For the American oil industry, which President Donald Trump has declared is entering an era of “energy dominance,” an escalating trade fight with China would represent a lost opportunity for U.S. efforts to break into a strategic market.

China has been the biggest new buyer of the millions of barrels of oil unlocked by U.S. shale companies from dense rock formations. Now the second-largest consumer of U.S. oil exports after Canada, China has seen its demand rise 200-fold over past two years and last year bought a fifth of...