Updated April 26June 5, 2019
U.S.-Japan Trade Agreement Negotiations
Overview
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 long-standinglongstanding U.S.
priority for trade negotiations, in particular following the
2017 U.S. withdrawal from the proposed Trans-Pacific
Partnership (TPP), which included Japanespecially as recent Japanese
trade agreements, including the EU-Japan FTA and the
TPP-11 (the successor to the Trans-Pacific Partnership
(TPP) following U.S. withdrawal), lower Japan’s tariffs on
imports from several countries, placing U.S. exporters at a
disadvantage in the Japanese market. 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 talks.
Japan’s recent free trade agreements (FTAs) with major
non-U.S. trading partners set new rules and lower tariffs
among the parties, disadvantaging U.S. exporters and
further incentivizing U.S. interest in new talks. Japan had
preferred a regional approach to trade negotiations, and
urged the United States to reconsider its TPP withdrawal.
Some suggest Japan became more willing to enter bilateral
talks after President Trump in May 2018 launched a Section
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 2018On May 17, 2019, following an investigation by the U.S.
Department of Commerce, President Trump proclaimed
U.S. motor vehicle and parts imports, particularly from
Japan and the EU, a threat to U.S. national security. This
grants the President the authority to impose import
restrictions under Section 232 of the Trade Expansion Act
of 1962. The President directed the United States Trade
Representative (USTR) to negotiate with Japan (and the
EU) to address this threat and report back within 180 days.
Japan strongly opposed U.S. Section 232 tariffs on imports
of steel and aluminum in place since March 2018, but did
not retaliate against the tariffs, in contrast with several other
U.S. trade partners, including the EU and China. Given that
motor vehicles are the top Japanese export to the United
States, U.S. import restrictions on the sector would likely
create a strong backlash from Japan. President Trump has
stated he is using the threat of auto tariffs to influence
broader U.S.-Japan trade negotiations, but it is unclear what
auto outcomes the President seeks as part of the FTA talks.
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 2018, U.S. exports to Japan totaled
$121.1 billion, with $75.7 billion in goods and $45.4 billion
in services. U.S. imports totaled $179.1 billion, with goods
accounting for the bulk of imports ($144.6 billion), most
notably motor vehicles and parts ($56.0 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 $67.6
billion was the fourth-largest U.S. deficit in 2018, remains a
source of tension, as does the idea that the imbalance stems
in part from various nontariff 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. 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, U.S. negotiating objectives
released in December 2018, as required by TPA, suggested
a broad range of issues would be covered, including trade in
goods, services, investment, intellectual property, stateowned enterprises, and digital trade. USTR indicated that it
may pursue negotiations with Japan in stages, in
consultation with Congress, which would represent a shift
in approach from past U.S. FTAs, which typically involve
one comprehensive negotiation.
U.S. exporters in key sectors such as automobiles,
agriculture, and services have been challenged by
multiple tariff and nontariff 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 exclude the United States and could have significant
implications for U.S. stakeholders. The Japan-led
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U.S.-Japan Trade Agreement Negotiations
Comprehensive and Progressive Agreement for TransPacific Partnership (or TPP-11), which took shape after the
U.S. withdrawal 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 2018, entered into an FTA in February 2019.
U.S. exporters 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, threaten U.S. export competitiveness. New rules
in the FTAs have also led to concerns that they may not
reflect U.S. priorities. E-commerce provisions in the EUJapan FTA, for example, do not cover the free flow of data,
unlike the recently negotiated U.S.-Mexico-Canada
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
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 is
a major priority for U.S. industry. In 2018, Japan was the
fourth-largest U.S. agriculture market, with exports of
$12.9 billion. Japan’s import sensitivities, however, may
limit its concessions to those provided in TPP-11
(considered Japan’s most ambitious commitments to date).
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 top U.S.
imports from Japan (more than one-third of all goods
imports); (2) despite being the third-largest world auto
market, Japan imports few U.S.-made autos ($2.4 billion in
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) supports nearly
350,000 direct and indirect U.S. jobs, per the Japan
Automobile Manufacturers Association.
Japan has no auto tariffs, but U.S. industry argues that
nontariff barriers, including discriminatory regulatory
treatment, disadvantage U.S. sales. Japanese stakeholders
counter that failure by U.S. industry to adjust to its market
characteristics is to blame. TPP included commitments on
nontariff issues, but arguably, the most significant
provisions affecting auto trade were the 25- and 30-year
phaseout 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 new talks include market access outcomes that
will increase U.S. auto production and employment.
Establishing auto rules of origin in the agreement may be a
challenge given extensive U.S. supply chain 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 U.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, 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 rules in the new
talks may be a negotiating priority for the United States.
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
DepartmentDepartment
of the Treasury’s currency monitoring list due to its large trade
trade and current-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 “early achievements,”
while USTR’s objectives suggest talks aim to cover a broad
agenda. The possibility that talks possibility that talks
may proceed in stages
raises questions for U.S. stakeholders regarding what areas
will be prioritized and whether outcomes will meet
congressional expectations or TPA requirements. Debate
over pending ratification of USMCA may also influence
U.S. approaches to talks 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
Trade Deficit. The Administration’s focus on deficits, which
which presumably will center on autos, is likely to be a
source of
tension. Economists generally view trade deficits
as driven
by macroeconomic forces, such as aggregate savings rates,
and less as an indicator of a trade relationship’s “fairness.”
U.S. Tariff Actions. The March 2018 imposition of U.S.
Section 232 tariffs on Japanese 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
Administration indicated it would hold off on new tariffs
against Japanese autos as new trade talks proceed, the issue
could feature prominently in the negotiations
of a trade relationship’s “fairness.”
U.S. Tariff Actions. President Trump’s declaration under
Section 232 that motor vehicle imports threaten U.S.
national security and its emphasis on “American owned”
production facilities is strongly opposed by Japanese auto
firms, which have invested more than $50 billion dollars in
the United States supporting 170,000 U.S. jobs, according
to data from the Bureau of Economic Analysis. It also
raises questions over the definition of national security and
congressional intent for the President’s use of Section 232.
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
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IF11120
U.S.-Japan Trade Agreement Negotiations
IF11120
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