The New Tariffs
On 23.7.2026, the Office of the United States Trade Representative (“USTR“) announced its imposition of tariffs on 60 economies, at President Donald Trump’s direction, under Section 301 of the Trade Act of 1974[i]. This comes following the conclusion of its investigation where it had found that there has been an alleged failure by these economies in prohibiting or effectively preventing imports made with forced labour and this constituted an “unreasonable” trade practice that burdens US commerce.
The new tariffs took effect from 24.7.2026 and Malaysia is among the 17 economies subject to a 10% additional tariff on exports to the United States (“US”). The remaining economies generally face tariffs of 12.5%, unless they fall within certain special arrangements. It appears that the 10% tariff imposed on Malaysia is in addition to, and not inclusive of, the ordinary most-favoured-nation (“MFN”) duty applicable to a product, as the USTR Notice expressly caps total duties inclusive of MFN duty only for the European Union and Taiwan (at 10%) and Japan, South Korea and Switzerland (at 12.5%).
Why did the US impose these measures?
The imposition of the additional 10% tariff on Malaysia is not because forced labour is being practised domestically or that Malaysian exports generally contain forced labour inputs. Malaysia currently has robust employment laws which prohibit forced labour and is protective of employees. So why then was Malaysia subject to the additional 10% tariff?
It was in response to the USTR’s findings of Malaysia’s failure to impose and effectively enforce a specific prohibition on the importation of goods produced wholly or partly with forced labour. The US takes the position that forced labour is not merely a human rights issue – it is also a trade issue.
Its reasoning is that if manufacturers can source inputs produced using forced labour, they enjoy artificially lower production costs. Those cost savings ultimately distort international competition and place producers complying with labour standards at a commercial disadvantage.
The USTR further argues that while the US has long prohibited imports produced with forced labour, many trading partners continue to allow such products into their domestic markets, indirectly facilitating their incorporation into global supply chains before eventual export to the US.
In other words, the USTR seeks to not only pressure countries into not producing products using domestic forced labour practices but to also pressure countries into preventing the importation of forced labour goods into their own markets.
Why was Malaysia subjected to the lower 10% tariff?
According to the USTR, economies receive the lower 10% rate where they have either:-
- • implemented a forced labour import prohibition but do not effectively enforce it;
- • committed to doing so through an Agreement on Reciprocal Trade (“ART”)[ii]; or
- • adopted measures that partially restrict the importation of forced labour goods.
The USTR found that Malaysia falls within the second of the said categories and therefore received a 10% tariff rather than 12.5%. Importantly, the 10% duty applies to all products of Malaysian origin except those expressly listed as exempt in Annex I (General exemptions) and Annex II, Part A (the universal exemption list applicable to all 60 economies) and Part E (Malaysia-specific exemption) to the Notice issued by the USTR[iii].
Further, Malaysia is one of only four countries (together with Bangladesh, Cambodia and Indonesia) that will eventually benefit from a textile and apparel Tariff-rate Quotas (“TRQs”) mechanism. Under the said TRQ mechanism, a certain volume of specific textiles and apparel, based on that economy’s importation of US inputs, will be allowed to enter the US free of the Section 301 tariffs. It is designed to encourage the use of US cotton and textile inputs, thereby reducing reliance on other sources that may contain forced labour inputs. The TRQs are not, however, yet in force. USTR has indicated that their establishment is not feasible at present but will be feasible by 1.9.2026[iv], and until they are established, the 10% tariff continues to apply to the very textile and apparel goods that the TRQs are intended to cover. USTR will publish a further notice on this TRQ framework and its effective date.
The tariffs are being challenged in the US Courts
The Section 301 forced labour tariffs are now the subject of several challenges pending before the US Court of International Trade (“CIT”). On 3.8.2026, a coalition of 25 US States filed a complaint contending that the tariffs are ultra vires, arbitrary and capricious and contrary to law. The states’ case joins an earlier action brought by, among others, spice importer Burlap and Barrel, Inc. and watch importer Collective Horology LLC and a further suit brought by Learning Resources, Inc. and other businesses[v].
No decision has been handed down yet and the tariffs remain in force and collectible in the meantime. The practical point for Malaysian exporters is that duties paid now may prove refundable if the challenges succeed. US importers of record should keep their entry records in order and take timely steps to preserve their refund position, and Malaysian exporters should ensure that their contracts address which party is to have the benefit of any refund, particularly where the exporter has agreed to absorb part of the duty.
What does this mean for Malaysian businesses?
For Malaysian businesses, the tariff is not an abstract dispute between governments. It makes Malaysian goods more expensive in the US market. The US importer of record may be the one paying the additional duty at the border, but the commercial cost may quickly be pushed back to the Malaysian exporter. US buyers may demand lower prices, postpone orders, reduce volumes or move to another source. Exporters may have to absorb part of the tariff simply to keep the customer, placing further pressure on margins.
Fixed-price contracts are especially exposed. A sale negotiated before the tariff may no longer be commercially workable if the contract does not clearly state who bears new customs duties. Smaller manufacturers are likely to feel the pressure more sharply because they generally have less bargaining power and less room to cut prices.
The harder point is that a Malaysian producer can have responsible labour practices, properly sourced materials and no connection to forced labour, yet still become less competitive simply because it is a Malaysian product. The tariff follows the product’s country of origin, not proof of wrongdoing by the particular exporter or shipment.
Malaysian businesses exporting to the US should therefore act now on the following practical measures:-
- 1. Confirm the US tariff classification and Malaysian origin of each product and verify whether it falls within a general or Malaysia-specific exemption, in which case the 10% duty does not apply.
- 2. Monitor the pending challenges to the tariffs in the US courts and build adjustment/refund mechanisms into contracts and pricing arrangements.
- 3. Establish who bears the additional duty under each existing contract, especially fixed-price sales.
- 4. Address tariff risk expressly in every new contract, including price-adjustment and termination rights if duties change.
- 5. Prioritise supply chain due diligence and screen their upstream suppliers for forced labour risk and obtain written supplier declarations confirming that inputs were not produced with forced labour. This does not itself remove the additional 10% tariff where the product is otherwise covered, but it remains important for managing broader forced-labour compliance and customer risk.
- 6. Maintain good and proper records on information such as the origin of raw materials and supplier audits so that it can respond promptly if a US buyer raises any enquiries.
- 7. For textile and apparel exporters, closely monitor the subsequent USTR notice establishing the tariff-rate quotas (which USTR has indicated should be feasible by 1.9.2026), as duty-free volumes will depend on Malaysia’s importation of US cotton and textile inputs.
The wider implications
The broader significance of these measures extends well beyond Malaysia. Traditionally, trade disputes focused on subsidies, dumping or market access. This latest action demonstrates that labour standards are increasingly becoming a trade policy instrument.
Whether other major economies will adopt similar approaches remains to be seen. However, the trend is consistent with growing global emphasis on Environmental, Social and Governance (“ESG”) obligations and mandatory supply chain due diligence legislation.
Businesses operating internationally should therefore expect increasing regulatory expectations regarding responsible sourcing.
A legitimate objective, but arguably a blunt instrument
The objective of eliminating forced labour is legitimate. Supporters argue that:-
- • forced labour creates unfair competitive advantages;
- • tariffs encourage countries to strengthen enforcement; and
- • economic incentives are often more effective than diplomatic pressure alone.
But a legitimate aim does not make every remedy fair, and an economy-wide tariff is a blunt instrument that critics may view as unfair to Malaysia and other countries.
First, the duty is not tied to evidence concerning each affected product or company. The US has identified a gap in Malaysia’s import controls but it has not made a product-by-product finding that most Malaysian exports contain forced labour inputs. A regulatory gap is being treated as though it were evidence against Malaysian products generally, and compliant manufacturers must bear the same charge even where their own supply chains are clean and traceable.
Second, the tariff places the cost of a state-level regulatory issue on private businesses, US importers and consumers. Notably, USTR itself records that interested parties argued the tariffs should be limited to products connected to forced labour, but it rejected those arguments on the basis that tariffs were being used as leverage to encourage countries to enact import prohibitions. That response makes the purpose of the measure clear: Malaysian goods are being burdened not because each product presents a proven risk, but to pressure Malaysia to take a strict stance against the importation of forced labour goods into their own market.
Third, there is an uncomfortable commercial element. USTR intends to establish TRQs for certain Malaysian textiles and apparel based on Malaysia’s use of US cotton and textile inputs. If the true concern is forced labour, relief should depend on credible proof that inputs were responsibly produced, not on whether they were purchased from the US. Otherwise, a human-rights measure begins to look partly like a tool to promote US exports.
Fourth, the 25 US States in one of the pending actions before the US CIT (as set out above) contend that the stated forced labour rationale is a pretext for recreating, under Section 301, substantially the same global tariff regime previously pursued through the International Emergency Economic Powers Act (“IEEPA”) and Section 122 of the Trade Act of 1974. The IEEPA tariffs were invalidated by the US Supreme Court, while the subsequent Section 122 tariffs were held unlawful by the CIT before expiring on 24.7.2026.
Key Takeaway
Regardless of whether one agrees with the US approach, the message for Malaysian businesses is clear.
The issue is no longer simply whether a company itself uses forced labour. Increasingly, businesses are expected to understand where their suppliers source their materials, whether adequate due diligence has been performed, and whether those supply chains can withstand heightened scrutiny from regulators and overseas customers.
For Malaysian exporters, particularly those supplying the US market, supply chain transparency is rapidly becoming a commercial necessity rather than merely a compliance exercise. The companies that invest early in traceability, supplier governance and responsible sourcing will likely be better positioned as international trade increasingly intertwines with human rights expectations.
HHQ supports businesses navigating the increasingly complex regulatory landscape of international trade. Working closely with leading lawyers and advisers across major economies, we provide practical, coordinated solutions to clients engaged in cross-border trade who must contend with tariffs, economic sanctions, export controls, import restrictions and other regulatory measures. Our international network enables us to help clients understand and manage risks across multiple jurisdictions while keeping their goods, services and businesses moving across borders. For assistance, please contact Siva Kumar Kanagasabai (kumar@hhq.com.my) and/or Pavidren Sivananda Ratnam (pavidren@hhq.com.my).
[i] Office of the United States Trade Representative, Notice of Actions in Section 301 Investigations of Acts, Policies, and Practices of Various Economies Related to the Failure of Each Economy to Impose and Effectively Enforce a Prohibition on the Importation of Goods Produced with Forced Labor (“Notice”) (23 July 2026), pp. 7–12, accessible at: Notice of Actions in Section 301
[ii] Under Article 2.9(1) of the Agreement Between the United States of America and Malaysia on Reciprocal Trade dated 26 Oct 2025, Malaysia is to adopt and implement a prohibition on the importation of goods mined, produced or manufactured wholly or in part by forced or compulsory labour, with the obligation to be implemented within two years of the Agreement’s entry into force. The Agreement is accessible here: Agreement Between the United States of America and Malaysia on Reciprocal Trade
[iii] Office of the United States Trade Representative, Notice of Actions in Section 301 Investigations of Acts, Policies, and Practices of Various Economies Related to the Failure of Each Economy to Impose and Effectively Enforce a Prohibition on the Importation of Goods Produced with Forced Labor (23 July 2026), p. 30; see also Annex I (commencing at p. 73) and Annex II, Part A (pp. 139-242) and Part E (pp. 254–259), accessible at: Notice of Actions in Section 301
[iv] Presidential Memorandum, 23 July 2026, Actions by the United States in the Investigations Under Section 301 of the Trade Act of 1974 of the Acts, Policies, and Practices of 60 Economies Related to the Failure of Each Economy to Impose and Effectively Enforce a Prohibition on the Importation of Goods Produced With Forced Labor.
[v] Complaint, Oregon v. Trump, Court No. 26-03467 (U.S. Court of International Trade. Aug. 3, 2026)
Disclaimer: This article is for general information only and does not constitute legal advice or legal opinion. It should not be relied upon as a substitute for specific legal advice. No person should act (or refrain from acting) based on this article without obtaining advice on the specific facts and circumstances. Halim Hong & Quek does not accept responsibility or liability for any loss or damage arising from reliance on this article. Halim Hong & Quek reserves the right to update, amend or withdraw this article at any time. All rights reserved.
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About the authors
Pavidren Sivananda Ratnam
Associate
Dispute Resolution
Halim Hong & Quek
pavidren@hhq.com.my
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Omar Qayyum bin Hamdan
Associate
Dispute Resolution
Halim Hong & Quek
omar@hhq.com.my
