Tariff Trade War Causing Looming Uncertainty for Franchisors and Franchisees

May and June have been a volatile month for tariffs as court battles, trade deals and President Trump’s executive orders continue to redefine global trade. On May 12, the United States and China announced a trade deal, in which both countries significantly lowered their tariffs for a 90-day period. The U.S. vowed to lower tariffs on goods coming from China from 145% down to 30%, while China agreed to lower its tariffs from 125% to 10%.

As it currently stands, after several modifications and negotiations, the February and March IEEPA Tariffs currently all remain in place, set at 25% for Mexican and Canadian products and at 20% for Chinese products. The IEEPA Tariffs on Canadian energy and energy resources remain at the lower 10% rate.

In April, President Trump issued an executive order, invoking IEEPA again and imposed a general 10% ad valorem duty on “all imports from all trading partners,” which “shall increase for” a list of 57 countries to higher rates ranging from 11% to as high as 50% ad valorem. Currently, the worldwide Reciprocal Tariffs remain in place at 10% for all countries, while the country-specific higher rates, that were paused for 90 days, are set to take effect on July 9, 2025.

Court challenges tariffs

On May 28, the United States Court of International Trade issued an opinion striking down the tariffs that President Trump implemented under the International Emergency Economic Powers Act of 1977. The question before the court was whether IEEPA delegates these powers to the President in the form of authority to impose unlimited tariffs on goods from nearly every country in the world.

On May 29, a second federal court, the U.S. District Court for the District of Columbia blocked President Trump's authority to unilaterally impose tariffs, ruling in favor of two Illinois toy importers. The U.S. Government appealed that decision to the U.S. Court of Appeals for the D.C. Circuit. On June 3, the DC Circuit, like the Federal Circuit, stayed the lower court’s action pending appeal.

The cases mentioned herein only challenged the IEEPA Tariffs and Reciprocal Tariffs imposed by President Trump earlier this year. Other tariffs imposed on certain sectors under national security investigations conducted under Section 232 Tariffs or under Section 301 of the Trade Act of 1974 are unaffected by the rulings. In fact, in early June, President Trump issued a proclamation increasing tariffs on steel and aluminum from 25% to 50%, which became effective Wednesday June 4th.

Franchise impact and mitigation

Franchisors and franchisees should closely monitor any further court actions and retaliatory tariffs. Tariffs on imported goods have caused importers to incur additional costs, which is forcing companies to raise prices and pass on the costs to consumers. As consumers bear the brunt of cost increases, it is unclear how consumer spending will react in the coming months and what effect any decrease in consumer spending will have on franchisor and franchisees’ bottom lines.

Franchisors and franchisees should proactively secure shipments of goods before any potential increase in Reciprocal Tariffs take effect on July 9. Additionally, some brands can mitigate tariff risk by seeking out domestic suppliers. As certain goods may increase in costs in the short-term, franchisors should be adaptive to potential alternative supplier changes, whether for food, goods or other products.

As this dynamic situation plays out, with tariffs in flux due to legal battles, bilateral negotiations, and temporary pauses, franchisors and franchisees should adjust operations as needed and communicate with each other to navigate such uncertainty. On June 11, President Trump announced a new handshake agreement with China, pending signatures, that would formalize the U.S.’

s Reciprocal Tariffs on China to be locked in at the baseline rate of 10% for the foreseeable future, while the U.S.’s tariffs on Chinese goods will remain at 10%, and in which China agreed to supply the U.

S. with rare earth metals.

This 10% Reciprocal Tariff rate is in addition to the 20% IEPPA Tariffs addressed above. Certain Chinese products are also still subject to additional tariffs ranging from 7.5% to 25% as imposed under Section 301 of the Trade Act of 1974 during President Trump’s first term in 2018. The total rate on Chinese goods is thus currently up to 55% depending on the type of goods.