Trump’s Tariff Threats Challenge Penang’s Semiconductor Future

The potential imposition of tariffs on semiconductor imports by United States President Donald Trump threatens to disrupt the growth of Penang, Malaysia, known as the “Silicon Valley of the East.” Experts warn that this move could undermine the state’s burgeoning semiconductor industry, which has positioned Penang as a significant player in the global technology supply chain.

During a dinner at the White House on September 4, 2023, Trump indicated that substantial tariffs would be levied on semiconductor companies not establishing operations in the US. While he did not provide specific rates or timelines, the announcement raises concerns among industry stakeholders in Penang. Trump stated, “We will be putting a very substantial tariff… with the understanding that if they come into the country… there will not be a tariff.”

Despite the lack of formal announcements regarding sectoral tariffs on semiconductors, many anticipate that the US could follow through with such measures. The recent introduction of a 100 percent tariff on patented pharmaceutical products unless manufactured in the US exemplifies this trend. This policy shift has already reverberated in neighboring Singapore, where pharmaceutical exports to the US are valued at approximately S$4 billion (US$3.08 billion).

Penang plays a critical role in the global semiconductor supply chain, accounting for an estimated 5 percent of global semiconductor exports, despite being Malaysia’s second smallest state. Major American multinationals, including Intel, Advanced Micro Devices (AMD), and Micron, have established operations in the region, underscoring its importance to the industry. According to the Malaysian Investment Development Authority, Malaysia contributes 13 percent of global semiconductor testing and packaging.

In response to potential tariff impacts, Chow Kon Yeow, Chief Minister of Penang, expressed optimism about the state’s competitive position for attracting investments. He noted that Malaysia’s reciprocal tariff rate is currently set at 19 percent, and without formal sectoral tariffs on semiconductors, the state remains appealing for foreign investment. Chow highlighted that in the first half of 2023, the US was the largest contributor to approved manufacturing foreign direct investment (FDI) in Penang, with a total investment value of RM2.6 billion (US$615.5 million).

While Chow remains hopeful, economists caution about the potential repercussions of high tariffs. If the US imposes tariffs exceeding 80 percent, the semiconductor sector in Penang could be severely affected, leading to increased production costs and a decrease in foreign investment. According to economist Woo Wing Thye, a distinguished fellow at the Penang Institute, such a drastic tariff could make operations in Penang unfeasible for many companies.

Despite the looming threats, Penang’s semiconductor ecosystem appears to be resilient, with foreign investment continuing. Wong Siew Hai, president of the Malaysia Semiconductor Industry Association, asserted that the state’s semiconductor momentum remains intact, contributing significantly to Malaysia’s total manufacturing FDIs. He emphasized that businesses are proceeding as usual, with no immediate impact from tariffs.

Moreover, some companies, like Analog Devices, are expanding their operations in Penang, indicating continued confidence in the region’s capabilities. George Chia, the firm’s ASEAN business director, praised Penang’s role in backend operations and highlighted Malaysia’s advancements in integrated circuit design.

At the same time, Penang is actively seeking to diversify its investor base. Chow noted emerging interest from Chinese firms in high-value industries, including semiconductor equipment and medical technology. Approximately 65 Chinese companies currently operate in the state, contributing significantly to Penang’s export landscape.

Despite this optimism, warnings persist regarding the local government’s proactive measures. There are concerns that insufficient support for local companies could hinder their development in the semiconductor space. Woo emphasized the need for the Malaysian federal and state governments to provide financing and support for local firms to enhance their production capabilities.

As Penang navigates these challenges, analysts suggest that the state should consider diversifying its semiconductor exports to countries involved in trade agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP). Such strategies could mitigate the potential impact of US tariffs and enhance Penang’s global competitiveness.

In summary, while Penang’s semiconductor industry currently exhibits resilience and growth, the threat of US tariffs looms large. The state’s ability to adapt to these challenges will be crucial in determining its future as a leader in the global semiconductor supply chain.