Policy Brief: How Tariffs are Undermining U.S. Energy and Economic Security
President Donald Trump campaigned on steep tariffs, lower energy prices, and “energy dominance” – drastically increasing American energy production and strategically leveraging those resources to achieve strategic goals at home, like developing AI, and abroad, like rebalancing trade.
However, in practice, the wide-ranging tariffs that the Trump administration has sought to impose will make U.S. energy more expensive and disrupt energy security. Far from restoring domestic manufacturing, this tariff regime has instead chilled capital investment and stunted manufacturing growth. Since the tariffs were put into place, the U.S. has seen higher manufacturing input price inflation than any country in the world, and North America is the only region where manufacturing production has fallen.
The energy sector is not immune: The trends toward higher costs will hit consumers’ pocketbooks, delay sorely needed infrastructure upgrades thereby exacerbating concerns over grid reliability, and stunt long-term American manufacturing growth, which itself relies on low-cost electricity. If the administration wants lower energy costs and a more secure energy system, it must find another way forward on trade policy. The disconnect between the administration’s goals and the economic reality underscores the need for a more strategic, coordinated approach to industrial policy – one that strengthens domestic capabilities without sacrificing affordability, innovation, or global competitiveness.
The courts step in – for now
The trajectory of tariffs may be murky, at best, in coming weeks. In late May, the U.S. Court of International Trade ruled that the Trump administration exceeded its authority in exercising the International Emergency Economic Powers Act (IEEPA) – a statute designed to address national security threats – to impose wide-ranging retaliatory tariffs. The decision strikes at the legal foundation of “Liberation Day” tariffs, which enact sweeping duties on imports from countries running trade surpluses with the U.S.
However, the story is far from over. First, Section 301 tariffs on some Chinese goods and Section 232 tariffs on cars, steel, and aluminum, among other essential economic building blocks, will remain in place because they are based on other authorities. Second, at the time of publication, U.S. Court of Appeals for the Federal Circuit paused the earlier decision, allowing the Trump administration to keep its tariff posture in place pending further legal proceedings. Third, the case at hand will likely reach the Supreme Court next year. Even if the Court rules against the Trump administration, it still retains access to other authorities – such as Section 232, 301, 201, 122, and 338 tariffs – that can recreate much of the existing tariff policy even though they generally require investigations and cannot be exercised overnight at whatever level the executive branch deems appropriate. While the pending decision may rein in the use of IEEPA, it does not preclude the administration from deploying a patchwork of other tools to achieve similar protectionist aims as it continues down this path. In fact, it will likely compel the administration to accelerate trade investigations to invoke these other authorities.
The energy insecurity premium
The broader problem is that the Trump administration’s intent with tariffs contradicts its other aims. Lowering energy costs and increasing U.S. energy production are worthwhile goals, especially if associated emissions can be addressed. The U.S. benefits from wholesale electricity prices lower than nearly all its developed-country peers, granting a competitive edge in maintaining energy-intensive industries, holding consumer bills low, and keeping inflation in check. However, every energy technology depends on global supply chains and imported components. Economy-wide tariffs on these goods slow deployment, compromise competitiveness, raise consumer prices, and create uncertainty in energy markets, stifling investment.
The scale is staggering: As of June 1, the U.S. effective tariff rate is still the highest it has been in nearly a century, even without “Liberation Day” levies that would impose even steeper tariffs on dozens of countries based on their trade balances with the U.S. Even after consumers and businesses shift their purchases to seek lower-cost options, the average tariff level they face will be an estimated 15%, up from only 2.5% last year, even with the temporary detente with China lowering the additional rate to 30 percentage points. And despite a perceived cooling of trade chaos after that detente, uncertainty continues: the administration has now threatened the European Union with a 50% tariff if a trade deal is not reached by early July.
If the courts ultimately rein in the administration’s use of IEEPA , the Trump administration will be limited to established tariff authorities like Section 232, Section 301, and Section 201, as well as others that it has not previously exercised Even within that narrower remit, much damage can be done. Before Liberation Day, the Trump administration had already imposed Section 232 tariffs on steel and aluminum imports at a rate of 25% and plans to double that level. It could also leverage Section 122 of the 1974 Trade Act, which allows for tariffs of up to 15% for 150 days to address “large and serious United States balance-of-payments deficits,” or Section 338 of the 1930 Trade Act, which allows the president to impose tariffs of up to 50% against countries discriminating against US products. Section 232, 301, and 201 have become commonplace, but no president has levied Section 338 or 122 tariffs in decades.
For now, USMCA-compliant goods are exempt from IEEPA-related levies, and these goods are heavily traded within North America. Canada and Mexico supply 40% of U.S. steel imports, with Canada alone providing the vast majority of U.S. aluminum imports. Further, copper, critical minerals, and semiconductors are temporarily exempted from tariffs. However, the administration has already signaled that the Commerce Department will initiate investigations on those goods that would subject them to similar tariffs. In the meantime, exemptions offer other countries pressure points to target: China has already instituted export controls on rare earths, of which it produces 90% of global supply, though Beijing has likely now paused some of these measures amidst negotiations. Even if the Trump administration quickly cuts deals that waive away steep country-specific levies, Section 232 tariffs may remain, as well as some element of the 10% universal tariff on all countries.
Notwithstanding the patchwork of exemptions and walkbacks, tariffs already in place target the essential building blocks of American energy production. There is hardly a way to produce molecules or electrons that does not require steel, aluminum, copper, or critical minerals. Take solar, for example: photovoltaic cells have become so inexpensive that aluminum frames are among the most expensive components in a solar panel. In the first three months of 2025, even before Liberation Day, nearly $8 billion worth of projects were cancelled, including major battery and hydrogen fuel cell manufacturing plants.
The Trump administration, which excluded renewables from its executive order declaring an energy emergency, very well may not see an issue with decelerating the deployment of intermittent renewables like wind and solar.
However, they will quickly find that doing so will hamstring their other, more popular goals like creating abundant, affordable electricity for AI and advanced manufacturing. Fossil fuels alone will not allow America to reopen its factories, power new industries, and compete in a global economy hungry for cheap, abundantly available electricity. The more likely outcome is that factories and data centers will instead be built more slowly or built overseas, unless U.S. trade policy stabilizes. The U.S. is not the only advanced economy with these goals, but it is the only one undermining its own investment predictability.
Moreover, the U.S. oil and gas industry is not immune to rising steel and aluminum prices— those metals are essential for drilling rigs, pipelines, storage tanks, and virtually every other segment of the supply chain. Energy producers that domestically source materials will likely still face cost increases as miners and metal producers raise prices amidst tariff protection. Higher drilling costs and weaker demand will push U.S. oil and gas companies to batten down the hatches, cutting investment while other countries like Saudi Arabia produce more.
Paying more to fall behind
The blow to expanding existing modes of U.S. energy production is likely staggering, but it could be even worse for earlier-stage energy innovations like advanced geothermal and nuclear that Energy Secretary Chris Wright and other senior administration officials have prioritized and pledged to support. The administration’s Earth Day message called out efforts to support “cutting edge” new industries including geothermal, nuclear, and carbon capture. While the U.S. has fallen behind in the most mature clean energy industries like wind, solar, and lithium-ion batteries, recent industrial policy and private sector investment have positioned it to catch up – and potentially lead – in new ones. But as costs rise and uncertainty chills investment, any comparative advantage that the U.S. has in these new technologies will slip away as competitors like China capitalize.
Batteries
The battery sector is among the fastest-growing energy industries, projected to more than double in value to $322 billion globally by 2030. It also intersects directly with core U.S. national security interests: The same batteries that underpin the resilience and stability of an increasingly complex electric grid are also underlying components of virtually every advanced technology defining global competition, from AI and data centers to electric vehicles and military systems like drones and other autonomous vehicles.
However, the industry is largely captured by China, which accounts for 75% of global production and dominates the refining of critical mineral inputs, including 90% of rare earths. It may seem sensible to compel the U.S. battery industry to forcefully and fully decouple from the Chinese supply chain, but the current posture would shoot its domestic infant industry in its crib. It is an industry worth protecting and paying to compete in, but tariffs on batteries and possibly critical minerals from the world’s largest supplier will cripple every key downstream industry, and tariffs on critical inputs will prevent a domestic industry from emerging.
Even without additional 232 tariffs on critical minerals, China has already implemented retaliatory export controls on minerals that it most dominates. Deterioration in trade and the investment environment has already taken its toll, and will likely continue to chill investment: two billion-dollar factories to expand U.S. battery manufacturing capacity have already been cancelled.
Batteries are heavily reliant on foreign supply chains and tariffs: Chinese and South Korean firms directly export to the U.S. or provide inputs for U.S. automakers. Korean battery makers are taking advantage of IRA incentives to manufacture in the U.S., but threats to those incentives, coupled with duties on upstream inputs, may compromise those investments. Shifting battery supply chains away from Chinese supply chains and refined metals will take time and require partnerships with allies, partners, like Chile, and even Chinese firms themselves. Chinese battery-makers are increasingly leading on innovative chemistries like lithium iron phosphate (LFP) batteries that require fewer hard-to-obtain minerals like cobalt. U.S. manufacturers of electric vehicles may do well to take a page from their Chinese competitors’ playbook and elicit technology transfer from innovative firms overseas. It may be the quickest path to catching up on the latest innovations and sidestepping critical mineral chokepoints.
The U.S. should also be clear-eyed about how to compete in the battery industry: while the U.S. is far behind in lithium-ion batteries, it has a chance to compete in solid-state and other emerging technologies. A more subtle strategy may empower allies like South Korea to compete on today’s technologies while investing in commercializing emerging tech. But competitiveness, even in the technologies of the future, will require tapping into international supply chains and partners’ resources. Today’s tariff regime risks splintering those opportunities.
Next-generation geothermal
Next-generation geothermal benefits from strong policy alignment with the Trump administration and a stronger comparative advantage than the U.S. has in most other clean energy technologies. The nascent U.S. geothermal industry builds on the American technological and industrial edge in drilling. As a global leader in drilling innovation and home to many of the world’s top geothermal vendors, the U.S. is well-positioned to compete and potentially export in the future. Next-generation geothermal power – and longer-term advancements such as superhot rock geothermal – can unlock huge amounts of reliable, inexpensive, and clean energy capacity across regions, and do so with a small land footprint. As a clean, firm power source, geothermal is an ideal technology with which to power data centers and other electricity-intensive assets, and to help provide reliable power supply relatively immune to seasonal variation.
Even though the U.S. geothermal industry is largely composed of domestic service providers, they rely on many components which are frequently produced outside the U.S., including turbines, drill bits, high-temperature/high-pressure sensing and power electronics, large-diameter well casings and drill string components. Further, because the current U.S. tariff posture is wide-reaching, the geothermal industry also remains vulnerable to tariffs that affect all energy sectors, particularly those on steel, cement, and copper, as well as broader indirect impacts.
If trade fragmentation results in accelerated inflation, higher capital costs, and reduced demand due to recession, next generation geothermal will suffer a fate that stymies the transition of many technologies in the demonstration stage. Geothermal and other firm power technologies have benefited from the promise of new power demand from artificial intelligence and data centers, the electrification of the economy, and other new, high-intensity industries. Major technology companies had made huge plans and commitments to construct gigawatts worth of new data centers across the United States and Europe. But so far this year, Microsoft has already cancelled 2 GW of data centers and Amazon has paused commitments for new data center leases. The dropoff of potential new demand sources, coupled with the loss of government support, may narrow opportunities for enhanced geothermal technologies to commercialize. And while collaboration with longtime allies such as Iceland and Japan would likely help U.S. companies develop more rapidly, tariffs instead push them away, giving competitors more opportunity to catch up.
Advanced Nuclear
Nuclear power has been one of the rare areas of bipartisan agreement in clean energy over the past few years, with both parties supporting legislation to enable nuclear restarts and new builds in the United States. However, as it stands today, Russia and China dominate the industry globally: As of December 2024, 55.5 GW of the 69.5 GW total nuclear power under construction globally is being built by Russian or Chinese companies. China is expected to overtake the U.S. nuclear power fleet as early as 2030. And, as tariffs cloud nuclear’s planned resurgence in the United States, China’s State Council has approved plans for 10 additional new reactors, pursuing both GW-scale reactors for bulk electricity generation and small modular reactors for industrial decarbonization. It is in the United States’ interest, both economic and geostrategic, to lead globally, including nuclear fuel supply which has been systematically undercut by low-cost Russian imports.
Trade fragmentation and policy uncertainty could seriously undermine conventional, large reactors and advanced, modular technologies alike. Reactors are, after all, behemoth infrastructure projects with massive amounts of reinforced steel and concrete, as well as components primarily fabricated abroad. Additionally, a number of nuclear technologies originating from the U.S. are currently pursued for deployment in the European markets.
The U.S. could construct a nuclear supply chain without adversaries like Russia and China, but not without allies like Canada, Japan and South Korea. Despite uranium’s exclusion from increased tariffs, new reactor construction is likely to see major cost increases, especially if there is further action on steel, cement, and copper imports. For an industry plagued by cost overruns that have cooled investment and raised the cost of capital – the most recent nuclear build in the U.S. at Vogtle came in at over double its budgeted cost – additional cost inflation and uncertainty will not help push the industry forward. The industry’s capital intensity exposes it even more to investment uncertainty and cost of capital changes than other industries. Over the past decade, Russia and China have both established robust policies and unwavering support for the nuclear industry that resulted in a series of new builds, competent workforce, efficient supply chains and ultimately increased cost-competitiveness of their technologies. The U.S. cannot compete if cost inflation worsens further.
Carbon capture and storage
Trump administration officials generally support carbon capture and storage (CCS), although the fate of carbon management DOE demonstration programs, crucial for lowering investment risk, is still unknown. Furthermore the administration has delayed the publication of updated carbon dioxide safety rules, first issued by the Biden administration in January this year, slowing progress in states like California that have moratoria in place dependent on those new rules. Tariffs risk decelerating already slow progress. Because capturing carbon dioxide from flue stacks adds costs to existing projects, developers rely upon either policy incentives like 45Q tax credits or knock-on value such as enhanced oil recovery to achieve commercial viability. CCS projects are therefore highly exposed to any policies that cut into margins or raise prices across the board. Like any infrastructure project, policy uncertainty and rising input costs are likely to slow investment and industry commitment to technologies and projects that require a premium – whether from policy incentive or a market signal – to pencil.
Across the board, manufacturing energy technologies and building new energy projects will get more expensive.
Tariffs are untethered from strategy or competitiveness
The price of uncertainty
It is difficult to imagine the current trade uncertainty playing out as the administration has envisioned if the primary goal is bringing back U.S. manufacturing. First, tariff protection is hardly guaranteed. The U.S. has swatted away deals from Vietnam and Israel so far, but Trump has touted forthcoming “tailored deals,” under which the U.S. could roll back trade measures, like that already reached with the UK. The business community has no reasonable expectations that tariff protection promised today will exist by the time their factories open, leaving them without the certainty necessary to invest in domestic manufacturing.
Second, even if the administration were to freeze tariffs in place, it will take more than four years for many businesses to obtain permits, put steel and the ground, and open their doors to manufacture most advanced energy technologies. By then, someone other than Trump will be president.
Third, even if construction time were a non-factor, existing manufacturers have seen their input costs balloon or at least become harder to estimate. If this trade war triggers global economic downturn, a growing possibility, businesses may rather hold on to capital than deploy it to meet uncertain, tepid demand. There is no way around the fact that a recession would slow U.S. energy growth, impairing the strategic industries like AI that require more of it. Constrained, high-cost supply paired with recession-depressed demand hardly spells energy dominance.
Fourth, it is possible that the bell cannot be unrung–even after reaching a deal with the UK. The Trump administration may have already created an irreversible trust deficit with some U.S. allies that feel mistreated and disrespected by the U.S. That is, Liberation Day may have worsened U.S. trade relations to such a degree that there is no scenario in which American trade negotiators roll back the clock to early April. It remains to be seen whether the promised slew of bilateral trade deals materializes, or which industries may win or lose from a new patchwork.
Negotiations could come to naught if countries perceive they have little to gain from making concessions, especially if they now see U.S. tariffs as legally dubious and less of a credible threat given the recent court ruling. The Trump administration’s theory of success is murky at best and likely hinges on a wide swathe of countries making massive concessions— lowering their own tariff rates on U.S. goods, committing to purchasing U.S. goods, and potentially aligning with the U.S. on non-economic issues of foreign policy, all while accepting a higher U.S. tariff on their goods than when Trump took office in January. To be sure, the Trump administration will likely reach framework agreements and deals with some countries that include concessions, but it’s possible— perhaps likely— that many U.S. allies and adversaries will not make meaningful deals at any political and economic cost or at the expense of national interest. The complete reversals of fortunes for the Liberal Party in Canada and Labor Party in Australia suggest that conceding would be more political liability than relief for some world leaders. In a worst-case scenario, some of America’s longstanding economic partners may instead write off the U.S., turning to other markets and economic partners while retaliating directly with tariffs or export controls of their own.
Even if such a scenario does not come to pass, tariff talks with many large trading partners could drag on for months if not years. It traditionally takes as long for trade officials to determine their positions before they engage in negotiations. The reasonable expectation is that it will take a long time for the U.S. to reach agreements with the roughly seventy countries that have expressed interest in doing so, each of which may be specifically tailored to provide investment and purchases of U.S. goods. And every month of dragged-out negotiations is another month of paralyzing uncertainty for U.S. industry.
Swapping sledgehammers for scalpels
Tariffs could nonetheless still prove a useful tool despite the myriad concerns with how the Trump administration is currently wielding them. If the administration is lucky, the U.S. has not squandered its longstanding goodwill across the world with its “might makes right” rhetoric. The possible upside is that this aggressive trade posture compels U.S. trading partners to lower their trade barriers amidst negotiations, giving way to freer flowing trade. The UK seems to have made such a deal, potentially lowering its tariffs on U.S. farm products and other goods.
The backlash from financial markets and partner countries has been so severe that the Trump administration may feel compelled to back down from its maximalist approach and adopt a more rational one that applies tariffs more strategically. Such may already be the case. The U.S. has seemingly blinked and said tariffs on China are too high and come down to 30%.
It is clear that tariffs alone will not make America energy dominant or lower energy costs. In fact, they are more likely to have the opposite effect without adjustments and complementary policies by stymying downstream industries dependent on imports like steel, aluminum, and copper. Maximizing effectiveness and impact requires tailoring tariffs and aligning them with other industrial policies. To do so, the administration would need to:
- Make tariffs targeted, predictable, and time-bound. The recent ruling against the administration’s use of IEEPA is a strong step toward a more rational trade policy. The U.S. should only impose tariffs in sectors and supply chain segments in which it has a real ability and intention to compete, while taking advantage of cheap imports in sectors where it does not. Applying tariffs to industries where the U.S. has close to no capacity or short-term plans to build it will result in near 100% pass-through prices without creating new U.S. manufacturing capacity. Predictability is also critical to allow companies to make capacity and investment plans based on stable policy expectations. Building in a sunset date— one that can be extended if necessary— ensures that domestic producers are incentivized to innovate and become more competitive globally, rather than atrophying behind a protective moat. Indefinite tariffs send the wrong signal that U.S. companies can sell at higher prices without the need to innovate and compete with foreign firms, leaving the U.S. consumer worse off.
- Pair tariffs with robust industry policy support. Tariffs are a blunt tool: they can buy time and protect domestic industries from foreign competition, but they do not ensure that those industries will innovate, become competitive, or even materialize. Subsidies reduce the risks for companies to invest in bringing emerging technologies to market and scaling production lines. They can bring R&D from American labs into the marketplace. To some extent, this path requires little departure from Trump’s first term. He can continue leveraging government tools to strengthen U.S. industrial capacity as he did in his first term, and Biden continued, though it would also require Trump to integrate some Biden-era initiatives like the Inflation Reduction Act clean energy tax credits into his own. These technologies are vital for emissions reductions and are increasingly central to strategic economic competition.
It will be important that the U.S. focus on innovative, game-changing clean tech that China does not yet dominate, including long-duration energy storage, geothermal, advanced nuclear, and carbon capture. The U.S. can lead these sectors by accelerating domestic deployment and eventually taking on international leadership as a technology provider to the world. Ignoring these industries would be a mistake that risks ceding influence and market opportunity to China and worsening the U.S. trade balance in the long term as these technologies grow in prominence. The administration’s proposed budget would do just that, by cutting billions from various Energy Department R&D budgets and $15.2 billion in spending from the Infrastructure Investment and Jobs Act that would support EV battery production, CCS deployment, and a slew of other critical programs. Cutting innovation at the knees will instead surrender that leadership in favor of short-term bravado, with value destruction to boot.
- Leverage, rather than spurn, foreign economic partners. To continue diversifying from Chinese supply chains, the United States should strengthen industrial partnerships with third countries rather than antagonizing them. The U.S. will likely never outcompete China in low-margin, low-tech industries, nor should it try if investing in them does not drive the creation of well-paying jobs, high-value-added economic growth, or strategic goals. Rather than aim for autarky, the U.S. can work with allies to strategically plan industrial strategies around their comparative advantages in battery materials and critical mineral processing, among other strategic supply-chain segments. Possible measures could include encouraging them to invest in the U.S., thereby transferring technologies and reaping profit to reinvest at home, and offering concessional U.S. finance in their complementary manufacturing capacity up and down supply chains with the Development Finance Corporation and other relevant U.S. agencies.
Creating a trade and industrial strategy that prioritizes U.S. competitiveness and growth is possible. To position U.S. firms competitively in the global export market, the administration can align commercial diplomacy, export finance, and development dollars with U.S. market power, domestic job creation, and geopolitical opportunity. There is an estimated $130 trillion market opportunity in clean energy technology through 2050, and yet the U.S. accounts for only 6% of those exports today.
If this or any future administration wants to make good on the promise of American energy dominance and industrial revival, tariffs must become instruments of strategy, not symbols of brute strength. That means abandoning the blunt-force approach of trade wars in favor of a smarter playbook: one that matches targeted tariffs with industrial investment, innovation-driven competitiveness, and the might of America’s economic alliances. The next phase of U.S. trade and energy policy must not be about retreating from globalization, but rather reshaping it in American competitive interest, with partners and a long game in mind.
