KUALA LUMPUR (June 25): Chinese companies, including China-based lithium battery producer Eve Energy, have been in discussions with the Malaysian government regarding the potential to bypass US tariffs by relocating their manufacturing operations to Malaysia, according to a report by the Financial Times (FT).

The FT report says that these Chinese firms, specialising in battery technology, medical devices and semiconductors, have approached government officials to persuade Washington to forego the tariffs as the products will be assembled in Malaysia.

Sources cited by FT claimed that Eve Energy, which currently exports about 20% of its products to the US, recently engaged with Malaysian ministers and the Malaysian Investment Development Authority (Mida). The company sought assurances regarding tariff avoidance in anticipation of its expansion plans in Malaysia.

“They [the Chinese companies] want guarantees but it is impossible for us to provide them with that. We can... and do lobby but there is no way [of knowing] what the US will do in the future. We are still trying to work that out ourselves,” a Malaysian government official was quoted as saying.

On the other hand, the report wrote that Johor executive councillor Lee Ting Han had received a similar request from the head of a Chinese medical device company.

The company also sought advice on whether it would incur tariffs after relocating its manufacturing operations from China to Malaysia, Lee informed FT. “I told them the answer is no for now. However, the US could suddenly change its policies. We have no control over that.”

Last month, US President Joe Biden announced plans to increase tariffs on a wide array of Chinese imports, including semiconductors, batteries, solar cells, and critical minerals. Biden said that the tariff rate on semiconductor imports from China will escalate from 25% to 50% by 2025.

According to Mida’s report in February, Malaysia has 13% of the global market for chip packaging, assembly and testing services.

The country is the world’s sixth-largest exporter of semiconductors, and the industry contributed to about 25% of Malaysia’s gross domestic product.

US may tweak tariff policy, say industry observers

Some industry observers The Edge spoke to indicated difficulty in providing assurances to Chinese companies, considering potential future changes in the US tariff policies that might involve tariffs on goods manufactured in Malaysia.

However, Malaysia can only reaffirm its stance of political neutrality and non-alignment, which could potentially boost confidence among Chinese firms, said TA Securities tech analyst Tony Chan Mun Chun.

“The trade diversion has been on-going for quite some time already since the trade war started. The US definitely knows some of the production lines have been diverted to other countries.

“One way for Malaysia is to consistently communicate with the US side to understand where the red line is, and then make sure we don’t cross it. Being politically neutral means, we don't want to be seen [as] siding with anyone,” he told The Edge.

Meanwhile, Malaysia Semiconductor Industry Association (MSIA) president Datuk Seri Wong Siew Hai said: "The US also imposed tariffs on solar for Malaysia previously. So that depends on the US, how they access the situation. If their [Chinese companies] goal is to manufacture products in Malaysia for global markets, that's positive. But if their reason is to avoid tariffs, then it won’t help, and we cannot do anything”.