Low-Energy Fridays: The Intersection of Trade and Energy Policy

The Biden administration recently set new tariffs on photovoltaic solar panels imported from Southeast Asia. Always a thorny issue, trade policy is expected to be especially controversial in 2025. Therefore, it’s worth understanding when tariffs might be appropriate and when they might carry more cost than benefit. The solar panel import issue is challenging because it isn’t a clear-cut trade matter—instead, it interweaves national security objectives and human rights concerns with otherwise mundane trade business as usual. In these situations, policymakers should keep the big picture in mind and ensure they maintain a hierarchy of priorities. Tariffs are a warranted policy in this latest case, but only because they are intended to address non-trade issues within broader U.S. foreign policy goals.

Trade policy is often contentious because the future beneficiaries of trade have less of a voice than present-day producers that resist foreign competition. The political discourse frequently devolves into a paradigm where domestic production is viewed positively while foreign production and imports are viewed negatively; however, such views don’t comport with our economic understanding of trade, which is that free trade is economically beneficial.

Trade is good because of something called “comparative advantage”—the understanding that some people can produce things at a lower cost than others and that we benefit from exchanging our relative advantages. If that seems confusing, consider this hypothetical: Suppose that, instead of nations trading with one another, individual households had to trade with each other. If I had to grow my own food, sew my own clothes, or craft my own tools, I’d spend all my time doing things that I could barely accomplish. But suppose my neighbor is a better tailor than I am, and I’m a better farmer than he is. If we agree to trade our goods and services, we are both better off because we are leveraging our comparative advantages to reduce our overall workload required for the same level of consumption. This is exactly how trade works at the macro level, as well—we import things because they are cheaper to produce abroad than domestically, and we benefit from that trade.

Getting back to the topic of solar panel imports, the issue is that China is selling solar panels at a cost below the market rate—at least partially because they use forced labor—and then “dumping” them on the market to force their competitors out. The United States has import restrictions on solar panels produced with forced labor or large subsidies, but China is circumventing this by selling the panels to other countries that then export those products to the United States. The tariffs are intended to correct for the misaligned price.

From a free-trade perspective, purists wouldn’t oppose importing subsidized products. Economic philosopher Milton Friedman noted that such subsidies are a form of “philanthropy” to the importing country, which benefits from the exporter’s economically unwise practices. The bigger issue is that a country may engage in these practices as part of a long-term strategy to create a reliance on its own production, raising prices later thanks to artificially induced product scarcity. A real-world example of such activity is the Organization of Petroleum Exporting Countries (known as OPEC) and its manipulation of oil markets.

Trade rules exist to prevent such practices, ensure that free trade enhances the benefits of market competition, and stop long-term-minded authoritarian regimes from taking advantage of the near-term profit motivations of private enterprise. In this vein, the new solar tariffs fit within the broader priority of enforcing trade rules.

More importantly, tariffs and other trade restrictions create accountability for foreign powers that violate international norms. Violations of international sovereignty or abuse of human rights require a suitable response that fits within the United States’ broader strategic objectives as outlined in the National Security Strategy. R Street raised this point when the Biden administration was slow to prohibit the import of Russian oil after its invasion of Ukraine for fear of political fallout from rising gasoline prices.

So even though tariffs and other trade restrictions are costly, on issues of international sovereignty or human rights it is worse in the long term to signal to foreign rivals that solar panels or gasoline are more important than peace or human dignity.

While the new tariffs on solar panels may be justified, we must be cautious of the inverse, in which tariffs are adopted without sufficient justification. The incoming administration’s threat of blanket tariffs, removed from any national security or foreign policy objective, aims simply to create a preference for domestic production over foreign. Because tariffs carry a real cost—both in the form of the paid tariff and reduced access to cheaper foreign products—the administration should set a high bar for justifying such an action. The case of China’s solar panels clears this bar, but other foreign production likely will not.

In a nutshell, trade is good for the U.S. economy. But when energy policy is in tension with our trade priorities, we must maintain an overall vision of the country’s strategic priorities. Some actions in energy trade easily fit this model, such as restricting oil imports from Russia or solar panels from China. In cases with weaker justification, we should let the trade flow so we can enjoy its benefits—even though domestic producers may bemoan their exposure to foreign competitors.