As intensifying China-U.S. competition reshapes global supply chains, Malaysia is finding it increasingly difficult to remain on the sidelines. A recent rare earths agreement between Australia’s Lynas Corporation and the U.S. Department of Defense has sparked domestic backlash, highlighting how middle powers like Malaysia are being drawn into strategic – and potentially military-linked – economic networks.
Earlier, a coalition of 57 Malaysian civil society organizations issued a joint memorandum opposing the approximately $96 million rare earths supply deal between Lynas and the U.S. Department of Defense. The groups warned that the agreement could link rare earth processing operations in Malaysia directly to foreign military supply chains, and urged Prime Minister Anwar Ibrahim to intervene.
In their April 14 memorandum, the coalition argued that recent U.S. military actions have been associated with alleged violations of international law. Given that rare earth oxides are essential inputs in advanced weapons systems, they warned that allowing Lynas to process materials at its Gebeng facility in the state of Pahang for supply to the U.S. defense sector would effectively make Malaysia part of 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 primary concern is that the agreement directly links rare earth processing on Malaysian soil to foreign military supply chains, thereby implicating Malaysia in U.S. 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 fundamentally contradict the country’s longstanding commitment to peace and its consistent opposition to the use of force in international relations.
“Allowing such arrangements to proceed would undermine 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 stressed that economic activity must be grounded in ethics and legality. “Any agreement that could lend support to war crimes, genocide, or crimes against humanity cannot be justified on the basis of economic gain. Such arrangements are unconscionable and must be condemned,” Raman added.
She further emphasized that adherence to international humanitarian and human rights law is fundamental to maintaining Malaysia’s non-aligned and neutral foreign policy stance. “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 pointed to 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 uphold 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 in committing acts that would be unlawful if carried out 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 through regulatory and licensing frameworks, the government cannot remain indifferent to how its territory and institutions are being used.
“Allowing Lynas to proceed with the agreement without proper scrutiny, despite clear risks, could at best constitute a failure to meet international obligations, and at worst amount to willful blindness to potential 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 fails to act.
The backlash to an agreement involving two foreign entities underscores the growing diplomatic sensitivity of 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 first moved to develop its rare earth sector about 15 years ago during the premiership of Najib Razak. Although the policy was initially opposed by the then-opposition Pakatan Harapan, the current government has since taken the position that rare earth resources should be prioritized for domestic use, with a focus on building local processing capacity.
According to Azmi Hassan, a senior fellow at the Nusantara Academy of Strategic Research, the decision to develop the sector was ultimately the right one despite earlier criticism.
He noted that as China increasingly leverages rare earths as a geopolitical tool, Malaysia’s strategic importance has grown. However, he stressed that Malaysia has no intention of using rare earths as a geopolitical instrument.
“Malaysia sits between three major powers – the United States, China, and Russia. While its rare earth reserves are relatively modest, their strategic importance remains significant globally,” he said.
He added that Malaysia should leverage this advantage not as a geopolitical bargaining chip, but to serve 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.
Trade Uncertainty and Structural Vulnerability
Beyond legal and ethical concerns, the controversy is also unfolding against a backdrop of growing uncertainty in Malaysia-U.S. economic relations.
In February 2026, the Supreme Court of the United States ruled that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) by former President Donald Trump were unconstitutional. As these tariffs formed the basis of the Malaysia-U.S. Agreement on Reciprocal Trade (ART), the agreement effectively lost its legal foundation.
The ruling triggered renewed global trade volatility, 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 has “not received any official communication” from the United States on the fate of the ART. The bilateral trade relationship has thus entered a period of significant uncertainty.
By April 2026, export-dependent businesses were grappling with tariff unpredictability and reassessing planned investments and procurement strategies tied to the U.S. market.
A furniture exporter said companies are reviewing their exposure to the U.S. market and implementing cost-cutting measures in response to frequent shifts in U.S. tariff policies. Firms, the exporter added, are adopting a wait-and-see approach and are reluctant to pivot abruptly toward 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 secure a 19 percent tariff rate through the ART was a tactical move that overlooked 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 ruling, despite its well-documented tendency to limit executive power. “The agreement signed in October 2025 was legally fragile, and that vulnerability became evident within months,” he said.
The ruling, he noted, does not signal a reversal of U.S. protectionism but rather a shift in tactics. “The Trump administration has already pivoted to using Section 301 of the Trade Act of 1974 to launch new investigations against multiple countries, including Malaysia. The direction remains unchanged – the method has shifted,” he said.
Ramlan also agreed that global trade rules are becoming increasingly fragmented and unstable. Major economies are relying more on unilateral measures such as tariffs, export controls, and subsidies, rather than multilateral mechanisms under the World Trade Organization (WTO).
“Malaysia is navigating overlapping regulatory regimes – from U.S.-led Indo-Pacific frameworks to EU environmental rules and China’s Regional Comprehensive Economic Partnership (RCEP). These systems operate with different standards, raising compliance costs and uncertainty,” he said.
Navigating Between Major 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 raises the cost of coercion,” he said.
He advocated a multi-alignment strategy – deepening economic ties with China through RCEP and Belt and Road initiatives, while expanding cooperation with the United States in high-tech and security sectors under frameworks such as the Indo-Pacific Economic Framework (IPEF).
“At the same time, Malaysia should reinforce ASEAN centrality, advance digital economy frameworks, and position itself as a neutral hub for semiconductor assembly and EV battery production,” he added.
Domestically, he stressed the need to upgrade 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, diversified, and legally robust economic framework – one capable of withstanding a global environment where rules can be reshaped overnight by foreign legal and political developments.
