The Great Tariff Wall: Climbing Over China's 145% Trade Barriers in eCom
Strategic Solutions for eCommerce Businesses Facing Unprecedented China Tariffs in 2025

Main Takeaways:
- Conduct SKU-Level Analysis: Understand the impact of tariffs on each product to identify which items remain profitable and which need intervention- either cutting the SKU entirely or minimizing exposure. Granular financial analysis is essential for making informed decisions.
- Optimize Multiple P&L Components: Address the tariff challenge through a multi-pronged approach - adjust pricing based on demand elasticity, negotiate with manufacturers, reduce discounts, minimize returns, and streamline operations across your entire business (for example optimize shipping and warehousing space).
- Stay Flexible in Your Strategy: The tariff situation remains fluid and could change. Rather than making drastic changes like immediately abandoning Chinese manufacturing, develop adaptable strategies that can evolve as the trade situation develops
Writing content is never easy. Especially when you are dealing with the volatile eCom market, which has experienced so many ups and downs in the last couple of years, including Covid, the supply chain crisis, high interest rates that just won’t come down, pulling out of almost all venture capital from the space, etc.
Analyzing the market, trends, KPIs and providing financial advice in this environment is tough, but doable (perhaps). But, once you throw tariffs and a nuclear trade war into the mix, all hell breaks loose.
Trade Wars and Peace
To briefly summarize the trade war (and this is just with respect to China!), this all just really started in earnest on Feb 1, 2025, when President Trump signed an executive order to impose an additional 10% tariff on China. After reciprocations, on March 4, 2025, an additional 10% tariff was imposed on goods from China, and on April 5th, another 10% was imposed, followed by reciprocal tariffs imposed on April 8th, which brought the effective tariff rate to 104%. This was followed by an additional tariff on April 9th, bringing the general effective tariff rate to 145%.
Now, some people think this is just positioning, and short term pain which will lead to long term manufacturing moving domestically back to the US. I kid you not- I was sitting outside of the Great Hulk roller coaster in Universal when I heard a loud scream up in the air. It wasn’t coming from the ride, but rather from the news that Trump is deferring tariffs (other than China) for 90 days, which caused the S&P to go totally green. Will this happen with China? Possibly- this could be one big game of chicken, but it has been going on a little too long for comfort.
This is killing eCom
While tariffs will impact everybody, likely lead to inflation, recession, high interest rates, and overall impact on the economy, they are hitting eCom businesses especially hard, with $439B of total goods being imported from China to the US in 2024, many of these in the eCom/CPG space. Slapping 145% tariffs on these goods is a huge hit to US based eCom business carrying out manufacturing in (or interacting with anyone importing/buying from) China.
A clarification
Before diving into the depth of the problem, and some possible solutions or ways to mitigate the risk, I wanted to clarify two points.
- The amount subject to tariffs is not the final sales price (the price you pay for your TV at the store/online), but rather, it is generally the price actually paid or payable for the merchandise when sold for exportation to the US.
- Following up on the previous point- not only are your costs from customs onwards (pick and pack, merchant fees, shipping out fees etc) not included in your tariff calculation, but also your freight costs, insurance costs for shipping etc, are generally not part of the calculation.
For example, if you pay your manufacturer in China $100 to produce each SKU, and have an additional payment of $10 per SKU for freight costs, and $5 insuring the shipping, only the $100 will generally be subject to tariffs, subject to proper documentation and meeting regulatory requirements. This isn’t a total comfort, but at least it puts things into perspective.
Heavy price and margins
Even taking the previous points into consideration, 145% added on to your export price is still one heck of a hefty price to pay. This hits eCom businesses both from a profitability standpoint, and from a cash flow perspective as well.
Profitability at Risk
Per Finaloop data, median gross margin for eCom brands in 2024 was about 52%, median contribution margin for eCom brands was about 28%, and median EBITDA for eCom brands was just about 8%. All of this is before tariffs. Now, add 145% tariffs into the mix. Again, this isn’t 145% on the full 48% median of COGS, but just on the product COGS side, and generally excluding insurance and shipping.
Despite the above, keeping things as is, is not tenable in this environment. To illustrate (and to keep things simple, I assumed no tariffs in the previous scenario):
If your:
- Net sales are $200
- Your previous COGS were $100 ($60 product COGS including $15 shipping and freight, and $40 non-product COGS, such as fulfillment fees, processing fees etc).
- Your previous gross margin was $100, or 50% of your net sales.
- Your current gross margin will be $200 less $15 shipping and freight (generally not subject to tariffs), less $40 non-product COGS like fulfillment etc (generally not subject to tariffs), less $45*145%=$110.25, equalling a grand total gross margin of $34.75 or just above 17%. Yikes.
Cash flow difficulties
Next up- cash flow. Per Finaloop data, the median cash conversion cycle in 2024 was about 92 days. This means, it takes about 92 days to convert your inventory into cash. With companies having tight cash positions, a lot of times, this position must be financed by inventory backed loans, or other forms of debt. Now, due to order cancellations, some factories are demanding up front payments for inventory, instead of part of the payments being paid at later dates (net 30/60), and the entire shipping process is taking more time, prolonging the cash cycle. In addition, standard tariffs are generally paid when goods are cleared through customs, which means that the hefty $65.25 tariff per SKU that we discussed above, must be paid before it is actually sold to the end customer. Both of these factors put significant stress on cash flow management.
To top this all off, and to add one last match to the fire, the Fed is not fast to lower interest rates, despite political attacks pressuring them to take this course. As such, debt is still quite expensive. So even if you wanted to finance your original inventory purchase, plus the upfront payment, plus the tariffs, the debt on this is going to be exorbitantly high.
The opportunity
We’ve laid out the problem (or more accurately, problems). Now, how should you be dealing with this?
First of all, a general quote from Mike Beckham, which I think succinctly describes the situation is this is the “mow your own lawn period”. A lot of great ideas and creativity come up in difficult situations and challenging climates. This is pretty much a market disruption, and you could end up on top. You just need to hang on tight. Very tight.
Own your numbers
Second, and this is a shameless Finaloop plug- own your numbers and your ecommerce accounting. It is not sufficient to know your general numbers, and whether or not your business is profitable (or even if your channel is profitable). You need to get real nitty gritty, down to the SKU level, and do an in depth analysis throughout the P&L. This is the first stage- assuming pricing remains the same- what position will you be in per each and every SKU. You may be surprised, and you could still be profitable with some SKUs, and with others you will see red. This will give you a general idea of where you stand, before taking any action.
Next, looking at every portion of your per SKU P&L, try to figure out how elastic the numbers are. Let’s dive in.
Optimize sales
In a lot of cases, your total price will have to go up. The question is, how elastic is the demand curve for your products? How discretionary are your items (the more discretionary, the more trouble you are in, in times of recession). If your items are more basic goods, you will probably have more leeway in raising prices here. Everyone buys dog food during recessions. As well as chocolate.
Second, consider discounting less. Discounts have become a real eCommerce staple in previous years, especially around holiday and gifting times, and now might be the time to cut those discounts.
Last, but certainly not least- take refunds and returns into account. After going through the whole process of bringing your merchandise to the US, and managing to sell your items in this difficult time, you don’t want to get your items refunded, sitting gathering dust in your warehouse. You won’t get refunds on your tariffs. This is a really important point that it is worth taking into consideration- if you have specific SKUs that are prone to high return rates, consider whether they are feasible in this current environment and consider adjusting your return policy accordingly.
Minimize your COGS
Next, let’s dig into your COGS.
First, the question everyone is asking is- can you somehow move manufacturing out of China. Vietnam is the big name on the block, but apparently, MOQs there are higher, and lead times are not short, so this is not for everyone. Moving manufacturing domestically could be an option, but is, at least in a lot of industries, quite costly and not really effective.
So what else can you do to decrease your COGS?
First of all- sourcing. Make sure you are talking with everybody, and sometimes, as others have said, it is worth a flight out to China and/or Vietnam. Consider negotiating for price decreases or in the very least, sharing the added costs with your manufacturer. You should also look into your 3PL rates, and negotiate hard to lower your rates.
When it comes to inventory orders, different people have been discussing various strategies for optimization. You can consider capitalizing on PO orders of bigger players to try to get a lower price that the big players are getting. Another strategy is to use more of a Just in Time form of inventory management, to bring in the bare minimum, and expose yourself to lower capital exposure from the onset. Especially since the tariffs could end up being rolled back.
Other strategies you can employ here is producing a slightly cheaper version of your product, which may not affect the customer experience, and this helps both on the initial cost side, and also on the tariff front, as the total cost per SKU will be lower. If you make a significant enough change, it may even classify as a different item for HS coding purposes, which could be a major benefit.
In addition, consider decreasing or fully cancelling free shipping. This can be a major area to cut costs without materially impacting conversions.
One other way to save costs is packaging (you would be surprised, we’ve seen customers overspending here significantly).
Adspend considerations
We’ve discussed maximizing sales, and minimizing COGS, let’s move down the P&L to the contribution margin. A large number of US advertisers expect companies to slash ad budgets due to the tariffs. It is worth keeping this in mind in general, and consider your ad budget carefully, specifically per SKU, and only focus on your top, profitable SKUs. It is worth modelling out new CAC targets as SKU breakdown points could change based on the anticipated gross margin compression.
On the other hand, due to the lower competition here, there may be hidden opportunities, as adspend costs may end up decreasing, due to lower bidding prices and reduced competition from Chinese manufacturers. One other factor to take into consideration here is that during recession, it may take more advertising dollars to convince people to open their purse strings. So even if ad costs may be lower, CAC could end up higher, if the conversion process is more difficult.
Opex incrementality
Moving on to Opex, many in the eCom space have been writing about cutting costs. This is always a good idea, and especially during wartime like this. Reviewing your operating costs will generally give room to subscriptions that are not necessary, or duplicate, or can be done in house. Use this opportunity to clean up your tech stack and to move more costs in house or slash them outright.
Summing things up
After running through the P&L and discussing various optimization ideas, I just wanted to make a general observation. Things are still very fluid. Nobody (probably including the US administration folks) knows where things will land. Therefore, taking drastic measures and abruptly closing manufacturing in China, discontinuing channels etc may not be the best course of action. Building out your per SKU analysis (check out finaloop.com), checking out price elasticity, bringing down your COGS, while looking into other manufacturing options may make the most sense. And only time will tell where this will all end up.
It definitely won’t be boring. I can promise you that.
That’s what we’re here for.
Accurate ecommerce books, done for you.
FAQs
Conduct a detailed SKU-level analysis to evaluate how tariffs affect the profitability of each product. By understanding how each product’s cost structure is influenced by tariffs, you can identify which items are still profitable and which may require strategic changes, such as price adjustments or discontinuation.
To optimize your P&L in a high-tariff environment, focus on strategies like adjusting product pricing based on demand elasticity, reducing discounts, cutting returns, and streamlining operations. Negotiating with manufacturers and optimizing shipping and warehousing can further reduce costs and improve profitability.
Rather than making drastic changes, such as abandoning Chinese manufacturing, develop a flexible strategy. Monitor the evolving tariff situation and adjust your approach as needed. Consider alternative manufacturing options, but ensure your strategy is adaptable to the changing trade environment.