What Franchisors and Franchisees Need to Know About the New Tariffs

A set of new U.S. tariffs took effect on March 4, imposing a 25 percent tariff on imports from Canada and Mexico and a 10 percent tariff on imports from China. Energy imports from Canada face a reduced 10 percent tariff. These tariffs, implemented by President Donald Trump under the International Emergency Economic Powers Act (IEEPA), were justified on grounds of illegal immigration and fentanyl trafficking.

Earlier in February, the U.S. also expanded Section 232 tariffs on steel and aluminum, increasing tariffs on aluminum imports from 10 to 25 percent, effective March 12. In response, Mexico, China, and Canada have imposed retaliatory tariffs on U.S. goods, further complicating trade relations.

A day after the March 4, IIEPA tariffs went into effect, dissatisfied U.S. automakers put pressure on President Trump, who then temporarily granted a one-month exemption on auto tariffs on Mexico and Canada. President Trump also suspended tariffs on all imports that are compliant with the United States-Mexico-Canada Agreement (USMCA) until April 2.

There are several different ways these tariffs impact franchising.

Food and beverage imports

The IEEPA tariffs heavily impact imports from Mexico, which supplies critical ingredients for many restaurant chains. Key imports include avocados, tomatoes, fresh beef, and baked goods. Chipotle, for example, expects a cost increase of approximately 60 basis points due to its reliance on Mexican ingredients but said it will absorb the costs and not raise prices.

Canada, exporting about $40.5 billion in agricultural goods annually, is another major supplier to U.S. franchises. Popular imports include baked goods, beef, chocolate, frozen vegetables, and pork. In response to tariffs, Tim Hortons announced it would seek alternative Canadian suppliers for items currently sourced from the United States.

Restaurant equipment costs will also rise. Many grills, kitchen appliances, and food processing equipment are sourced from China. The U.S. imported $120 billion worth of electronics and $81 billion worth of machinery in 2023, according to the Peterson Institute for International Economics, making these tariffs particularly burdensome for restaurant operators.

Auto industry and dealerships

The automobile sector is heavily dependent on parts from China, Mexico, and Canada. Mexico plays a crucial role in the U.S. auto industry, exporting 86.9 percent of its auto parts to the U.S. Nearly every major automaker operating in the U.S. has at least one plant in Mexico. Canada also exports billions in automotive products, with Ford, GM, Stellantis, Toyota, and Honda producing an estimated 1.3 million vehicles in Canada for the U.S. market.

Wells Fargo estimates that should the 25 percent tariffs on imports from Mexico and Canada go into effect, it would could cost U.S. automakers billions annually, directly impacting dealerships and consumers through higher vehicle prices.

Section 232 tariffs: Steel and aluminum

As all steel imports now face a 25 percent tariff and aluminum imports increase from 10 to 25 percent, franchise operations and construction will be significantly affected. The cost of building new franchise locations, upgrading existing infrastructure, and acquiring necessary equipment will rise. Fitness chains, which rely on steel and aluminum for exercise equipment, will also be hit with increased costs.

In response to Trump’s 25 percent tariffs on steel and aluminum, for example, Coca-Cola said it would likely sell more of its sodas in plastic bottles.

Combined impact of multiple tariffs

The IEEPA and Section 232 tariffs are additive, meaning that those tariffs will apply to subject imports in addition to regular duties and any other special duties, such as the Section 301 tariffs that apply to certain goods from China. For example, Chinese imports of battery parts (non-lithium-ion batteries), which are currently subject to 25 percent Section 301 tariffs, will now be subject to the 10 percent IEEPA tariffs in addition to the 25 percent Section 301 tariffs—a 35 percent cumulative tariff.

Franchisors and franchisees must consider the reliability of Item 7 of the Franchise Disclosure Document (FDD) and other investment information in their current analysis of start-up costs. They should also consider the necessity of updating Item 7 cost information when evaluating construction costs and goods and equipment costs that will likely, as a result of the tariffs, increase the total investment for a franchisee. Likewise, any Item 19 financial performance representations that include operating costs, such as food and equipment for a restaurant concept, will need to address potential increases in costs.

Proactive measures

Franchisors can take the following proactive steps to mitigate tariff impact:

1. Supplier diversification/Explore new markets: Identify alternative suppliers in domestic and tariff-free regions, such as Taiwan and Indonesia, to reduce reliance on Chinese equipment and technology imports.
2. Menu adjustments: Emphasizing locally sourced ingredients can help mitigate cost and may reduce reliance on imported goods.
3. Long-term contracts: Locking in supplier pricing before further tariff hikes can provide cost stability.
4. Supply contract review: Determine tariff cost responsibilities and renegotiate contract terms where possible.
5. Dynamic pricing provisions: Long-term supply contracts should be keenly negotiated with considerations for dynamic pricing provision indexes (e.g., a 10 percent increase in duties triggers renegotiation). Define who bears the cost (supplier, buyer, or split), and set timelines for notice and adjustment.
6. Key contract provisions: Implement force majeure, termination, and indemnification clauses to account for unpredictable trade conditions.
7. Origin of goods compliance: Require suppliers to certify product origins to ensure tariff compliance and avoid penalties.
8. Currency and payment terms: Address exchange rate risks if tariff policies impact international transactions.
9. Delivery and risk of loss: Clarify when title and risk transfer to avoid unexpected costs from customs delays.
10. Insurance protection: Consider trade disruption insurance, contract frustration insurance, and expropriation insurance to protect against supply chain uncertainties.
11. Import strategy adjustments: Importing partially assembled products or deferring software installations until after importation can reduce the declared value and may reduce overall tariff costs.

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.