New U.S. Tariffs Add to Cost Pressures for Canada’s Restaurant Industry

With new U.S. tariffs now in place and Canada having announced its retaliatory response, the economic consequences of the trade dispute are becoming clearer. For Canada’s restaurant industry, the impact will come not only from tariffs on products operators purchase, but through their effects on supply chains, costs, employment and consumer confidence.

The new 50% U.S. tariff applies to approximately $28 billion of Canadian goods, representing roughly 5% of Canada’s annual exports to the U.S. TD Economics estimates the new tariffs could reduce Canadian GDP growth by 0.3 to 0.6 percentage points over the next year. The effects could be significant for the industries and communities directly targeted.

Canada’s proposed retaliatory tariffs, scheduled to take effect September 8, create a second channel through which the dispute can affect Canadian businesses. For restaurants, the good news is that the proposed measures avoid many of the priority food products identified by Restaurants Canada for the federal government, particularly fresh produce. However, some food inputs, food-grade packaging, restaurant equipment and other operating supplies remain exposed.

Impact on the restaurant industry

For restaurants and suppliers, the economic issue is how these direct and indirect pressures work their way through an industry already operating with little capacity to absorb additional costs.

Restaurants operate on thin margins and purchase products through highly integrated North American supply chains. The proposed retaliatory tariffs will increase the cost of certain food and beverage products, restaurant equipment, replacement parts, packaging and other operating supplies.

But the size of the impact will depend on more than the tariff rate itself. It will also depend on whether restaurants and their suppliers can realistically substitute Canadian or other international products at comparable volumes, specifications and prices.

Restaurants already source approximately 68% of their food and beverage purchases domestically, rising above 80% in important categories such as dairy, cheese, chicken and beef. But Canada does not produce every product, specification or volume restaurants require year-round. Where sufficient Canadian supply exists, tariffs can encourage substitution toward domestic products. Where it does not, operators may need to turn to suppliers in other countries.

That shift is not necessarily cost-free. If many businesses move away from U.S. supply at the same time, demand for alternative products increases, which can put additional pressure on both supply and prices. The economic question is therefore not simply whether an alternative product exists, but whether sufficient supply exists at the volume, specification and price required by Canadian businesses.

Food-grade packaging and restaurant equipment illustrate the challenge. Both rely on highly integrated North American supply chains, and operators cannot necessarily switch quickly to Canadian or other international suppliers. Specialized commercial equipment and replacement parts can be particularly difficult to substitute when operators rely on established supply and servicing networks. Tariffs on components such as steel and other parts can also increase the cost of equipment manufactured or assembled in Canada.

In addition, trade uncertainty can put downward pressure on the Canadian dollar, making imported products more expensive.

Consumer confidence

Weaker economic conditions can also put additional pressure on discretionary spending, including spending at restaurants. This is particularly true at a time when consumers are already highly cost-conscious. The impact could be especially pronounced in communities that rely heavily on industries directly affected by the new tariffs.

The impact of the trade dispute therefore extends beyond the products directly affected by tariffs. Consumer confidence is also an important part of the economic risk. When households become concerned about their finances, employment or the broader economy, one of their first responses can be to pull back on discretionary spending – and restaurants tend to feel that change quickly.

This creates a compounding risk for the sector: restaurants can face higher input costs at the same time that consumers become less willing or able to absorb higher menu prices.

Restaurants have limited room to absorb additional costs

Any additional cost pressure comes at a difficult time for restaurant operators.

Restaurants Canada research shows that 41% of operators are now operating at a loss or barely breaking even, compared with 12% in 2019. Restaurants spend approximately 34% of their revenue on food, compared with an average pre-tax profit margin of only about 4%. These economics leave relatively little room to absorb another significant increase in input costs.

Restaurants Canada research shows operators are already using a wide range of strategies to manage rising expenses. Eight in 10 have increased menu prices, 60% have shopped around for other suppliers and 45% have negotiated with existing suppliers. Nearly two-thirds have reduced staffing levels.

At the same time, operators have limited ability to simply pass higher costs along to consumers. Restaurants Canada research shows consumers are increasingly sensitive to menu prices, with some purchasing fewer items or shifting toward lower-cost options.

This creates a difficult balancing act: restaurants need to manage rising costs while continuing to deliver the affordability and value consumers are looking for.

This matters beyond individual operators. Restaurants are Canada’s fourth-largest private-sector employer, with youth accounting for approximately 40% of the workforce. The sector also purchases approximately $43 billion in food and beverages annually, including roughly $30 billion from Canadian suppliers, and serves 23.7 million customer visits every day.

A significant decline in restaurant traffic or profitability therefore has consequences throughout the economy: less demand for Canadian farmers, food processors and distributors, fewer hours and shifts for workers, less capacity to hire and invest, and additional pressure on an industry already operating on very narrow margins.

How Restaurants Canada is responding

Restaurants Canada supports the Government of Canada in defending Canadian economic interests and responding to the latest U.S. tariffs. The objective now is to help ensure that Canada’s response is as targeted and effective as possible. On Friday, we submitted our response to the proposed retaliatory tariffs as part of the consultation process and will participate in a round of meetings to discuss the specifics and potential impacts on the sector, the communities we serve and the wider economy.

Restaurants Canada will remain closely engaged with federal officials, advocating on behalf of operators while supporting Canada’s broader efforts to defend our economy. During the consultation period on the proposed retaliatory tariffs, we will continue to provide industry evidence on the remaining areas of concern and where targeted, product-specific exemptions may be warranted.

We will continue to keep you informed as developments unfold.