What happened

Shares of consumer electronics retailer Best Buy (BBY -0.84%) were down about 5.7% at 11:45 a.m. EDT. The escalation of the trade war between the U.S. and China is the culprit. The U.S. raised the tariff rate on $200 billion of Chinese goods last week, and China retaliated on Monday with plans for its own tariff increase.

So what

Best Buy said in its fourth-quarter earnings call in February that the $200 billion list of Chinese goods impacted by tariffs only affected about 7% of its cost of goods sold. However, the company's outlook for this year assumes that the tariff rate on Chinese goods would remain at 10%. That assumption is no longer valid.

Shipping containers painted with U.S. and Chinese flags.

Image source: Getty Images.

With China retaliating against the U.S., additional tariffs on Chinese goods may be in the cards. President Donald Trump has threatened to impose 25% tariffs on an additional $325 billion of Chinese goods, which would almost certainly hit Best Buy harder than the original tariffs.

Now what

With tariffs raising prices for Best Buy, the company can either boost prices to try to preserve its profitability, eat the higher cost of products and take a hit on the bottom line, or some combination of the two.

Best Buy is set to report its first-quarter results on May 23, the first quarterly report under new CEO Corie Barry. With the tariff situation escalating, Best Buy may be forced to cut its guidance for the year.