VIDEO: How Tariffs Affect the Restaurant Industry [Under 60 Seconds]

The Trump Administration is leaning heavy on trade tariffs in an attempt to strong arm foreign trade partners into “better deals” as well as to get more Americans to shop domestically. Regardless of how well the tactic works or not, it’s important for restaurant owners and operators to know how tariffs will affect their business.

What are Tariffs & How Do They Work?

To boil it down, tariffs are taxes on goods on products imported into the United States. It adds to the overall cost of a product and is paid by the domestic consumer — in our case, restaurant operators. That means when, say, the US adds a tariff to a foreign country’s import, it’s you who pays the tariff and not the foreign government or business.

The theory is that by levying tariffs and increasing imported good costs, consumers will choose to shop domestically.

Tariffs mainly come in two main varieties — as a fixed-fee or as an ad-valorem — and is collected by the US government as additional revenue.

History of Tariffs

It’s been a long time since the US has levied high tariffs on trading partners. The last time being in the 1930s when Congress passed the Smoot-Hawley Tarrif Act which put a tariff on farm products and manufactured goods. The goal was to strengthen the US economy during the Great Depression; however, other nations also struggling retaliated with their own tariffs on US goods, worsening economic conditions in the US.

It’s estimated that overall world trade declined 66% between 1629 & 1634 because of the tariffs.

Since then, US policymakers have stayed away from trade barriers like tariffs, choosing free-trade instead… until the Trump administration that is.

How Trade Tariffs Affect Restaurants

But how do tariffs affect restaurants?

For starters, any imported food items — like foreign beer or wine — would cost more.

Roughly 43% of all fruits and vegetables eaten by Americans are imported by Mexico. Chipotle estimated Trump’s 2019 Mexico tariffs would cost them $15 million, leading for Chipotle management to consider raising menu prices to offset the cost.

Also retaliation tariffs slapped on US exported food goods could mean US farmers charge more domestically in an attempt to make-up for lost revenue. Alternatively, it also could potentially drive down local costs as if supply outweighs demand.

Independent restaurants should expect to feel the weight of tariffs harder than their chain counterparts who buy in larger bulk and can flex their purchasing muscles for better deals.

How Can Restaurants Manage Tariffs?

There’s not a whole lot restaurant operators can do to deal with tariffs. They mainly have two options:

1. Eat the added expense

2. Raise menu prices

None of which is typically appetizing for restaurant operators.

Restaurants can also look for creative ways to offset rising inventory costs such as buying seasonal goods or adopting a farm-to-table approach.

Regardless, there are few winners when tariffs are involved.

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