In the post-pandemic era, Malaysians have raised concerns about a form of “economic colonization” by China, as the Chinese retail chains and franchises rapidly sprang up and occupied the market space. In the context of Malaysia’s “Malaysia My Second Home” (MM2H) policy, a noticeable influx of Chinese migrants replaced local workers, and speciality businesses have been displaced by standardized Chinese brands, such as Mixue, Haidilao, and Chagee. China’s growing presence now extends from “high-end” industries to “everyday” consumer markets, reflecting not only a change in Malaysian consumption preferences but also the structural reconfiguration of the domestic production landscape. 

Over the past two decades, Malaysia’s trade relationship with China has undergone rapid expansion, coinciding with Malaysia’s premature deindustrialization and China’s recent subsidies, which have created unfair low-priced advantages. A silent trade war between Malaysia and China captures the hidden asymmetrical competition in industrial capacity and relative bargaining power within the relationship, where China’s state policies distort prices without formal conflict. In order to crack the trade imbalance, Malaysia needs to build its endogenous strength through a proactive industrial strategy to reposition itself as a high-productivity, innovation-driven economy. 

Made in China but Sold in Malaysia

The trade imbalance between Malaysia and China has increasingly widened since 2022. In 2025, China has been Malaysia’s largest trading partner for 17 consecutive years, while Malaysia has had a trade deficit with China for over 13 consecutive years. In July 2025, China accounted for 22.8% of Malaysia’s imports. These data indicate Malaysia’s increasing exposure and dependence on China. 

Malaysia has experienced a continuous decline in the share of manufacturing value added since its peak in 2000. This is a typical symptom of premature deindustrialization. According to the Central Bank of Malaysia, this, among other factors, is due to the negative impact of China’s accession to the WTO in 2001 on Malaysia’s competitiveness, by the twin decline in employment as well as the output share of manufacturing. The result is that, at the micro level, local electronics and electrical (E&E) and small and medium-sized enterprises (SMEs) have trouble competing with China due to a lack of scale, resources, and bargaining power, consequently weakening Malaysia’s competitiveness in the global value chain (GVC). In its place, cheap Chinese goods have flooded in to fill the gap, deepening economic reliance on China. That dependence, alongside eroding domestic firms and economic sovereignty, also makes Malaysia’s domestic industry extremely vulnerable to external shocks, such as trade distortions.

For example, in the electronics and electrical (E&E) industry, Malaysia imported about 25% of Chinese E&E products, indicating a highly Chinese-dependent sector. The result is Malaysia’s vulnerability to foreign supply disruptions: during the 2020 pandemic, as Chinese factories closed down, directly causing a 20% drop in exports from Malaysia’s E&E industry. Such hazards runs not only in the E&E sector, but other foreign-dependent ones—construction, agriculture, manufacturing, to name a few—as well, adding immense risk to the Malaysian economy. The importation of Chinese goods has also been crowding out Malaysian enterprises. The import penetration data shows that 19 out of 22 E&E product categories experienced a rising rate of import penetration—the reliance on foreign imports in an industry—from China in the domestic market of Malaysia between 2002 and 2013. The trend suggests a growing share of Malaysia’s E&E consumption is being replaced by Chinese imports, to the detriment of domestic producers. 

In addition to the growing imbalanced flow of goods, the capital flow from China to Malaysia also shows signs of instability and unreliability. China’s foreign direct investment (FDI) in Malaysia peaked at RM6.89 billion in 2017, but it has since declined. By 2024, China’s FDI net inflows in Malaysia were only RM41 million, less than 0.1% of total national investment. 

The dramatic decrease in FDI was reflected in multiple high-profile projects in Malaysia. Melaka Gateway and Forest City, both coastal mega infrastructure projects, heavily relied on investment from the Chinese state-backed investors. Once touted as symbols of Malaysia–China cooperation, these projects have experienced significant capital outflows, with rows of vacant residential properties. With labor and materials mainly coming from China, these ventures limited technology spillover and localization benefits. And as 80% of China’s oil transits the Malacca Strait, the projects (both coastal in nature) clearly showed geopolitical strategy as the primary motive, rather than any genuine technology or industrial cooperation. Chinese investment, the only silver lining in this unequal relationship, thus shows itself as ineffective at stimulating Malaysian local industrial development.

What Drives Chinese Dumping?

Over the past decade, China has consolidated its global economic position with an active combination of industrial policy and export expansion. China is increasingly relying on trade dominance as the core pillar of national power. A key factor behind Chinese companies’ ability to seize the global market at highly competitive prices is rooted in the government’s long-term industrial subsidies that artificially lower production costs. 

In 2019, China spent USD 406 billion (ranked first globally) on industrial policies such as state investment funds, below-market credit, R&D support, tax incentives, and direct subsidies. What distinguishes China is its massive scale and the persistence of non-market interventions that enable Chinese enterprises to dump their manufactured products abroad at below-market prices to expand their market share.

And yet, that production runs into a weak domestic consumption base. China’s composite consumer confidence index fell sharply to a historical low of 85.5 in November 2022, and retail sales of consumer goods have shown consistent weakness, recording negative growth repeatedly in 2022. In the face of this domestic consumption weakness, production surplus thus goes overseas: in 2024, its trade surplus reached a historic high of USD 992.2 billion. China is acutely relying on exports to absorb industrial surpluses. 

In 2023, ASEAN surpassed the US and the European Union, becoming China’s largest export market, meaning the consequences of China’s distortionary exports have shifted toward Southeast Asia. The large influx of Chinese export goods has driven regional trade figures upwards statistically, but has contributed little to local employment creation or industrial growth, and in some cases, has hollowed the manufacturing base of several ASEAN countries. 

Since 2020, the influx of cheap and low-priced Chinese imports to Malaysia has suppressed the domestic profit margin by curbing the overall price growth. The share of SMEs’ exports in total exports has decreased dramatically from 17.9% in 2019 to just 10.5% in 2022. These situations reveal the common trend across ASEAN. In neighboring countries such as Thailand, over 2000 factories were closed between 2023 and 2024 due to intensified price competition for Chinese imports. The business association in Malaysia, ACCCIM, also voiced its concern that the Malaysian economy is struggling to withstand the low-priced competition from Chinese-backed ventures, especially in the service and retail sectors. 

This “low-priced competition” is not a result of genuine comparative advantage, but rather is representative of China’s attempt to fabricate an “artificial comparative advantage” via subsidies or other distortionary interventions. The most obvious impact on Malaysia is that it stunts the growth of domestic industries and amplifies the effect of the aforementioned premature deindustrialization, weakening Malaysian national economic sovereignty in the process.

What Comes Next?

In May 2025, the Ministry of Investment, Trade, and Industry Malaysia (MITI) implemented a five-year anti-dumping duty on Chinese flat-rolled steel products, ranging from 4.48% to 20.42% and subsequently launched a preliminary investigation into other types of steel. Chinese polyethene terephthalate (PET) products are also subject to such duties ranging from 2.29% to 11.74%. 

However, defensive measures can only provide short-term buffering and can have a myriad of negative side effects. Looking back in time, the “Look East Policy” of 1982 shielded the automotive sector by heavy tariff protection, import quotas, ethnic-based preferential treatment, and preferential contracts for politically‑linked firms for the national car project. Yet, protectionism, political cronyism, and ethnocentric policies inflated consumer costs, stifled competition, and weakened firms’ motivation to innovate. It does not help that Malaysia’s anti-dumping investigations overlooks the impacts on consumers, and the term “public interest” in Malaysia’s Anti-Subsidy and Anti-Dumping (Amendment) Act 2025 is not clearly defined. 

Therefore, though anti-dumping duties may be the most direct response, they may not be the most effective way to improve social welfare. Rather, Malaysia is facing a lose-lose dilemma: imposing anti-dumping duties protects domestic producers but burdens consumers with higher prices, while allowing cheap Chinese imports undermines local competitiveness. 

The only sustainable path forward, then, is to boost productivity and technological innovation through industrial growth and investment. This benefits both producers and consumers through lower costs and prices. With efficiency rises, firms can offer goods at more competitive prices without relying on protectionist measures. More importantly, strengthening a nation’s economic capabilities and structural resilience is the most effective means of self-protection. 

One element that holds back this program is Malaysia’s structural weaknesses, especially its weak domestic investment: private investment in Malaysia dramatically reduced from 32% of GDP in 1997 to just 16% in 2024. Therefore, Malaysia must attract foreign investment and collaboration to restore capital accumulation and innovation. These foreign investments should emphasize technological diffusion and promote industrial upgrading to reduce dependence on imports. One way to do this is to play into Malaysia’s global strengths. Malaysia’s role in global production is largely limited to back-end processes such as assembly, testing, and packaging (ATP). These processes provide low technical complexity and value addition. So, Malaysia needs to gradually transform to attract value-added, skill-intensive FDI rather than labor-intensive one.

Another structural issue is Malaysia’s low R&D spending, resulting in limited productivity growth and weaker capacity to upgrade into higher-value industries. R&D spending in Malaysia is only 0.95% of GDP, which is far behind China (2.5%) and Korea (5.2%). So, to move up the value chain, FDI projects should be accompanied by higher R&D spending, joint ventures, knowledge transfer, talent development, and scientific research collaboration. Malaysia should require foreign firms to include technology input and local workforce training, allowing greater integration of new technologies and techniques. One idea would be requiring foreign firms to train Malaysian engineers or hire local management to qualify for tax incentives.

To complement FDI, policy incentives should encourage companies to export and compete directly with global brands. This approach promotes business strategy iteration, export sophistication, productivity enhancement, and improvement in worldwide competitiveness. Existing incentives, such as pioneer status tax incentives (PS), reward firms regardless of performance: as long as the company obtains pioneer status, it will continue to enjoy benefits, even if it incurs losses. So incentives should form a results-based approach that links to export performance, making ‘export’ a key condition for benefits. 

Malaysia should also strengthen its institutional framework and cooperation to ensure that technological cooperation, FDI guidance, and SME upgrading are not isolated goals. For instance, promote returnees’ spin-offs through tax incentives or research grants to encourage start-ups and enhance the capability to export. At the same time, enhancing the cooperation between ‘SMEs Corp Malaysia’ and ‘Malaysian Investment Development Authority’ (MIDA), developing a unified blueprint for industrial and technological upgrading, simplifying FDI-SME linkage procedures, and conducting a policy performance review every three years to eliminate ineffective or overlapping projects would contribute to this goal.

By governing high-quality investment and linking incentives to performance, Malaysia can enhance domestic technology absorption, avoid foreign technology imitation, and strengthen its global competitiveness.

Escaping the Silent Dependency Trap

The economic relationship between Malaysia and China is deepening, and simultaneously, the hidden asymmetric trade is becoming increasingly apparent. China’s state-led industrial subsidies and overcapacity led to low-priced competition that undermines Malaysia’s industrial self-reliance and accelerates premature deindustrialization. 

While anti-dumping duties and protectionist policies serve as short-term buffers, sustainable progress requires innovation-led growth through industrial upgrading and technological cooperation with foreign countries. This is crucial because if Malaysia fails to upgrade now, it risks being locked into a low-value, import-dependent position and long-term vulnerable to external shocks. Yet, by reforming institutional frameworks and strengthening SME and FDI linkages, Malaysia can transform from a dependent importer into a modern, competitive, and innovation-driven economy, one fit for a new world.

Image credits: Wikimedia Commons