Gap’s Tariff Exposure and Margin Compression: A Cautionary Call for Retail Investors

The U.S. tariff landscape has become a minefield for retailers like Gap Inc., and the numbers tell a troubling story. As of August 2025, the average tariff on apparel imports from China has skyrocketed to 69.1%—a 300% increase from the 13.9% rate in May 2024 [1]. Vietnam, once a relative safe haven, now faces a 20% tariff, while India’s 50% rate has turned it into a high-risk bet [2]. For Gap, which has spent years diversifying its sourcing base to mitigate these risks, the question isn’t whether tariffs are a problem—it’s how long the company can absorb the costs without eroding its margins.

The Tariff-Driven Sourcing Shift: A Double-Edged Sword

Gap’s strategy to reduce reliance on China—from 10% of sourcing in 2024 to under 3% by 2025 [3]—has been a lifeline. The company now sources 27% of its apparel from Vietnam, 18% from Indonesia, and smaller shares from India and Central America [4]. This diversification has helped stabilize gross margins, which hit 41.8% in Q1 2025 [5]. But the devil is in the details. Vietnam’s 20% tariff, while lower than the initially threatened 46%, still adds $100–150 million in annual costs [6]. Meanwhile, India’s 50% tariff—imposed in August 2025—has forced Gap to reconsider its plans to expand sourcing there [7].

The problem isn’t just the tariffs themselves but their volatility. The Trump administration’s “reciprocal tariff” policy allows for sudden escalations, as seen with India’s rate jumping from 25% to 50% in a single month [8]. For Gap, this creates a nightmare scenario: suppliers in high-risk countries may demand higher prices to offset tariffs, squeezing margins further. And with no single country accounting for more than 25% of sourcing by 2026 [9], the company’s strategy hinges on a delicate balancing act that could unravel if tariffs spike again.

Labor Costs and Geopolitical Risks: The Hidden Costs of Diversification

While Vietnam and Indonesia offer lower labor costs—Vietnam’s factory workers earn $302/month in 2024 [10]—these advantages are eroding. Vietnam’s localization rate in textile production is rising to 45–50% by 2025, driven by investments in automation [11], but this could lead to wage inflation. Indonesia’s 19% tariff, paired with non-tariff barriers, complicates logistics [12]. Even Central America, with its proximity to the U.S. and CAFTA-DR trade agreements, lacks the scale to fully offset disruptions in larger hubs [13].

Geopolitical risks further cloud the picture. Vietnam’s 40% tariff on transshipped goods [14] and India’s export sector instability [15] mean Gap’s supply chain is vulnerable to policy shifts. For example, if the U.S. escalates tariffs on Vietnam to 46% as initially proposed, Gap’s Vietnam-sourced costs could surge by 150%, threatening its $150 million in annualized cost savings [16].

The Long-Term Outlook: Can Gap’s Strategy Survive?

Gap’s executives insist they can absorb these costs through operational efficiencies and pricing discipline [17]. But the math is shaky. The company projects $250–300 million in tariff-related costs for 2025, with $100–150 million directly impacting operating income [18]. While diversification has helped, it’s not a panacea. If tariffs on Vietnam or India rise further, or if geopolitical tensions disrupt production in Southeast Asia, Gap’s margins could compress irreversibly.

Conclusion: A Cautionary Tale for Investors

Gap’s sourcing strategy is a testament to resilience, but it’s built on a fragile foundation. The company’s gross margin gains in Q1 2025 [5] are encouraging, but they mask the long-term risks of a tariff-driven world. For investors, the key takeaway is clear: while Gap’s diversification has bought time, it hasn’t eliminated the threat. Until the U.S. tariff policy stabilizes—and that seems unlikely in 2025–2026—Gap’s margins remain under siege. Retail investors should tread carefully.

Source:
[1] Average Tariff Rates for U.S. Apparel Imports under Trump’s Reciprocal Tariff Policy (Updated June 2025) [https://shenglufashion.com/2025/07/08/average-tariff-rates-for-u-s-apparel-imports-under-trumps-reciprocal-tariff-policy-updated-june-2025/]
[2] Trump's 50% tariff shock hits India – what it means for... [https://m.economictimes.com/news/economy/foreign-trade/trump-tarrifs-impact-50-shock-for-india-to-hit-soon-what-it-means-for-growth-jobs-and-hardest-hit-sectors/articleshow/123521817.cms]
[3] Gap Inc.: Navigating Tariff Storms to Unlock Value by 2026 [https://www.ainvest.com/news/gap-navigating-tariff-storms-unlock-2026-2505/]
[4] Gap Inc.'s Evolving Apparel Sourcing Base: 2021-2024 [https://shenglufashion.com/2025/03/06/gap-inc-s-evolving-apparel-sourcing-base-2021-2024/]
[5] Gap (GAP) earnings Q1 2025 [https://www.cnbc.com/2025/05/29/gap-earnings-q1-2025.html]
[6] Gap lists tariff costs but excludes them from forecast... [https://www.reuters.com/business/retail-consumer/gaps-quarterly-sales-beat-strong-demand-old-navy-namesake-brands-2025-05-29/]
[7] Trump tariffs hit India's garment makers as US buyers say... [https://www.reuters.com/world/china/trump-tariffs-hit-indias-garment-makers-us-buyers-say-move-production-2025-08-07/]
[8] State of U.S. Tariffs: August 7, 2025 | The Budget Lab at Yale [https://budgetlab.yale.edu/research/state-us-tariffs-august-7-2025]
[9] Gap Inc.: Navigating Tariff Storms to Unlock Value by 2026 [https://www.ainvest.com/news/gap-navigating-tariff-storms-unlock-2026-2505/]
[10] Asia Sourcing Strategy 2025: China, Vietnam & Beyond [https://www.eastwestbasics.com/asia-sourcing-strategy-china-vietnam-india-cambodia/]
[11] How Vietnam's Supporting Industries Are Responding to US Tariffs [https://www.vietnam-briefing.com/news/vietnams-strategic-response-to-us-tariffs-supporting-industries-in-focus.html]
[12] Implications of U.S. Tariffs on Southeast Asia [https://www.sidley.com/en/insights/newsupdates/2025/08/implications-of-us-tariffs-on-southeast-asia-navigating-the-trade-tumult]
[13] Gap Inc.'s Evolving Apparel Sourcing Base: 2021-2024 [https://shenglufashion.com/2025/03/06/gap-inc-s-evolving-apparel-sourcing-base-2021-2024/]
[14] US Tariffs on Vietnamese Exports: Analyzing the New... [https://www.vietnam-briefing.com/news/new-tariffs-on-vietnamese-exports-analyzing-the-new-tariff-framework.html]
[15] Trump's 50% tariff shock hits India – what it means for... [https://m.economictimes.com/news/economy/foreign-trade/trump-tarrifs-impact-50-shock-for-india-to-hit-soon-what-it-means-for-growth-jobs-and-hardest-hit-sectors/articleshow/123521817.cms]
[16] Gap Inc.: Navigating Tariff Storms to Unlock Value by 2026 [https://www.ainvest.com/news/gap-navigating-tariff-storms-unlock-2026-2505/]
[17] Gap lists up to $300 million tariff costs but excludes them from... [https://finance.yahoo.com/news/gaps-quarterly-sales-beat-strong-201847255.html]
[18] Gap Inc.: Navigating Tariff Storms to Unlock Value by 2026 [https://www.ainvest.com/news/gap-navigating-tariff-storms-unlock-2026-2505/]