From oil to chips: How the EU-Malaysia FTA became a semiconductor power play

Key takeaways:

A trade negotiation that collapsed over agricultural protectionism in 2012 has been resurrected as a key element of Europe’s technology sovereignty strategy. With a second round of talks scheduled for November, the EU and Malaysia aim to finalize the new free trade agreement (FTA) by 2027 to secure new markets and forge lucrative semiconductor partnerships.

For Europe, the deal is an urgent bid to diversify chip supply chains away from China and Taiwan amid escalating geopolitical tensions and Trump’s unpredictable trade policies. For Malaysia, it represents another act in a careful balancing performance, courting Western technology partnerships while maintaining strong ties with Beijing.

The transformation of this trade agreement from a contentious agricultural dispute into a semiconductor supply chain partnership captures a broader shift in how middle powers and major economies navigate the increasingly fraught landscape of 21st-century trade, where technology and security concerns now rival traditional commercial priorities.

What killed the deal; what revived it?

The EU-Malaysia trade deal negotiations began in 2010 but stalled two years later due to the EU’s environmental regulations, which Malaysia perceived as discriminatory against its palm oil industry while protecting EU-produced alternatives like rapeseed oil. Despite the impasse, trade between the two economies continued to flourish. Under the WTO framework and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), bilateral trade reached €44.7 billion in 2023, with Malaysia enjoying a €13.5 billion surplus.

On January 20, 2025, both sides announced the resumption of negotiations. The first round took place from June 30 to July 4, 2025, with 21 chapters now under discussion, including new provisions on digital trade and sustainable development, which were absent from the 2010 talks. A second round is scheduled for November 2025, with both parties aiming to finalize the agreement in 2027.

The timing reflects shifting priorities on both sides. Europe, caught between Chinese industrial overcapacity and Trump’s unpredictable tariff policies, urgently needs to diversify its trading partners and semiconductor supply chains. Malaysia, facing similar pressures from US trade restrictions, sees an opening in Europe’s search for reliable technology partners able to operate outside full dependence on either Beijing or Washington.

The semiconductor story

The inclusion of digital trade is no coincidence. Malaysia harbors significant ambitions: “We aspire to become a semiconductor powerhouse in several years’ time,” a senior lecturer at the University of Malaya explained in a recent interview. The country aims to move beyond its strong base in assembly, testing, and packaging to compete in higher-value segments such as integrated circuit design, manufacturing equipment, and advanced packaging.

These ambitions are backed by serious investment. Malaysia’s 2025 National Semiconductor Strategy includes a €4.5 billion investment plan and the training of 60,000 new engineers. The momentum is already visible: Malaysia recorded 16.4% year-on-year growth in semiconductor and electronics exports in Q1 2025. This builds on the long-standing presence of firms such as Infineon, Intel, and Texas Instruments, which have operated in the country for decades.

European engagement is already taking shape. German semiconductor manufacturer Infineon’s €7 billion multi-phase expansion of its Malaysian facility, the world’s largest 200mm silicon carbide power fabrication plant, is supported by the EU’s Global Gateway initiative. The first phase was inaugurated in 2024. These chips are critical for electric vehicles and renewable energy systems, sectors where European manufacturers, like Volkswagen and Siemens, depend on secure supply chains. The FTA would formalize and expand such cooperation beyond individual projects.

Yet a crucial gap remains. “We still need to cooperate with our external partners,” the senior lecturer noted. “If not, we won’t achieve the whole supply chain by doing this alone. We may just have upstream and downstream [while] lacking the midstream, especially in the AI chip supply chain.” This is where the trade deal with the EU becomes strategic for Kuala Lumpur. German engineering firms are natural partners for technology transfer, and guaranteed EU market access grows increasingly valuable for Malaysia as American reliability wavers.

Malaysia is also keeping a close eye on its regional competitors. After Vietnam secured an FTA with the EU in 2020, exports to Europe rose from €35 billion in 2019 to over €48 billion in 2023. Malaysia sees similar potential but faces competition from Singapore, Thailand, and the Philippines for European semiconductor investment.

The stakes extend well beyond trade flows. For Malaysia, semiconductors represent a potential escape from the middle-income trap that has long constrained its development. Moving up the value chain, from assembly to design and fabrication, could transform the country’s economic trajectory, but only with the right partnerships and market access.

The Trump catalyst

US President Donald Trump’s tariff policies have injected fresh uncertainty into Malaysia’s export strategy. Initially, Trump imposed a reciprocal tariff on Malaysia of 24–25%, which was later negotiated down to 19%. Early provisions exempted key sectors such as semiconductors, pharmaceuticals, copper, and lumber.

But the reprieve proved short-lived. Trump subsequently announced a 100% tariff on semiconductor imports from companies not manufacturing in the United States or committed to doing so. This reversal meant that roughly 55% of Malaysia’s exports to the US would face full duties, pushing the trade-weighted average tariff to around 14%.

“We need a lot of adaptability, a lot of fast responsiveness. Because it’s all uncertain. Trump really makes everyone play it according to his game,” the senior lecturer explained. This volatility has accelerated Malaysia’s push to diversify its export markets. The US currently accounts for about 13% of Malaysia’s total exports, primarily in electronics and semiconductors. Compared to Trump’s unpredictability, the EU offers stability and a rules-based trading environment.

An FTA would provide Malaysia with a reliable export market at a critical moment, while giving Europe a chance to secure semiconductor partnerships beyond China’s orbit.

Malaysia’s balancing act

Throughout the negotiations, Malaysian Prime Minister Anwar Ibrahim has emphasized Malaysia’s commitment to a neutral foreign policy. The country seeks access to Western technology and markets, but it also depends on Chinese trade and infrastructure investment.

That relationship remains strong. During Chinese President Xi Jinping’s state visit to Malaysia in April 2025, the two countries agreed to build “a high-level strategic Malaysia–China community with a shared future.” Malaysia welcomed China’s application to join the CPTPP and agreed to explore cooperation in advanced manufacturing, artificial intelligence, and quantum technology.

For Malaysia, however, the FTA with the EU carries certain risks. Moving too close to Western tech blocs could invite Chinese economic pressure. At home, EU labor and environmental standards may prove politically sensitive, while heightened European competition could spark resistance from domestic industries.

The question hanging over the negotiations is whether Malaysia can sustain its careful balance, or whether intensifying great-power competition will eventually force a choice.

What’s at stake

The FTA’s implications extend far beyond bilateral trade. For Malaysia, success would validate its neutrality strategy and deliver the technology partnerships essential for moving up the value chain. It would also provide guaranteed access to a stable €500 billion market and serve as a potential model for other middle-income countries seeking to leverage great-power competition rather than be crushed by it.

For Europe, the deal represents a crucial test of whether its “de-risking” strategy can succeed with a partner deeply intertwined with China. A successful agreement would create a blueprint for similar pacts with Vietnam, Thailand, and the Philippines, deepening EU engagement across the Indo-Pacific. It would also reduce dependence on Taiwan and China for critical semiconductors while supporting Europe’s AI ambitions.

Failure, however, would expose the limits of both strategies. If EU labor and environmental standards prove too demanding, or if Malaysia cannot balance competing pressures, other ASEAN states may conclude that European partnerships come with impossible conditions. For Malaysia, failure would mean a more definitive choice between rival economic blocs, precisely the outcome Kuala Lumpur is trying to avoid.

Yet a deeper paradox remains: de-risking through partners heavily integrated with China may simply relocate, rather than reduce, supply chain vulnerabilities. Malaysian semiconductor production still depends heavily on Chinese inputs, equipment, and markets. True resilience may require not just geographic diversification but a fundamental restructuring of global semiconductor supply chains, a far more complex and costly undertaking than any trade agreement alone can deliver.

Conclusion

 The EU-Malaysia FTA’s evolution from a palm oil impasse to a semiconductor partnership illustrates how swiftly geopolitical realities can reorder trade priorities. What once seemed an intractable dispute over agricultural standards has been overtaken by the urgent need to diversify chip supply chains.

Whether the deal succeeds or fails will signify more than the fate of bilateral trade: it will test whether Europe’s “de-risking” strategy can function with partners unwilling to reduce their exposure to China, and whether middle powers such as Malaysia can truly profit from great-power competition or will ultimately be forced to choose sides. The outcome could set a new precedent across the Indo-Pacific and beyond.