What Changed: The De Minimis Timeline
For decades, Section 321 of the Tariff Act allowed imports valued at $800 or less to enter the United States duty-free. This provision, known as the de minimis exemption, was originally designed to reduce administrative burden on low-value shipments. It became the backbone of a massive direct-to-consumer import model, with platforms like Shein and Temu shipping millions of individual parcels daily from China directly to U.S. consumers, each valued just under $800, and paying zero duties.
On May 2, 2025, the de minimis exemption was suspended for goods originating from China. Every shipment from China, regardless of value, became subject to formal customs entry and applicable duties. The immediate impact fell hardest on ultra-low-cost retailers and dropshipping operations that relied entirely on the exemption to maintain their pricing models.
On August 29, 2025, the suspension was extended to all countries of origin. The de minimis exemption effectively ceased to exist for commercial imports. This second phase caught brands that had shifted sourcing from China to Vietnam, India, or Mexico specifically to maintain de minimis eligibility. The workaround closed within four months of the original change.
The practical reality for e-commerce brands today: every inbound shipment, whether it is a $50 sample from a new supplier or a $500,000 container of finished goods, now requires formal customs entry, classification under the Harmonized Tariff Schedule (HTS), and payment of applicable duties.
Section 301 Tariffs: Where the Numbers Stand in 2026
Section 301 tariffs were originally imposed in 2018 and 2019 as part of the U.S.-China trade dispute. They were expanded significantly in 2025, and as of early 2026, the landscape for Chinese imports is as follows.
List 1 through List 4A products carry tariffs of 20% to 25% on top of any existing most-favored-nation (MFN) duty rates. This covers a broad swath of consumer products, industrial components, and electronics. List 4B products, which include many consumer goods like apparel, footwear, and home textiles, carry tariffs of 7.5% to 15% under the original structure but have been supplemented by additional tariffs bringing effective rates to 20% to 30% for most categories.
The net effect: a product classified under an HTS code with a base MFN duty of 5% and a Section 301 tariff of 25% carries a total effective duty rate of 30% on its declared customs value (typically the FOB or transaction value of the goods).
For non-China imports, duty rates vary dramatically by product and country of origin. Goods from countries with free trade agreements (FTA) like Mexico (USMCA), South Korea, and Australia may still enter duty-free or at reduced rates for qualifying products. Goods from Vietnam, India, and other non-FTA countries carry MFN rates that range from 0% to 25% depending on the HTS classification.
Per-Unit Duty Impact: A Worked Calculation
Understanding the per-unit duty impact is essential for updating your landed cost model and making informed pricing decisions. Here is the calculation for a typical consumer product imported from China.
Product: Silicone kitchen utensil set. FOB China price: $12.00 per unit. HTS classification: 3924.10.4000 (articles for table or kitchen use, of plastics). MFN duty rate: 3.4%. Section 301 tariff: 25%. Total effective duty rate: 28.4%.
Duty per unit: $12.00 x 28.4% = $3.41. Ocean freight and insurance per unit (assuming 2,000 units per container at $4,800 per container): $2.40. Customs brokerage and handling per unit: $0.35. 3PL receiving per unit: $0.50.
Total landed cost per unit: $12.00 + $3.41 + $2.40 + $0.35 + $0.50 = $18.66. Pre-tariff landed cost (using the old 3.4% MFN rate only and de minimis for small shipments): approximately $15.66. The tariff impact alone is $3.00 per unit, representing a 19.2% increase in landed cost.
If this product sells for $44.99, the pre-tariff gross margin was 65.2% ($29.33 / $44.99). The post-tariff gross margin is 58.5% ($26.33 / $44.99). That 6.7 percentage point margin compression flows directly to the bottom line. For a brand selling 50,000 units per year of this product, the annual duty impact is $150,000 in additional costs.
How Duties Flow Through Your Financial Statements
Duties are part of landed cost, which means they are capitalized into inventory on the balance sheet and expensed as COGS when the inventory sells. They are not an operating expense. This distinction matters for several reasons.
First, duties increase your inventory asset value on the balance sheet. Higher inventory values mean more cash tied up in working capital, which compounds the cash conversion cycle challenges discussed in our CCC guide. A brand carrying 60 days of inventory with $3.00 per unit in additional duties on 50,000 annual units is carrying an extra $24,658 in inventory value at any given time ($150,000 / 365 x 60).
Second, duties reduce your gross margin because they increase COGS. This is the correct treatment: duties are a direct cost of acquiring inventory and should be reflected in gross margin, not buried in operating expenses. If your financial statements show duties as an operating expense line, your gross margin is overstated, and your unit economics analysis is based on fictional numbers.
Third, duties are paid at the time of customs entry, which is typically weeks before the inventory sells. This creates a cash flow timing mismatch that is separate from and additive to the inventory cash timing issue. You are paying duties on goods that will not generate revenue for 30 to 90 days.
The Pricing Decision: Absorb, Pass Through, or Split
Every e-commerce brand facing increased duties has three options. The right choice depends on your competitive position, your price elasticity, and your margin structure.
Option 1: Absorb the Duties
Absorbing means you keep prices the same and accept lower margins. This preserves your conversion rate and competitive positioning but reduces profitability. For the kitchen utensil example, absorbing the $3.00 per-unit duty impact means your gross margin drops from 65.2% to 58.5%.
Absorbing makes sense when your category is highly price-competitive and small price changes cause significant volume drops, your margins are strong enough to absorb the hit and remain profitable, your competitors are also absorbing (creating a market expectation of stable pricing), or you are prioritizing market share and customer acquisition over short-term profitability.
The risk: margin compression is permanent unless duties decrease. Many brands that chose to absorb tariffs in 2018 and 2019 assumed the tariffs were temporary. Seven years later, those tariffs are higher than ever, and the brands that absorbed have been operating on structurally lower margins the entire time.
Option 2: Pass Through to Customers
Passing through means you raise prices to offset the full duty impact. For the kitchen utensil set, you would increase the price from $44.99 to approximately $47.99 to $48.99 to recover the $3.00 per-unit duty cost plus maintain your target margin percentage.
Passing through makes sense when you sell a differentiated or premium product where customers are less price-sensitive, your brand has strong loyalty and customers are unlikely to switch over a 5% to 10% price increase, the entire market is raising prices (tariffs affect all importers in your category equally), or your margins are already thin and absorbing would push you into unprofitability.
The risk: price increases reduce conversion rates. The standard e-commerce rule of thumb is that a 10% price increase reduces conversion by 5% to 15%, though this varies dramatically by product and brand strength. A 7% price increase that reduces volume by 10% actually decreases total revenue and total gross margin dollars, making you worse off than absorbing.
Option 3: Split the Impact
Splitting means you raise prices partially and absorb the remainder. This is the most common approach and usually the most pragmatic. For the kitchen utensil set, you might raise the price from $44.99 to $46.99 (a 4.4% increase), absorbing roughly $1.00 of the $3.00 duty impact and passing through $2.00.
The math on a 50/50 split: Price increases from $44.99 to $46.49. New gross margin: 60.8% (compared to 65.2% pre-tariff and 58.5% with full absorption). Assuming the $1.50 price increase reduces volume by 3% (a reasonable estimate for a moderate increase), net gross margin dollars decline by approximately 5% instead of the 10% decline from full absorption.
The split approach works well because it shares the burden between you and your customers, preserves most of your volume, and avoids the sticker shock of a full pass-through. It is also easier to implement incrementally: raise prices 3% now, monitor conversion for 30 days, and adjust up or down based on actual customer behavior.
Landed Cost Model Updates: What to Include
If you have not updated your landed cost model since the tariff changes, your unit economics, margin analysis, and pricing strategy are all based on outdated numbers. A complete landed cost model for 2026 should include the following components for each SKU or product category.
Product cost (FOB or EXW): The price you pay to the manufacturer, excluding shipping and duties. Ocean freight or air freight per unit: Container rates have moderated from the 2021-2022 peaks but remain 40% to 60% above pre-pandemic levels. Factor in current rates, not historical averages. Freight insurance: Typically 0.5% to 1.0% of cargo value. Customs duties: Base MFN rate plus any applicable Section 301 or other additional tariffs. Use your specific HTS codes, not estimates. Customs brokerage fees: Per-entry fees typically range from $150 to $350 per customs entry, allocated across the units in that shipment. Harbor maintenance fee: 0.125% of cargo value for most imports. Merchandise processing fee: 0.3464% of cargo value, with a minimum of $31.67 and maximum of $614.35 per entry. Inland freight: Cost to move goods from the port to your 3PL or warehouse. 3PL receiving and put-away fees: Per-unit or per-pallet fees charged by your fulfillment provider for receiving inbound shipments.
Most brands we work with find that their actual landed cost is 15% to 25% higher than what their bookkeeping system reflects because several of these cost components are recorded as operating expenses instead of being allocated to inventory.
Sourcing Diversification: The Tariff Mitigation Strategy
Many brands responded to the China tariffs by diversifying sourcing to Vietnam, India, Cambodia, Indonesia, and Mexico. This strategy can meaningfully reduce duty exposure, but it comes with trade-offs that are often underestimated.
Vietnam has become the most popular alternative for apparel, footwear, and consumer electronics. MFN duty rates on Vietnamese goods are generally lower than China-specific Section 301 rates, but Vietnam does not have a free trade agreement with the U.S., so base MFN duties still apply. Manufacturing quality and capacity have improved significantly, but lead times are often 2 to 4 weeks longer than China for comparable products.
Mexico (USMCA) offers duty-free treatment for qualifying goods that meet rules of origin requirements. For brands that can source finished goods or components from Mexico, this is the most powerful tariff mitigation strategy available. The challenge is that Mexico's manufacturing base is strong in automotive, appliances, and certain food products but limited in categories like consumer electronics and textiles.
India offers competitive labor costs and growing manufacturing capacity, particularly in textiles, jewelry, and home goods. MFN duty rates are generally comparable to Vietnam. Quality consistency and communication can be more variable than China or Vietnam, requiring more hands-on supplier management.
The critical point: sourcing diversification reduces tariff exposure but increases supply chain complexity, quality management overhead, and lead time variability. A brand that previously managed one supplier relationship in China may now manage three suppliers across three countries with three different regulatory environments. The tariff savings need to be weighed against the operational cost of managing a more complex supply chain.
What Happens If Tariffs Change Again?
Tariff policy is inherently political and subject to change with every administration and trade negotiation. The brands that weather tariff volatility best are the ones that build tariff scenario planning into their financial models rather than reacting to each policy change after it happens.
Build three scenarios into your annual financial plan: a base case using current tariff rates, a downside case assuming a 5 to 10 percentage point increase in applicable rates, and an upside case assuming a partial rollback or exemption. For each scenario, calculate the impact on landed cost, gross margin, and contribution margin. Pre-decide your pricing response for each scenario so you can move within days of a policy change instead of spending weeks in analysis paralysis.
The brands that preserved the most margin through the 2025 tariff changes were the ones that had already modeled the scenarios and had pricing adjustments ready to implement. They raised prices within 2 to 4 weeks of the tariff increases. Brands that waited 3 to 6 months to respond absorbed the full cost increase during the delay period and then faced customer resistance to larger, more sudden price increases.
The 90-Day Action Plan
If you import products and have not fully adapted to the current tariff environment, here is a practical 90-day roadmap.
Week 1-2: Audit your HTS classifications. Misclassification is one of the most common and most expensive errors in import duty management. A single digit change in an HTS code can shift your duty rate by 10 to 20 percentage points. Have a licensed customs broker or trade attorney review your top 20 SKUs by import volume to confirm you are classified correctly and not overpaying.
Week 3-4: Update your landed cost model. Rebuild your per-unit landed cost for every active SKU using current duty rates, current freight rates, and all applicable fees. Compare to the landed costs currently reflected in your accounting system. The gap is often surprising.
Week 5-6: Run the pricing analysis. For each product category, model the margin impact of absorbing, passing through, and splitting the duty increase. Factor in your best estimate of price elasticity for each category. Decide on your approach and prepare the price changes.
Week 7-8: Implement pricing changes. Update prices on your DTC site, marketplace listings, and wholesale price sheets. For marketplace channels, stagger increases over 2 to 3 weeks to avoid triggering algorithmic suppression from sudden price jumps.
Week 9-12: Evaluate sourcing alternatives. For your highest-volume, highest-duty products, research alternative sourcing countries and request quotes from manufacturers. Calculate the all-in landed cost comparison including the higher quality management and logistics costs of a new supplier relationship.
The tariff environment is not going back to 2019. De minimis is not coming back for Chinese goods, and the global suspension shows no signs of reversal. The brands that accept this as the new normal and build it into their permanent cost structure and pricing strategy are the ones that will maintain healthy margins through whatever comes next.