World Bank Malaysia lead economist Dr Apurva Singhi (second from left), with conference session moderator Tan Sri Dr Sulaiman Mahbob (left), Asian Development Bank regional lead economist James Villafuerte (second from right) And Malaysian Institute of Economic Research (MIER) senior fellow Dr Khalid Abdul Hamid (right) during Session 1 of the National Economic Outlook Conference on Thursday. (Photos by Patrick Goh/The Edge)
KUALA LUMPUR (Nov 27): A World Bank economist said on Thursday that Malaysia should reduce tariffs for all trading partners, not just major ones like the US, because selective cuts can distort trade and reduce overall welfare.
Chief economist for East Asia and the Pacific Apurva Sanghi said non-discriminatory tariff cuts would make Malaysia’s economy more open and efficient.
“Tariff cuts are good, but if you are going to cut them, you need to cut them in a non-discriminatory fashion,” he said at the National Economic Outlook Conference 2025 organised by Malaysian Institute of Economic Research (MIER). He added that preferential tariffs often benefit less efficient foreign producers, while hurting the country’s overall welfare.
Sanghi made the remarks during a presentation on global economic challenges, warning that slowing growth, weak investment, and rising debt make trade openness especially important for middle-income countries.
World Bank Malaysia lead economist Dr Apurva Singhi: Tariff cuts are good, but if you are going to cut them, you need to cut them in a non-discriminatory fashion.
He noted that Malaysia signed a Reciprocal Trade Agreement (ART) with the US in October, its third-largest trading partner, creating a delicate balance with its biggest trading partner, China. The deal has raised concerns that Malaysia might be forced to align with US sanctions, potentially affecting its neutral stance in the US-China rivalry.
To explain his point, Sanghi used a simple economic model to show how trade diversion works. The model assumes Malaysia has no local carmakers and imports only BYD from China and Tesla from the US, which are perfect substitutes, so buyers choose based on price. Pre-tariff prices are US$20,000 for BYD and US$30,000 for Tesla, with a 100% import duty and 50 buyers in the market.
With tariffs, BYD would cost US$40,000 – the cheaper option – all 50 buyers would choose it, and the government would collect US$1 million in tariff revenue.
If tariffs are removed only for Tesla, it drops to US$30,000, and consumers switch to Tesla, saving money, but the government loses US$1 million, creating a net welfare loss.
If tariffs are removed for all cars, BYD drops to US$20,000, generating US$1 million in consumer savings, offsetting the loss of revenue.
“The net outcome is zero, which is better than the negative outcome under unilateral preferential treatment,” Sanghi said. He emphasised that the example was about economic logic, not fairness or geopolitics. “Preferential treatment leads to both trade creation and trade diversion,” he noted. “But when it is extended to a less efficient country, the negative impact of diversion outweighs the positive effect of trade creation.”
Earlier, Sanghi warned that the world economy faces slowing growth, stalling investment, and rising debt, with investment in low- and middle-income countries at its slowest in 30 years, and global policy uncertainty at record highs.
