As intensifying Sino-US competition reshapes global supply chains, Malaysia is finding it increasingly difficult to stay on the sidelines. A recent rare earths deal between Australian company Lynas Corporation and the US Department of Defense has sparked domestic backlash, highlighting the extent to which middle powers like Malaysia are drawn into strategic – and potentially military-linked – economic networks.
Previously, a coalition of 57 Malaysian civil society organizations issued a joint memorandum opposing the approximately $96 million rare earth supply deal between Lynas and the US Department of Defense. The groups warned the deal could directly link Malaysia’s rare earth processing operations to foreign military supply chains, and urged Prime Minister Anwar Ibrahim to intervene.
In its April 14 memorandum, the coalition asserted that recent U.S. military actions were associated with alleged violations of international law. Given that rare earth oxides are critical inputs in advanced weapons systems, they warned that allowing Lynas to process materials at its plant in Gebeng, Pahang state, for supply to the US defense sector would have the effect of integrating Malaysia into that military supply chain.
Direct military link raises legal concerns
In an interview, Meenakshi Raman, president of Sahabat Alam Malaysia (Friends of the Earth Malaysia), said the coalition’s main concern is that the deal directly links rare earth processing on Malaysian soil to foreign military supply chains, thereby implicating Malaysia in US military operations.
She noted that there are credible allegations that some U.S. military engagements involve serious violations of international humanitarian law and international human rights law. Linking Malaysia to such operations, she argued, would be fundamentally at odds with the country’s long-standing commitment to peace and its consistent opposition to the use of force in international relations.
“Allowing such arrangements to continue would damage Malaysia’s credibility as an independent voice in multilateral forums and could weaken its principled positions on conflicts involving Palestine, Iran and elsewhere,” Raman said.
The coalition also emphasized that economic activity must be based on ethics and legality. “Any agreement that may support war crimes, genocide or crimes against humanity cannot be justified on the basis of economic gain. Such arrangements are unacceptable and must be condemned,” Raman added.
She further emphasized that respect for international humanitarian and human rights law is fundamental to maintaining Malaysia’s non-aligned and neutral foreign policy position. “Clear legal and regulatory safeguards are needed to ensure that companies operating in Malaysia are not complicit in international wrongdoing, particularly in supply chains linked to military or conflict contexts,” she said.
She also highlighted Malaysia’s obligations under international law, including the Articles on Responsibility of States for Internationally Wrongful Acts (ARSIWA), adopted by the United Nations General Assembly in 2001.
“Malaysia must ensure that all actors operating within its jurisdiction respect and enforce international law, including international humanitarian law and international human rights law. Under Article 16 of ARSIWA, Malaysia must not knowingly aid or assist another state to commit acts that would be unlawful if committed by Malaysia itself, including war crimes, crimes against humanity or genocide,” she said.
She added that when such commercial activities take place on Malaysian soil and are approved by regulatory and licensing frameworks, the government cannot remain indifferent to how its territory and institutions are used.
“Allowing Lynas to enter into the deal without thorough review, despite obvious risks, could, at best, constitute a breach of international obligations and, at worst, amount to willful blindness to possible complicity in internationally wrongful acts,” she warned.
Raman added that the coalition would continue to press for a response through public advocacy and social media if the government did not act.
The backlash over a deal involving two foreign entities highlights the growing diplomatic sensitivity over rare earth projects – and Malaysia’s difficult balancing act as it attempts to position itself within global supply chains.
Malaysia’s rare earth strategy
Malaysia began developing its rare earths sector about 15 years ago, during the tenure of Najib Razak. Although this policy was initially opposed by the then opposition Pakatan Harapan party, the current government has since adopted the position that rare earth resources should be prioritized for national use, with an emphasis on building local processing capacity.
According to Azmi Hassan, a senior researcher at the Nusantara Strategic Research Academy, the decision to develop the sector was ultimately the right one despite previous criticism.
He noted that as China increasingly exploits rare earths as a geopolitical tool, Malaysia’s strategic importance has increased. However, he stressed that Malaysia did not intend to use rare earths as a geopolitical tool.
“Malaysia sits between three major powers: the United States, China and Russia. Although its reserves of rare earths are relatively modest, their strategic importance remains significant on a global scale,” he said.
He added that Malaysia should exploit this advantage not as a geopolitical bargaining chip, but to meet its own development needs. “This is why the government has chosen to first develop and secure its rare earth capabilities before considering exports,” he said.
Business uncertainty and structural vulnerability
Beyond legal and ethical concerns, the controversy also unfolds against a backdrop of growing uncertainty in economic relations between Malaysia and the United States.
In February 2026, the United States Supreme Court ruled that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) by former President Donald Trump were unconstitutional. With these tariffs forming the basis of the Malaysia-US Reciprocal Trade Agreement (TRA), the agreement has effectively lost its legal basis.
The decision triggered further volatility in global trade and Malaysia became the first country to publicly declare that the ART, signed in October 2025, was no longer valid.
Malaysia’s Minister of Investment, Trade and Industry, Johari Abdul Ghani, said the government had “received no official communication” from the United States on the fate of ART. The bilateral trade relationship has thus entered a period of great uncertainty.
By April 2026, export-dependent businesses were grappling with the unpredictability of tariffs and reassessing planned investments and sourcing strategies related to the U.S. market.
A furniture exporter said his companies are reviewing their exposure to the US market and implementing cost-cutting measures in response to frequent changes in US tariff policies. Companies, the exporter added, are taking a wait-and-see approach and are reluctant to suddenly pivot to alternative markets such as China.
Mohd Ramlan Mohd Arshad, a lecturer at Universiti Teknologi MARA, said the episode exposed Malaysia’s over-reliance on existing trade frameworks.
“The rush to achieve a 19 per cent tariff rate through the ART was a tactical decision that neglected long-term strategic positioning, leaving Malaysia vulnerable once the legal basis collapsed,” he said.
Ramlan added that policymakers appeared unprepared for the U.S. Supreme Court’s decision, despite its well-documented tendency to limit executive power. “The agreement signed in October 2025 was legally fragile, and this vulnerability became evident within months,” he said.
This decision, he stressed, does not signal a reversal of American protectionism but rather a change in tactics. “The Trump administration has already decided to use Section 301 of the Trade Act of 1974 to launch new investigations against several countries, including Malaysia. The direction remains unchanged – the method has changed,” he said.
Ramlan also acknowledged that global trade rules are increasingly fragmented and unstable. Large economies rely more on unilateral measures such as tariffs, export controls and subsidies, rather than the multilateral mechanisms of the World Trade Organization (WTO).
“Malaysia faces overlapping regulatory regimes – from the US-led Indo-Pacific frameworks to EU environmental rules and China’s Regional Comprehensive Economic Partnership (RCEP). These systems operate with different standards, increasing compliance costs and uncertainty,” he said.
Navigating between the great powers
Looking ahead, Ramlan argued that Malaysia should avoid choosing sides between the United States and China and instead strengthen its position within global supply chains.
“Malaysia should invest in high-tech manufacturing, such as semiconductors and AI data centers, to become indispensable to both sides. This increases the cost of coercion,” he said.
He has advocated a multi-alignment strategy – deepening economic ties with China through the RCEP and Belt and Road initiatives, while expanding cooperation with the United States in the high-tech and security sectors under frameworks such as the Indo-Pacific Economic Framework (IPEF).
“At the same time, Malaysia should strengthen ASEAN centrality, advance digital economy frameworks and position itself as a neutral hub for semiconductor assembly and electric vehicle battery production,” he added.
At the national level, he stressed the need to improve technical standards and labor regulations to enhance credibility. “Neutrality is not passivity: it requires proactive policymaking and investment in resilience,” he said.
Ultimately, Malaysia must move beyond short-term responses to tariff pressures and instead build a more resilient, diverse and legally stronger economic framework – capable of withstanding a global environment in which rules can be reshaped overnight by foreign legal and political developments.