BLUF:
Malaysia is an emerging hub of critical mineral processing, and this gives it another tool to manage strategic competition between the United States and China. However, the country is facing political change, with recent elections pointing to a new balance of power in the 2027-28 general elections. While most political factions back continuity on industrial and technology policy, economic nationalism is on the rise, particularly among Malay nationalists. This may color the government’s approach to the critical mineral industry, particularly as government changes often lead to short-term policy disruptions.
Key Points
The Growing Contest in Refining
Malaysia hosts the largest rare earth refining facility outside of China: Lynas’s Kuantan plant, producing dysprosium oxide and light rare earths. Malaysia also sits on an estimated 16.1 million tons of ionic-clay rare earth deposits, largely untapped. Both the United States and China want Malaysian refining (and production) capacity to grow on terms favorable to their own interests. Khazanah, the Malaysian state investment fund, has reportedly been negotiating a refinery joint venture with a Chinese state-owned firm that would involve the transfer of Chinese processing technology in return for Malaysian ore. Washington’s trade agreement proposed no export bans or quotas on sales of critical minerals to the U.S., codevelopment with U.S. companies, and unrestricted magnet sales.
This is an active arena of geopolitical competition. Both the US and China compete over the same potential capacity and feedstock. Simultaneous compliance with both powers’ wishes will be difficult to manage. But Kuala Lumpur sees this as a potential opportunity, not just a risk. As one of the few non-Chinese rare earth refining games in town, Malaysia hopes to leverage its value to both countries to gain further economic incentives and infrastructure development.
Loosening the Rare Earths Export Ban
One option for Kuala Lumpur is to sell selective access rather than pick a side. In August, officials signaled that they were weighing limited exports of unprocessed rare earths, easing a 2024 ban. This would be conditional to buyers investing in domestic processing, technology transfer, and further research. Malaysia is exploring this option as it would help meet future US flow commitments while keeping feedstock as the price of entry for any new partners. If effective, it would see an influx of Chinese refining technology through state-linked joint ventures, and Western consumption of processed REEs through Lynas and its peers, all while Khazanah serves as a partnership gatekeeper to ensure Malaysia’s benefit.
One constraint is the role of Malaysian states, which own the land and collect royalties. For example, Kedah, opposition-run and holding major deposits, has a 15% rare earth royalty. Mining in forest reserves is being assessed alongside a five-year study through 2029; adverse findings, alongside growing environmental concern, could tighten permitting or trigger a moratorium. As nationalist parties entrench power in the states that hold the deposits, mineral permits will serve as a key bargaining chip between them and the capital. Investors will likely have to pay for access at both levels, state and national.
The State of Malaysian Politics
Like several of its Southeast Asian neighbors, Malaysian politics are a blend of personality-based factions, political ideologies, sectarian divides, and competing ethnicities. The current government of Anwar Ibraham, which initially sought to balance among these differing groups, is facing a slow erosion of support. With the general elections coming in late 2027 or early 2028, the political balance is already in flux. Anwar’s Pakatan Harapan (PH) has lost seats in two recent state elections, while his nominal coalition partner Barisan Nasional (BN), part of the longstanding United Malays National Organisation’s (UMNO), is gaining ground after cooperating with the opposition Perikatan Nasional (PN). The opposition has further fractured with a break between the Malaysian Islamic Party (PAS) and Bersatu. In short, traditional pro-Malay nationalism is once again on the rise a year or so before the next general election.
ElectionData.MY – State Assembly Results, 2021 to 2026
Anwar faces pressure from inside his own government. The potential soon release of former Prime Minister Najib Razak, imprisoned for corruption, is unpopular – a senior minister has offered his resignation over the Najib decision – there is declining support among ethnic Chinese voters, who are frustrated by the slow pace of promised reforms, and as with many countries, Malaysia’s economy faces challenges from energy prices, tariffs, and general disruptions to global trade patterns. While there is general backing for the industrial and technology policies designed to bolster Malaysia’s economy and resilience, NIMBY opposition to new data centers is rising, and the government is responding with restrictions on new data centers tied to water and electricity availability. Political transitions in Malaysia often accompany short-term shifts in policies, whether to differentiate from the previous government or to shift patronage networks.
Hedging Between the US and China
Malaysia has been a long-term partner to both the United States, with economics and trade tied to the former, security and technology to the latter. At the end of last year, both relationships seemed strong. Chinese President Xi Jinping conducted a state visit in April, Malaysia hosted the ASEAN summit in October where it signed the Malaysia-US trade agreement. Yet Malaysia has challenged Chinese terms for infrastructure development, and pushed back against U.S. tariff and trade deals following the Supreme Court’s decision to strike down IEEPA tariffs.
Both powers pull different levers, yet the overlap is increasing. China’s pull is economic and steady. It has been Malaysia's largest trading partner for 17 straight years and the Chinese-built East Coast Rail Link, with both passenger and freight service crossing the Malay Peninsula, will see first phase operations within a few months. Washington’s primary levers are market access and security cooperation. Malaysia currently faces a 10% Section 301 tariff (in ASEAN’s lowest tier), a Section 232 review on semiconductors and chips (a 25% ad valorem on a narrow set of products), and wider tech export controls. On broader issues, Malaysia complies where US enforcement is visible, as with its 2025 permit rule for US AI chips, but resists (or minimally complies with) commitments that bind domestic maneuvering.
Malaysia holds levers of its own. It assembles, packages, and tests about 13% of the world’s chips. As US firms own plants that produce about 65% of Malaysia’s chip exports to the US, additional tariffs on Malaysian chips would largely be a self-tariff on American companies. The country also possesses the land, power, and water that hyperscale data centers want. But its emerging role as a critical minerals processing hub adds another lever to its tool kit.
Final Thoughts
Overall, Malaysia remains a stable partner of both the US and China, leveraging each’s competitive advantage in the region. The government treats both relationships as important, and has shown that it will absorb US tariff pressure and Chinese maritime provocations rather than choose between them. Malaysia has thus far balanced the tech competition between Washington and Beijing, and it is hoping to carry that success on to the strategic mineral and rare earth sectors. Increased U.S. tensions and changing priorities and regulations in both countries may make this a difficult balance. At the same time, the domestic drift back towards nationalism may make Malaysia’s offerings more expensive, driven by majority affirmative action for the Bumiputera (sons of the soil), conditionality on ownership and local processing, and differing state-level regimes. Down the road, this may also lead to increased friction with the ethnic Chinese population, adding friction to relations with Beijing, while opening space for revived Islamist parties, which could complicate relations with the United States.
Additional author contributions from Ethan Burk