Trump's reciprocal tax: What it is and how it could affect you

As President Donald Trump advances his agenda to level the playing field for U.S. companies, he floated the possibility of enacting a “reciprocal tax” on other nations, including allies.

During a press conference on Monday, the president said, “We're going to be doing … a reciprocal tax and you'll be hearing about that during the week.”

A reciprocal tax would function as a tariff slapped on imports from other countries that tax U.S. exports. The president did not give details about specific rates or which goods could be impacted, though he used Harley Davidson – which is building a factory in Thailand to avoid the country’s steep tariffs on its products – as an example of existing trade challenges.

Implementing such a tariff could have several negative effects, including making U.S. imports more expensive and reducing competition, according to Christine McDaniel, senior research fellow at George Mason University’s Mercatus Center. For businesses that rely heavily on imports, increased costs could be passed along to the consumer.

McDaniels, who previously served as a deputy assistant secretary at the Treasury Department, also said that such a measure would not reduce the trade deficit and would essentially be “impossible” to administer. Every tariff has been negotiated between countries through rounds of multilateral negotiations, she pointed out, adding that these things can't be looked at "in a silo."

When asked about the possibility of a reciprocal tax being implemented on Tuesday, an administration official downplayed the president’s comments, saying there was “nothing formal in the works right now.” The same official hinted that the president was simply re-emphasizing the need for fair trade.

These comments come amid a slew of contentious trade cases handled by the administration. This month, the U.S. government enacted a 30% tariff on imported equipment used in solar panels, a decision that divided the industry. The administration also called for a 20% tariff on the first 1.2 million imported washers for the current year, and will increase that fee to 50% for each additional unit.

While the U.S. government approved a 300% tariff against Canadian planemaker Bombardier in response to a trade complaint brought by U.S. plane manufacturing giant Boeing (NYSE:BA), the U.S. International Trade Court ultimately voted against its implementation.

Meanwhile, the North American Free Trade Agreement, or NAFTA, is still being negotiated and while substantial progress has been made on a new draft, discussions have largely stalled over a number of contentious issues. A Canadian official this week said the trio of countries had made little progress on the major issues because the U.S. was concentrating on its own needs, according to Reuters.