New Reciprocal Tariffs Impact on Franchisors and Franchisees and Recommended Proactive Measures

The current tariff increases and volatility are creating challenges. In April 2025, President Trump implemented new “reciprocal” tariffs, introducing a 10% tariff on goods from most countries, and significantly higher rates for goods from countries with which the US has the largest trade deficits, as set out in Annex I.

As of April 9, there is a 90-day pause on the increase in reciprocal tariffs for all countries with reciprocal tariff rates above 10%, except for China. During that 90-day period, the original 10% reciprocal tariff rate will remain in effect. China is now subject to an increased 125% reciprocal tariff, in addition to the 20% IEEPA tariff already imposed in February/March of this year, bringing the total tariffs imposed on goods from China to 145%. China retaliated by imposing a 125% tariff on US goods entering China.

Earlier executive orders from February/March imposing 25% IEEPA tariffs on non-originating imports from Canada and Mexico (i.e., goods that do not qualify for United States Mexico Canada Agreement (“USMCA”) duty preference) are still in effect. However, energy or energy resources and potash imported from Canada and not qualifying as originating under the USMCA are presently subject to the lower additional tariff of 10%. Applicable rules of origin which may exempt certain goods from the IEPPA tariffs under USMCA vary on a case-by-case basis.

Impacts on retail and service brands

Many franchise-driven industries are impacted, including service-based brands and retail franchises.

Service-based franchises

Service-based franchises will feel the pinch for goods and equipment imported, such as chemicals or equipment (e.g., vacuums from China), which now may cost more under the reciprocal tariffs. Many retail franchises that are required to purchase work vehicles will also be impacted as the automobile industry depends heavily on parts and manufacturing from China, Mexico, and Canada and these tariffs could have a significant impact on the price of vehicles. Franchises that rely heavily on technology – such as computers, laptops, chips, or other electronics and technology from China – should closely monitor any possible tariff exemptions.

While many service-based franchises will not be exposed to the buildout costs that restaurant and service brands are subject to, some service-based brands that are required to have a showroom or office may see an uptick in construction costs.

Service brands that rely heavily on imported goods, such as materials for roofing, fencing, or other residential and commercial buildings, and equipment such as drills saws, and other machinery, will see costs of goods increase and may experience diminished margins.

Retail franchises

Retail franchises will be hit hard by the tariffs on China, with many products such as tools, snacks, and electronics being sourced there. The 10% reciprocal tariffs on imported goods from other countries (e.g., the EU) also adds pressure. Retail franchises that rely on products from China should seek alternative suppliers. Clothing and sneakers made in China will likely increase in costs. Convenience stores may have more flexibility to look into alternative goods and products from domestic sources to try to avoid tariff impacts. Tariffs on tools and materials (e.g., lumber from Canada, steel from China) will increase project costs for all types of franchises, including the buildouts for retail franchises.

Retail franchises that deal with imported goods such as hardware and machinery or car parts and accessories may see increased prices. Apparel, shoes, and toys that are manufactured overseas may also increase in cost. While big box retailers can negotiate group pricing and bulk purchasing, smaller retail franchises will not have as much negotiating power and flexibility when purchasing imported goods.

Broader trends and adaptations

Planning is difficult in this environment. Franchisors and suppliers saw first-hand how other “go to” countries such as Vietnam and India can also be subject to a vast increase in tariffs, even with the planned increase in reciprocal tariffs above 10% temporarily paused. Given the volatile nature of international trade, it is best to monitor each development and consider the following ways to mitigate risk:

Proactive measures

Diversify supply chains: Franchisors should consider shifting sourcing away from China to Mexico or Canada, whose originating goods that qualify for USMCA duty preference are exempt from the IEEPA tariffs or partner with U.S.-based manufacturers or distributors that source and produce goods domestically to avoid paying import duties and tariffs altogether.

Reviewing supply contracts: Franchisors and franchisees should review their supply contracts to determine who bears tariffs costs and (re)negotiate terms where possible. 

Negotiate dynamic pricing contracts: Parties should consider negotiating dynamic pricing provisions or include language that the parties will work in good faith to approve alternative suppliers if tariffs materially change the bargained-for contract. 

Key contract provisions: Force majeure clauses are typically for unforeseeable events and courts have been reluctant to read in tariffs as a trigger for force majeure unless tariffs are explicitly contemplated. 

Origin of goods: Require suppliers to certify the country of origin for goods, ensuring compliance with tariff rules and avoiding penalties for misclassification. This is critical under U.S. customs law, where incorrectly designating the origin of a good can lead to unpaid duties, interest, and penalties. 

Delivery and risk of loss: Clarify when title and risk transfer (e.g., FOB shipping point or destination), especially if tariffs delay customs clearance. This prevents ambiguity over who pays if a delay in processing goods results in the imposition of new duties.

Insurance protection: Franchisors and franchisees can manage risk by looking into insurance products such as trade disruption insurance, contract frustration insurance, and expropriation insurance.

Import strategy adjustments: Importing parts (of a product) separately that can be declared at a lower value and then assembling the parts in the United States may reduce overall tariff costs. A company may also want to import equipment without the software pre-installed on the equipment to bring down the value of goods to minimize duty implications and then install the software after importation.

Joyce Mazero is co-chair of Polsinelli’s Global Franchise and Supply Network practice. Josh Goldberg is an associate in Polsinelli’s Global Franchise and Supply Network practice. Alissa Chase is an associate in Polsinelli's International Trade practice group.