February 28Updated April 26, 2019
U.S.-Japan Trade Agreement Negotiations
Overview
Figure 1. Top U.S. Trade Partners, 2017
Under Trade Promotion Authority (TPA) procedures, on
October 16, 2018, the Trump Administration gave Congress
its official 90-day advance notification of intent to enter
into trade agreement negotiations with Japan
In April 2019, the United States and Japan held their first
round of negotiations toward a new bilateral trade
agreement. The Trump Administration is pursuing the talks
with Japan under U.S. Trade Promotion Authority (TPA)
procedures, potentially allowing for expedited legislative
consideration of a concluded agreement. As the fourthlargest U.S. trade partner, Japan is a longstandinglong-standing U.S.
priority for trade negotiations, in particular following the
2017 U.S. U.S.
withdrawal from the proposed Trans-Pacific Partnership
(TPP) in 2017, which included Japan. With initial TPA
requirements met, official negotiations could start at any
time. The precise scope of the negotiations remains
somewhat uncertain but areas of focus likely include trade
Partnership (TPP), which included Japan. The two parties
continue to negotiate on the precise scope of the talks, but
both sides appear to prioritize quick results over a more
comprehensive negotiation. Key issues are likely to include
trade commitments on motor vehicles, agricultural goods,
and services, as well as areas where the two nations have
largely similar goals, such as digital trade. Currency
commitments are a priority among some U.S. stakeholders,
but Japan opposes including them in the trade talksservices, and potentially policies affecting exchange rates.
Japan’s recent free trade agreements (FTAs) with major
non-U.S. marketstrading partners set new rules and lower tariffs for Japan’s
trading partners
among the parties, disadvantaging U.S. exporters and further
further incentivizing U.S. interest in new talks. Japan had preferred
preferred a regional approach to trade negotiations, and
urged the
United States to reconsider its TPP withdrawal. Some
Some suggest Japan became more willing to enter bilateral talks
talks after President Trump in May 2018 launched a Section 232
232 investigation that could result in increased tariffs on
Japanese autos and auto parts—Japan’s top export to the
United States and a major source of the U.S. trade deficit
with Japan. Japan strongly opposed U.S. Section 232 tariffs
on imports of steel and aluminum—deemed a threat to U.S.
national security—in place since March 2018.
Bilateral Trade and Economic Relations
The world’s third-largest economy, Japan is the fourthlargest U.S. trade partner, fourth-largest U.S. investment
partner, and second-largest foreign holder of U.S.
government debt. In 20172018, U.S. exports to Japan totaled
$114.7121.1 billion, with $68.375.7 billion in goods and $4645.4 billion
in services. U.S. imports totaled $171.3179.1 billion, with goods
accounting for the bulk of imports ($138.3144.6 billion), most
notably motor vehicles and parts ($55.556.0 billion). The stock
of U.S foreign direct investment (FDI) in Japan was valued
at $129.1 billion in 2017, concentrated in finance and
insurance ($64.1 billion). Japanese FDI stock in the United
States totaled $469.1 billion in 2017, with manufacturing
accounting for the largest share ($157.3 billion).
The size of the bilateral goods trade deficit, which at $70.067.6
billion was the thirdfourth-largest U.S. deficit in 20172018, remains a
source of tension, as does the idea that the imbalance stems
in part from various non-tariffnontariff barriers in the Japanese
market. Such concerns arguably peaked in the 1980s and
early 1990s, dissipating over the past two decades in the
face of Japan’s domestic economic challenges, major
Japanese investment in the United States, Japan’s increased
economic openness, and a shift in U.S. focus to concerns
over trade relations with China. Under the Trump
Administration, bilateral tension over the trade deficit has
returned to prominence in the relationship.The Trump Administration,
however, has renewed U.S. focus on the trade deficit.
Figure 1. Top U.S. Trade Partners, 2018
Source: CRS with data from Bureau of Economic Analysis (BEA).
Scope and Timing of Negotiations
The potential scope of the trade talks remains unclear, in
part due to differing characterizations by the two sides.
Prime Minister Abe initially referred to the talks as goodsonly negotiations, differing from other comprehensive
Japanese FTAs. Meanwhile, within specific negotiating
objectives U.S. negotiating objectives
released in December 2018—as required by TPA
30 days before talks can commence—the U.S. Trade
Representative (USTR) suggested , as required by TPA, suggested
a broad range of issues
will would be covered, including trade in
goods, services,
investment, intellectual property, state-ownedstateowned enterprises,
and digital trade. USTR has indicated that it
may pursue
negotiations with Japan in stages, in
consultation with
Congress, which would represent a shift
in approach from
recent past U.S. FTAs, which typically involve one
one comprehensive negotiation.
U.S. exporters in key sectors such as automobiles,
agriculture, and services have been challenged by
multiple tariff and non-tariffnontariff barriers for decades.
USTR, USJTA Negotiating Objectives, December 2018
Japan’s FTAs with Other Major Markets
In 2018, Japan concluded and ratified two major FTAs,
which although excludingexclude the United States, and could have
significant significant
implications for U.S. stakeholders. The Japanled Japan-led
Comprehensive and Progressive Agreement for TransPacific Partnership (or TPP-11), which took shape after the
U.S. withdrewwithdrawal from TPP, entered into force at the end of
2018. Meanwhile, the European Union (EU) and Japan,
which together accounted for more than one-quarter of total
U.S. trade in 20172018, entered into an FTA in February 2019.
U.S. exporters to Japan worry that a reduction in tariffs for
TPP-11 and EU countries, particularly on agricultural
raise concerns that Japan’s reduced tariffs on
imports from TPP-11 and EU countries, particularly on
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U.S.-Japan Trade Agreement Negotiations
agricultural products such as Japan’s relatively high 38.5% beef tariff,
will threaten the competitiveness of U.S. exports in the
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U.S.-Japan Trade Agreement Negotiations
Japanese market. New rules
beef tariff, threaten U.S. export competitiveness. New rules
in the FTAs have also led to
concerns that they may not
reflect U.S. priorities. EcommerceE-commerce provisions in the EU-JapanEUJapan FTA, for example,
do not cover the free flow of data,
unlike the recently
negotiated U.S.-Mexico-Canada Agreement (USMCA) and
TPP-11 that prohibit related restrictions. Meanwhile, TPP11 suspended
Agreement (USMCA). Meanwhile, TPP-11 also suspended
22, largely U.S. -priority, provisions from the
original TPP
text, including some of relevance in Japan,
such as
prohibiting cross-subsidization of express delivery
services services
by monopoly postal services (e.g., Japan Post).
Key Sectors and Potential Provisions
Agriculture
Opening Japan’s highly protected agriculture market and
reaching parity with exporters from Japan’s FTA partners,
such as the EU, Australia, and Canada (a member of TPP11), is is
a major priority for U.S. industry in the proposed
talks. In 2017. In 2018, Japan was the fourth
fourth-largest U.S. agriculture
market, with exports of $11
$12.9 billion. Japan’s import
sensitivities in the sector sensitivities, however, may
limit its
concessions to those provided in the TPP TPP-11
(considered
Japan’s most ambitious commitments to date). In
announcing new talks, Abe said
Prime Minister Abe stated Japan plans to limit new
agriculture market access to offers in existing FTAs.
Motor Vehicles
Motor vehicles have long been contentious in U.S.-Japan
trade relations. Three major factors influence bilateral
dynamics in the industry: (1) autos and parts are the top
U.S. import from Japan, accounting for top U.S.
imports from Japan (more than one-third
of all goods imports
imports); (2) despite being the third-largest
world auto
market, Japan imports very few U.S.-made autos
($2.34 billion in 2017)
2018), leading to a major bilateral U.S.
deficit in the sector;
and (3) major Japanese investment in
U.S. production
facilities ($51.8 billion in 2017, or about
one-third of
Japan’s FDI in U.S. manufacturing) facilities)
supports nearly
350,000 direct and indirect U.S. jobs, as per
per the Japan
Automobile Manufacturers Association.
Japan has no auto tariffs, but U.S. industry argues that
nontariff barriers, including inequitablediscriminatory regulatory
treatment,
have led to poor disadvantage U.S. sales abroad. Japanese stakeholders
counter that failure by U.S. industry to adjust to its market
characteristics is to blame. TPP included commitments on
non-tariffnontariff issues, but arguably, the most significant
provisions affecting auto trade were the 25- and 30-year
phase-outphaseout periods for the 2.5% and 25% U.S. car and light
truck tariffs, respectively. President Trump has repeatedly
flagged the U.S. trade deficit in autos and noted that U.S.
goals in the in the
new talks, U.S. aims include market access outcomes that
will increase U.S. auto production and employment in the sector.
Establishing auto rules of origin in the agreement may be a
challenge given extensive U.S. supply chainschain links in North
America and widespread Japanese sourcing in Asia.
Services
The United States has a bilateral services trade surplus, and
Japan is a major market for U.S. service providers. For
example, the Japanese insurance market is the second
largest in the world behind the United StatesU.S. market, accounting for
nearly 30% of all U.S. foreign affiliate sales in the industry
in 2016 ($48.9 billion). Japan Post, the state-owned postal
service and, is among Japan’s largest banks and insurers,; it has
moved toward privatization but remains majority-owned by
the government. Historically, U.S. firms have found it
difficult to enter segments of the Japanese market and argue
that Japan confers preferential treatment on insurance and
express delivery subsidiaries of Japan Post. Several TPP
provisions were designed to level the playing field for
services suppliers, and crafting similar provisions may be a
rules in the new
talks may be a negotiating priority for the United States in the new talks.
Currency
Some U.S. stakeholders argue that the Japanese government
has at times made efforts to unfairly depress the value of
the Japanese yen relative to the U.S. dollar to gain a trade
advantage, contributing to the U.S. trade deficit. A weaker
.
Currency and Other Issues
Some U.S. stakeholders argue currency commitments
should be a priority in the negotiations, as exchange rates
have a significant effect on trade flows and the U.S. trade
deficit. A weaker yen makes imports from Japan cheaper in
the U.S. market,
while increasing the cost of U.S. exports.
Although Japan
has not intervened directly in foreign
exchange markets
since 2011, monetary stimulus under the
“Abenomics”
program has put significant downward
pressure on the yen.
Japan remains on the U.S. Treasury
Department’s currency
monitoring list due to its large trade
and current account
surpluses with the United States. USMCA commitments,
which could serve as a template for talks with Japan,
includes the first ever chapter on exchange rate policies in a
negotiated U.S. FTA, and it goes further than the nonbinding declaration on currency in the proposed TPP-account surpluses with the United States.
USMCA includes the first-ever U.S. FTA commitments on
exchange rates and could serve as a template in the Japan
talks (TPP included a nonbinding declaration on currency).
Japan opposes including currency provisions in the talks.
Digital Trade and Other Issues
On a number of trade issues, such as digital trade and stateowned enterprises, the two countries have largely similar
goals. Commitments on these topics may also be included;
USTR stated a need for “high standards in the area of
digital trade” after the first round of negotiations.
Issues for Congress
Scope of Negotiations and TPA. The initial framing of the
negotiations emphasized a focus on areas that produce
“early achievements,”
while USTR’s objectives suggest
talks aim to cover a broad
agenda. The possibility that talks
may proceed in stages raises some
raises questions for U.S.
stakeholders regarding what areas
will be prioritized and
whether outcomes will meet
congressional expectations or
TPA requirements. The debate Debate
over pending ratification of
USMCA may also influence
U.S. approaches to Japan talkstalks with Japan.
Trade Deficit. Among top USTR objectives related to trade
in goods is to “improve the U.S. trade balance and reduce
the trade deficit with Japan.” The focus on deficits, which
presumably will center on autos, is likely to be a source of
tension; Japan and other countries. Economists generally view bilateral
trade imbalances as just one aspect of trade relations and
less an indicator of a trade deficits as driven
by macroeconomic forces, such as aggregate savings rates,
and less as an indicator of a trade relationship’s “fairness.”
PresidentialU.S. Tariff AuthoritiesActions. The March 2018
imposition of U.S.
Section 232 tariffs on Japanese metals
imports steel and aluminum imports
created new uncertainties in the bilateral
relationship.
Unlike other countries, Japan has not filed a
dispute at the
World Trade Organization (WTO), though it
is considering
retaliatory tariffs on U.S. products. While the
Trump Trump
Administration indicated it would hold off on new
tariffs tariffs
against Japanese autos as new trade talks proceed,
the issue
could feature prominently in the negotiations.
For more information, see CRS Report RL33436, JapanU.S. Relations: Issues for Congress.
Cathleen D. Cimino-Isaacs, Analyst in International Trade
and Finance
Brock R. Williams, Specialist in International Trade and
Finance
https://crsreports.congress.gov
IF11120
U.S.-Japan Trade Agreement Negotiations
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