Written by Dr Stewart Nixon, Director of Research of the Institute for Democracy and Economic Affairs (IDEAS).

As IDEAS convenes its Malaysia Outlook Conference 2026 with the support of the Friedrich Naumann Foundation, the need to recognise the shared economic and political policy challenges confronting Malaysia and Germany has seldom been starker. A turbulent 2025 in which United States foreign, economic, and strategic policy became significantly more interventionist, less cooperative, and more unpredictable — treating friends and enemies alike — added impetus to a longstanding need to deepen direct connectivity between Southeast Asia and Europe. The reanimation of Malaysia-EU free trade agreement negotiations from a 12-year coma is among the most salient signs of renewed urgency.

Responding to tariff policy shocks

Malaysia and Germany faced the challenges of 2025 from very different positions of regional leadership, contributing to differences in approach and outcomes.

Southeast Asia was fortunate to have a respected elder statesman and vigorous diplomat as ASEAN Chair in Malaysia’s Prime Minister Anwar Ibrahim. His leadership supported a deliberate and consultative approach that avoided worst-case tariff escalation scenarios and positively reshaped Malaysia’s (and ASEAN’s) image in Washington. Even with Anwar’s leadership however, ASEAN lacked the commitment mechanisms and institutions for joint negotiations to gain a foothold.

Germany meanwhile benefited from the EU’s institutional leadership and greater regional cohesion on trade policy, with a newly enshrined Chancellor Friedrich Merz reinforcing that the EU would negotiate as a bloc and there would be no side deals. Most respected commentators argue that Europe secured a far better deal than any country in Southeast Asia. This deal is now imperilled by Trump’s provocations on Greenland, with Trump again weaponising tariffs without regard for longstanding friendships or respect for his own bilateral deals.

Navigating an uncertain world

Both countries will be managing continued and evolving US policy and broader geopolitical uncertainty throughout 2026, engaging an increasing range of economic, security, technological, and environmental issues. Identifying and acting upon shared interests will be increasingly important, as will be learning from each other’s experiences.

Navigating the increasing intersection of economics and security is a leading area of mutual interest. Germany and NATO’s European members face the dual threats of Russian aggression and US withdrawal from NATO, which provides an opportunity to revitalise industry but also fiscal and security challenges. Malaysia is among the frontline countries facing sharper choices as strategic competition between the US and China mounts, with Malaysia’s trade deal with Washington requiring it to adopt equivalent trade policy measures against US national security targets (upon request, applying to third countries like China).

America’s increasing isolationism on technology is of shared concern ripe for deepened cooperation. The US is escalating sanctions and restrictions targeting China and other competitors, which impedes wider adoption of US and Chinese technology in Malaysia and Europe and encourages geopolitically fragmented technology development. This necessitates new partnerships among countries that prefer technological cooperation. German technology investments have long supported Malaysia’s development and could play a greater role as a stable and trusted partner.

Positioning on China

China looms large in conversations around the economic outlook for both countries. Both countries and the world face difficult challenges as the ‘China shock’ spreads out from the US.

Malaysia has long been viewed as a competitor or alternate manufacturing base to China, while also a popular re-exporter and governance weak point for circumventing trade restrictions. US tariffs and strategic policies position Malaysia between countervailing head and tailwinds, boosting its attractiveness as a China substitute for both formal and informal trade but only if it can convince Washington of its allegiance, including through concerted action to counter sanctions circumvention. But Malaysia also features prominently in China’s supply chains and must navigate the risk of alienating a major trade partner — one that may test its resolve by flooding Malaysian markets with goods diverted from the US.

Meanwhile Germany has seen its comparative advantage vis-a-vis China turn from complementary to overlapping. Following years of strong surpluses, last year saw Germany experience a deficit in capital goods trade with China — as Chinese manufacturers increasingly outcompete their German rivals.

Significant infrastructure investment needs

Malaysia and Germany also share significant needs and challenges raising government expenditure on physical and social infrastructure. Both countries have fairly similar government debt levels of between 60 and 70% of GDP and self-imposed constraints on overall debt and deficit financing respectively.

Germany is essentially ‘maxed out’ in having both high government revenue and expenditure shares of GDP and anaemic economic growth. It has substantial infrastructure maintenance and green transition investment needs, alongside rising costs of health and childcare require new blended financing models.

Malaysia’s revenue base remains grossly inadequate and exposed to fossil fuel price shifts. It too faces a mounting physical damage bill exacerbated by climate change on top of major expansion needs for rail, road and energy infrastructure. It also faces rising expectations and costs in areas like education, healthcare, and social welfare consistent with a growing middle class. Malaysia’s need to raise revenue by broadening and deepening its tax collections is increasingly urgent.

Decarbonisation and competitiveness

While occupying very different positions on the development and carbon emissions spectrums, Malaysia and Germany have much common ground on climate change. Both are politically invested in decarbonisation, but only Germany’s carbon intensity is falling. Malaysia’s energy use per person has grown more slowly over the last decade, but together with Germany’s usage falling over the same period, Malaysians became larger consumers in 2024 (*though Malaysia’s population is grossly underestimated, which inflates per person consumption estimates).

Germany’s efforts to promote energy efficiency through industrial and building standards and household education stand out against Malaysia’s low-hanging fruit opportunities to improve consumer and business behaviour. Both countries risk losing industrial goods trade competitiveness under stricter carbon emissions reductions, with industry not decarbonising as quickly as in other countries.

The countries approach decarbonisation with contrasting energy systems, each with their pros and cons. Malaysia’s centralised and state-owned energy (under TNB) and oil and gas (under Petronas) sectors provide near complete state control over energy futures but strong disincentives to innovate, drive efficiency, practice good governance, and to shift away from fossil fuels and leverage private capital. Germany’s private sector-led model is more decentralised and profit-oriented but less malleable in shifting towards national targets.

Threats to liberal democracy

While democracy is alive and well in both countries — at least as measured by voter participation and debate — faith in politics and governance is depressed. Populist politics has taken hold in Germany, feeding off economic malaise, resurgent anti-migrant nationalism, and dysfunctional governing coalitions. While economic sentiment is more upbeat and populism less widespread, Malaysia too is grappling with a cobbled together governing coalition whose reform ambition is stifled by steep ideological differences among members, and both anti-US and ‘Malaysian only’ narratives are increasingly used for political expediency. Neither provides an environment conducive to policies that benefit the lives and freedoms of Malaysians and Germans, with bolder effort needed to reinforce democratic institutions.

Shadow of persistent inequality

And both countries suffer from high and persistent income inequality. Decades of ethnicity-focused affirmative action have narrowed inequality between ethnic groups in Malaysia, but longstanding gaps between rich and poor within groups, across states and territories, and between rural and urban households remain. Malaysia’s minimalist tax, transfer, and social welfare system is a leading contributor.

Germany likewise faces high pre-tax income inequality with persistent differences across geography. Its budgetary systems do a lot of heavy lifting to reduce post-tax differences, with equalisation of opportunity the more salient driver in need of attention.

Towards a shared outlook

Building off a shared interest in an integrated, open, clean, and peaceful economic and geopolitical world, Germany and Malaysia should see their futures as increasingly intertwined. Facing similar problems from differing vantage points, there is considerable scope for mutual learning and enhanced cooperation both bilaterally and inter-regionally.

The views expressed in this article are solely those of the authors and do not necessarily represent the views or positions of IDEAS Malaysia. All opinions are the author’s own.