How Tariffs Threaten the U.S.-China Energy Nexus

By Nathan Abbington

Cover Image Attribute: A file photo of an LNG vessel docked at Zhoushan Port, Zhejiang province. /Source: Yao Feng/China Daily

The escalating trade war between the United States and China, marked by a flurry of tit-for-tat tariffs, has cast a long shadow over one of the most dynamic sectors of their economic relationship: the petrochemical feedstock trade. This often-overlooked commerce, centered on natural gas liquids (NGLs) like propane and ethane, has grown exponentially over the past decade, fueled by the U.S. shale boom and China’s insatiable demand for petrochemicals. However, recent tariffs—145% from the U.S. and 125% from China on propane, alongside a 34% reciprocal tariff on all U.S. goods—threaten to unravel this mutually beneficial trade, with far-reaching consequences for both nations. The stakes are high: plummeting prices, shuttered plants, and disrupted supply chains loom, yet the interdependence of the two economies suggests that neither side can easily walk away. This article explores the implications of these tariffs, balancing the perspectives of both U.S. producers and Chinese consumers, to understand the broader economic fallout.
The U.S. shale revolution transformed the nation into a global energy powerhouse, not only in crude oil and natural gas but also in NGLs like propane and ethane. U.S. NGL production has more than doubled in a decade, reaching over 7 million barrels per day, with propane, ethane, and butane constituting nearly 6 million barrels. Propane, used in China primarily to produce propylene for plastics, and ethane, a key building block for ethylene, have found an eager market in China. Last year, China imported 62% of its 1.4 million barrels per day of LPG and ethane from the U.S., with the U.S. supplying virtually all of China’s ethane imports since 2018, rising to 265,000 barrels per day. China, in turn, absorbed 57% of U.S. ethane exports and 27% of its propane exports, making it the largest buyer of U.S. LPG. This trade, valued at nearly $18 billion annually, has been a cornerstone of U.S.-China energy commerce, second only to agricultural imports like soybeans.
The tariffs, however, have thrown this relationship into disarray. “This is really destruction of demand,” said Rob Wilson, COO for East Daley Analytics, highlighting the lack of alternative markets for U.S. NGLs. The 125% tariffs on U.S. propane and ethane make these feedstocks prohibitively expensive for Chinese petrochemical plants, particularly propane dehydrogenation (PDH) plants that convert propane into propylene for products like carpets, car bumpers, and food wrap. Since March, propane prices have fallen 25% and ethane prices 15%, with further declines expected. The U.S. Energy Information Administration (EIA) predicts that some of the 400,000 barrels per day of propane China imports from the U.S. may find new buyers, but not enough to prevent a surplus at export hubs like Mont Belvieu, Texas. This oversupply could max out U.S. propane storage in months, forcing producers to dump propane domestically at rock-bottom prices, as Kristen Holmquist of RBN Energy warns.
China’s petrochemical sector, while heavily reliant on U.S. feedstocks, may have more flexibility to adapt. Only 8% of China’s ethylene capacity uses ethane and LPG, with 70% relying on naphtha, a refinery byproduct. This allows China to potentially shift feedstocks, though at a higher cost, as ethane produces more ethylene than naphtha. Alternative suppliers like Qatar and the UAE exist for propane, but no other country exports significant ethane volumes. In 2018, China halted U.S. propane imports during a previous trade spat, turning to other suppliers. However, as Julian Renton of East Daley Analytics notes, “China cannot replace U.S. propane and the U.S. cannot replace the Chinese propane demand.” The growth of Chinese PDH plants since then has deepened this interdependence, making a complete decoupling challenging. If China mothballs plants, it risks disrupting its plastics industry, which exports goods like toys and car parts back to the U.S., potentially exacerbating inflation as these products face double tariffs.
The U.S. faces its own dilemmas. NGLs are byproducts of oil and gas production, meaning halting their output would curtail crude and natural gas yields—a non-starter given the U.S.’s energy dominance ambitions. “The U.S. needs to be able to send its propane to China. For a large portion of it, the propane has nowhere else to go except China,” Holmquist emphasizes. Ethane, however, offers a temporary workaround through “ethane rejection,” where producers leave ethane in the natural gas stream for domestic use, such as power generation. “Ethane is the ultimate chameleon molecule,” Wilson quips, noting that rejecting 250,000 barrels per day could nearly eliminate ethane exports to China. Yet, this strategy slashes profits for ethane transporters and exporters, like Energy Transfer, which operates the Orbit joint venture with China’s Satellite Chemical in Texas. The tariffs thus hurt both sides of this partnership, potentially forcing Satellite to absorb higher costs to keep exports flowing.
The broader economic implications are stark. For the U.S., the tariffs threaten financial challenges for NGL producers, transporters, and exporters, including Fortune 500 firms like Enterprise Products Partners and Phillips 66, which have stayed silent on the issue. The American Petroleum Institute, through Dustin Meyer, underscores that “NGLs are a critical part of American energy trade,” signaling ongoing engagement with policymakers. Domestically, cheap propane could benefit U.S. chemical makers, but as Holmquist notes, it’s unlikely to significantly boost demand. Meanwhile, Trump’s tariffs on imported steel raise costs for building LNG and NGL facilities, further straining the industry. Globally, the tariffs could dampen economic growth, reducing demand for gas and petrochemicals, as Gillian Boccara of Kpler suggests.
China’s strategic pivot to Russian LNG, which supplied four times as much as the U.S. last year, illustrates its ability to diversify energy sources. Following Europe’s boycott of Russian gas after the 2022 Ukraine invasion, Chinese firms capitalized on cheap Russian LNG, often reselling U.S. LNG to Europe for profit. In 2021, Chinese companies dominated global LNG procurement, securing 91% of long-term contracts. This agility contrasts with the U.S.’s constrained export options, giving China a potential edge in the trade war. However, Beijing’s 15% tariff on U.S. LNG and the latest 34% tariff on all U.S. goods signal a broader decoupling, risking the $143.5 billion U.S. export market to China, where oil and gas account for over 10%.
The petrochemical feedstock trade exemplifies the intertwined fortunes of the U.S. and China. “The two industries need each other,” Holmquist asserts, yet the tariffs force both to confront unpalatable choices: absorb higher costs, find scarce alternatives, or scale back operations. For the U.S., the risk is a glut of unsold NGLs, eroding profits, and storage capacity. For China, it’s the potential idling of petrochemical plants, disrupting its plastics supply chain. Both sides face inflationary pressures, as tariffed feedstocks and goods ripple through global markets. The trade war thus tests the resilience of this energy nexus, revealing the fragility of even the most robust economic ties. As the conflict deepens, the petrochemical trade, once a glowing success, stands poised to wither, a cautionary tale of how protectionism can unravel mutual prosperity.
With reporting by Fortune, New York Times, Reuters, and the Wall Street Journal

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