maintain some form of trade barriers, whether tariffs or non-tariff measures, to regulate trade. The objectives may be to protect strategic sectors, safeguard public health or national security.
When applied in a transparent and predictable manner, these tools are part of the normal functioning of the global trading system. However, tariffs and non-tariff measures are increasingly being used not only for economic safeguards but also as protectionist tools.
This is evident in the ongoing trade conflict between the US and China, where Washington has imposed sweeping tariffs on Chinese goods and tightened non-tariff requirements in a bid to protect American jobs and counter Beijing’s influence.
Market access, once considered a matter of commercial policy, is now being weaponised as a bargaining chip in wider geopolitical disputes.
Non-tariff barriers, such as quotas, product standards, certification requirements and outright import bans, can restrict trade just as effectively as tariffs, but with less visibility. Their sudden enforcement can disrupt supply chains and raise prices for producers and consumers alike.
However, the costs often fall on the imposing country. Estimates from the Peterson Institute for International Economics suggest US tariffs on Chinese goods cost American consumers US$70 billion in a single year.
Businesses also face higher input costs, retaliatory tariffs, reduced exports and disrupted supply chains — impacts that spread through global networks to trade-reliant economies like Malaysia.
Perhaps the most damaging consequence is uncertainty. Abrupt tariff hikes, shifting non-tariff rules and escalating disputes make firms hesitant to invest or hire. For Malaysia, such volatility directly affects export demand, manufacturing jobs and overall investor confidence.
The multilateral trading system anchored in the World Trade Organization (WTO) has long provided a safeguard against such unpredictability. Established in 1995, the WTO acts as the arbiter of global trade, setting international trade rules and providing a neutral process to resolve disputes.
When a country believes its exports are being unfairly restricted, it can bring a case to the WTO’s dispute settlement mechanism, where panels of experts examine the evidence and issue rulings.
At the heart of this system is the Appellate Body, the highest court for trade disputes. It ensures consistency by reviewing panel rulings and confirming whether they align with WTO agreements.
In recent years, however, this system has been brought to a standstill. The failure to reach consensus on appointing new members has left the Appellate Body without enough quorum to hear cases.
As a result, countries that disagree with unfavourable rulings can now file an appeal to a non-functioning Appellate Body, known as appealing “into the void,” delaying rulings indefinitely.
This breakdown hits smaller economies like Malaysia hardest. Unlike larger powers that can rely on political influence or retaliatory action, smaller and trade-dependent economies like Malaysia rely on a rules-based system to challenge unfair practices.
Without a functioning dispute settlement mechanism, Malaysia faces greater difficulty pushing back against discriminatory standards, sudden import restrictions, or politically motivated tariffs, leaving it more vulnerable to external pressures and prolonged disputes.
Future-proofing the economy
In response, Malaysia has taken steps to reinforce its position. In July, investment, trade and industry minister Tengku Zafrul Aziz made it clear that Malaysia will not compromise on core areas such as halal standards, government procurement, and the right to impose a digital tax on a non-discriminatory basis.
At the regional level, Malaysia has been working to strengthen Asean’s internal trade and investment links, with Anwar urging members at the AMM to “fortify our internal foundations” to reduce reliance on any single external power.
The country is also diversifying its economic partnerships, expanding ties with emerging markets and BRICS nations as part of a broader effort to spread risk and increase resilience.
Domestically, Malaysia is investing in high-value sectors, upgrading infrastructure and logistics, and improving digital trade systems. Projects include the development of an AI-driven container port in Port Dickson as part of the Malaysia Vision Valley 2.0 initiative.
Bank Negara’s recent decision to cut its benchmark interest rate for the first time in five years is aimed at supporting domestic demand in the face of global headwinds, and targeted fiscal measures have been introduced to support affected industries.
Diversifying the economy
A major pillar of the national strategy is economic diversification, which includes support for small and medium-sized enterprises (SMEs) and a stronger focus on education and vocational training in STEM fields.
Malaysia Association of Sustainable Supply Chain & Innovation president Lorela Chia said SMEs must resist the instinct to retreat during volatile periods.
“When things get tough, it’s instinctive to shrink your area of influence or keep everything closer to you and better controlled. Expanding in difficult times feels counterintuitive, but SMEs need to consciously decide to go beyond that.
“Start small, but start. Don’t be reckless. And in today’s world, trust is very important, so build relationships first. Credibility and trust travel faster than scale,” she said.
Chia also said that compliance with international standards, while often seen as a cost, can be turned into a competitive advantage if embedded into core processes, citing the palm oil sector as an example.
“Malaysia’s at the top not just because we are compliant, but because our core processes are that good. Whatever hurdles they throw at us, we clear them and when they move the goalpost, we clear that too.”
Meanwhile, trade expert Sufian Jusoh of Universiti Kebangsaan Malaysia said that while foreign direct investment (FDI) remains important, it should not be seen as a complete solution.
“The biggest misconception is that FDI is a magic wand that can solve everything. It isn’t. FDI should be seen as a catalyst, but we also need to grow our domestic investment.
“We must ensure we get more than just jobs and capital; we need to bring in knowledge, talent and technology. Some investors are reluctant to share technology, so we must have the policies and the human talent ready to adopt and absorb it when the opportunity comes,” he said.
Sufian added that Malaysia’s strongest opportunities lie in high-value services such as research and development, testing and compliance, and that nurturing these sectors will require both policy support and a change in mindset.
By closing the loop between its trade policy, domestic reforms, SME development, and investment in high-value sectors, Malaysia aims to build a more resilient economy that can adapt to global shocks.
For both government and industry, the challenge will be to pair immediate defensive measures with long-term strategies that expand opportunity and strengthen competitiveness in an increasingly protectionist world.
Malaysia remains committed to a fair and rules-based international trading system, as underscored by Anwar’s call at the AMM to uphold the rules even when other parties withdraw from them.
Danish Raja Reza is a journalist at FMT.
The views expressed are those of the writer and do not necessarily reflect those of FMT.