Malaysia considers moving beyond intermediate-goods exports to strengthen domestic industrialization

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Highlights

Malaysia is considering moving beyond intermediate-goods exports, as this model is seen as keeping the country in the middle-income trap while local value added remains low.
The reshoring trend among foreign companies and the negative effects of FDI, such as pressure on natural resources, are increasing risks to Malaysia’s economy and strengthening the case for domestic industrialization.
Malaysia’s average tariff rate of around 6.1% on industrial goods raises the question of whether it is sufficient to protect and strengthen local producers.

This article was translated from the original. Read the original version by our correspondent here.

The role of intermediate goods in Malaysia’s export model

As reported by The Edge Malaysia, the reappearance of the “intermediate goods” category in trade statistics published by the Department of Statistics Malaysia has revived a longstanding debate about Malaysia’s position in global supply chains. The category covers parts, components or raw materials used as inputs to produce other goods or services, and has long been a defining feature of Malaysia’s industrial base, which was built largely through FDI.

This model has helped maintain Malaysia’s role in international supply chains and provided a degree of economic security. However, critics argue that this approach has also kept the country in the middle-income trap, as technology transfer and movement up the production value chain have not materialized as often promised.

The economic returns from this model are also compared with Foxconn’s iPhone assembly operations, which the article says illustrate how the value of manufacturing far exceeds the income earned by assemblers. In this context, the key question is whether host countries should continue committing resources if the value captured locally remains small.

FDI risks and the push for domestic industrialization

The article argues that excessive efforts to attract FDI can come at a cost to the development of local industries, including when incoming investment has negative spillover effects on resources or the environment. Examples cited include plastic waste imports, strip mining near major cities, and the growth of data centres, which could put additional pressure on water and energy supplies.

At the same time, the “reshoring” trend among foreign companies increases the risks facing host economies such as Malaysia if investments that previously drove exports eventually return to their countries of origin. This strengthens the case for Malaysia to continue building up domestic industrialization through the gradual production of finished goods and the development of its own brands, in line with local market needs.

Tariffs are also highlighted as a policy tool that can protect local industries, but they need to be carefully targeted to avoid simply driving up inflation when no competitive local alternatives are available. In this argument, Malaysia’s average tariff rate of around 6.1% on industrial goods raises the question of whether the current level of protection is sufficient to support local producers.

In our earlier coverage of Budget 2027’s focus on high-value semiconductors we discussed funding allocations to help local companies move beyond assembly and testing into segments such as integrated circuit design. We also highlighted the government’s targets to deepen local value added, strengthen domestic supply chains, and ensure productivity gains translate into better wages.

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