What Franchisors and Franchisees Need to Know About New Reciprocal Tariffs - April 2025 Update

On April 2, President Donald Trump issued an executive order implementing “reciprocal” tariffs. The order imposed a 10% additional tariff on goods from the vast majority of countries, effective April 5, and planned an increase to higher country-specific tariff rates on April 9 for goods from countries with which the US has the largest trade deficits, as set out in Annex I.

Certain goods are excluded from the reciprocal tariffs, including, but not limited to, all steel and aluminum articles and derivatives and all automobiles and automotive parts subject to the duties imposed pursuant to Section 232 tariffs.

As of April 9, hours after increased reciprocal tariff rates went into effect, President Trump announced 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 that President Trump announced on April 2 will remain in effect.

China, on the other hand, will now be subject to 125% reciprocal tariffs, in addition to the 20% IEEPA tariffs already imposed in February/March of this year – bringing the total tariffs imposed on goods from China in Trump’s second term to 145%. (Many goods from China are also subject to the Section 301 tariffs imposed during Trump’s first term, which range from 7.5% to 25%.)

In its third retaliatory response, China announced it will impose a 125% tariff on US goods entering China but indicated that it will not impose additional retaliatory tariffs beyond that point. With the retaliation-based trade war currently focused on China while the US discusses tariff negotiations with other countries, franchisors and franchisees should monitor their global supply chains closely and consider seeking alternative suppliers outside of China. Companies should monitor other countries’ retaliatory tariffs as well.

As discussed in our prior article, it should be noted that the existing February/March executive orders 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%. USMCA goods that are wholly grown or produced in Mexico or Canada, such as agricultural goods or mined ores, will continue to be excluded from the IEEPA tariffs.

In addition, certain manufactured goods also meet the requirements for USMCA duty preference, such as products produced entirely from materials sourced from the US, Canada, or Mexico such as a table manufactured in Mexico from components that are all made in Mexico. Applicable rules of origin which may exempt a certain good under USMCA vary on a case-by-case basis and parties should consult with counsel to strategize whether their current goods meet USMCA standards or could possibly be adapted to meet USMCA standards and therefore be eligible to be exempt from the IEPPA tariffs.

Franchising impacts

The impact of these tariffs varies widely based on franchise type and industry. Restaurant franchises face acute supply and cost pressures, service-based ones see milder but real effects, gym franchises wrestle with equipment hikes, and other sectors like auto and retail navigate a mixed bag. This all comes while unexpected tariffs upend prior planning, forcing rapid adaptation in a tense economic climate.

Restaurant franchises

Restaurant franchises are among the hardest hit due to their dependence on imported ingredients, equipment, and packaging. The reciprocal tariffs on imported goods from China drive up costs for kitchen equipment like fryers or grills and technology-related costs. While food imports, such as avocados from Mexico, are largely unaffected by the February/March tariffs imposed on goods from Canada and Mexico as they are homegrown resources excluded from those tariffs, businesses face rising costs and supply chain pressure for Mexican and Canadian goods that are still subject to the 25% tariff.

Goods that are not deemed as “originating” in a USMCA country under the USMCA-specific rules of origin are not exempt from the February/March IEEPA tariffs, such as foods like coffee beans imported from Colombia and roasted in Canada or pre-assembled grill components shipped from China and assembled in Mexico. Packaging costs may increase, as rubber or plastic goods from China that make up a significant portion of the goods or packaging materials, are still subject to the 25% tariffs.

Service-based franchises

Service-based franchises are less directly exposed but still feel the pinch for goods and equipment imported to operate a service business. For example, cleaning franchises rely on imported chemicals or equipment (e.g., vacuums from China), which now may cost more under the reciprocal tariffs. 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. Pet care franchises could face rising costs for grooming tools and other accessories commonly imported from China.

Gym franchises

Gym franchises are grappling with significant equipment cost increases. The fitness industry imports over 70% of its equipment from China. The reciprocal tariffs could significantly raise equipment prices, a major hit for new locations or refits. Membership fees might rise to compensate, but with consumer spending cautious, some gyms may delay upgrades or lean harder on domestic suppliers—though U.S. manufacturing capacity for fitness equipment remains limited.

Other industries

• Automotive dealerships: The automobile dealership industry depends heavily on parts and manufacturing from China, Mexico, and Canada. Consequently, these tariffs could have a significant impact on U.S. dealers.
• Retail franchises: The reciprocal tariffs on goods from China will hit retail franchises hard, with many products such as tools, snacks, and electronics sourced there. The 10% reciprocal tariffs on imported goods from other countries (e.g., the EU) also add pressure. Inventory costs likely will rise, forcing price hikes or margin cuts.
• Home Improvement: Tariffs on tools and materials (e.g., lumber from Canada, steel from China) will increase project costs. Service-heavy models likely will fare better, but franchises selling imported goods face supply chain squeezes.

Broader trends and adaptations

Across industries, franchisors are diversifying suppliers, looking for alternative supply sources (e.g., Taiwan, India), renegotiating contracts with dynamic pricing, or pushing for domestic sourcing, though U.S. production often can’t scale fast enough. Franchisees or franchisors, especially smaller or emerging businesses, may struggle most, lacking the capital to absorb costs or pivot quickly. Larger chains might weather this by leveraging scale to negotiate better terms or pass costs to consumers, but the uneven impact risks widening gaps between franchise tiers.

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. Suppliers who had already changed manufacturing and supply chain facilities over the past month to those countries were left searching for alternatives during the first week of April after President Trump first announced the reciprocal tariffs. Given the volatile nature of international trade at the moment, it is best to monitor each development and consider the following ways to mitigate risk:

Proactive measures

1. Diversify supply chains geographically 

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, as discussed above, or partner with U.S.-based manufacturers or distributors that source and produce goods domestically. This reduces exposure but requires vetting new suppliers for quality and reliability. Franchisees can also seek out local and regional producers – typically subject to the franchisor’s approval - for goods like food, cleaning supplies, or parts, to avoid paying import duties and tariffs altogether.

2. Negotiate dynamic pricing contracts

Update supplier agreements to include flexible pricing clauses that adjust for tariff fluctuations. This shares the cost burden with vendors and avoids locking parties into pre-tariff rates that could turn profitable deals into losses. Pair this with bulk purchasing goods at lower 10% tariff prices during the 90-day pause, to stockpile critical goods (e.g., equipment, ingredients) at lower costs.

3. Centralize procurement

Use franchisor buying power to secure goods at lower rates, then distribute them to franchisees. This cuts per-unit costs and shields smaller franchisees from navigating tariff-hit markets alone. It also strengthens franchisor control over quality and pricing consistency. Franchisees can also streamline operations and cut waste to offset rising input costs or optimize staff schedules in service franchises.

4. Adjust pricing strategically  

Franchisees can pass on some cost increases to customers via targeted price hikes - e.g., raise menu prices by 5% on high-demand items, rather than across the board. Pair this with value messaging (e.g., loyalty discounts) to soften pushback.

5. Joint task forces

Franchisors and franchisees can form working groups to share data, identify tariff workarounds, and lobby for industry-specific relief (e.g., USMCA exemptions for key goods). This pools resources and amplifies influence.

6. Training and support

Franchisors can provide franchisees with tariff impact “playbooks”—guides on cost-cutting, supplier vetting, or pricing tactics by drawing on corporate expertise to level the playing field and provide value for franchisees.

7. Contract drafting 

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. 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.

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.