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U.S.-Japan Trade Agreement Negotiations

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Updated June 5September 12, 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 longstandinglong-standing U.S. priority for trade negotiations, especially 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. On 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.. In August, President Trump and Prime Minister Abe announced they reached an agreement on “core principles” of a trade agreement covering agricultural market access, some industrial goods tariffs, and rules on digital trade. Both sides have released few details on the exact terms, but indicate they aim to finalize and sign the deal by late September. The announced deal reportedly does not cover trade commitments on motor vehicles, a long-standing area of bilateral tension. President Trump has stated he is using the threat of increased U.S. auto tariffs to influence the broader negotiations. On May 17, 2019, following a Section 232 investigation by the U.S. Department of Commerce, President Trump proclaimed motor vehicle and parts imports, particularly from Japan and the European Union (EU), a threat to U.S. national security. This grants the President the authority to impose import restrictions. The President directed the U.S. 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. 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. 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 at $125.5 billion in 20172018, concentrated in finance and insurance ($64.1 billion). insurance. Japanese FDI stock in the United States totaled $469.1 484.4 billion in 20172018, 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 view by some observers 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 opennessU.S., and a shift in U.S. focus to concerns 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 remainswas unclear from the onset, in , in part due to differing characterizations by the two sides. Prime Minister Abe Both sides appear to prioritize quick results over a more comprehensive negotiation. Prime Minister Abe initially referred to the talks as goodsonlygoods-only negotiations, differing from other comprehensive Japanese FTAs. Meanwhile, U.S. negotiating objectives released in December 2018, as required by TPA, suggested suggested a broad range of issues would be covered, including trade in goods, services, investment, intellectual property, stateownedstate-owned 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 in stages, however, in consultation with Congress. This would depart from past U.S. FTA practice, which typically involves one comprehensive negotiation. 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 https://crsreports.congress.gov U.S.-Japan Trade Agreement Negotiations Comprehensive and Progressive Agreement for TransPacificTrans-Pacific 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 EU and Japan entered into an FTA in February 2019: these two trading partners accounted for more than one-quarter of total 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 and nontariff barriers on imports https://crsreports.congress.gov U.S.-Japan Trade Agreement Negotiations from TPP-11 and EU countries, particularly on agricultural products 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 reflect U.S. priorities. E-commerce provisions in the EUJapan EU-Japan FTA, for example, do not cover the free flow of data, unlike the recently negotiated unlike the proposed 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-subsidizationcrosssubsidization of express delivery services by monopoly postal services (e.g., Japan Post). Key Sectors and Potential Provisions AgricultureAnnounced Agreement in Principle USTR specified that the agreement covers market access in agriculture and some industrial goods, and digital trade. Market Access in Agriculture and Goods 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 AssociationFrom the onset of negotiations, Japan stated its plans to limit additional agriculture market access to offers in existing FTAs, including the TPP-11. According to USTR Lighthizer, the announced agreement will “open up markets to over $7 billion” of U.S. agricultural exports, and “lead to substantial reductions in tariffs and nontariff barriers,” benefiting various products, including beef, pork, wheat, dairy, wine, and ethanol. Few details were offered on the specific tariff reductions for industrial goods, but USTR confirmed U.S. auto tariffs are not included. Rules on Digital Trade On digital trade, an area in which the two countries have largely similar goals, Lighthizer referred to the announced agreement as a “gold standard.” Many observers expect the terms to largely reflect the content of the TPP-11 and proposed USMCA. Key provisions in those agreements included prohibition of localization barriers in the digital space and commitments on cross-border data flows. Other Potential Provisions U.S. negotiating objectives include several other issues of importance to the U.S.-Japan trade relationship. It is unclear to what extent these may be subject to future negotiations. Motor Vehicles The announced deal reportedly does not cover trade commitments on autos or address pending U.S. Section 232 tariffs. Following the announcement, President Trump indicated that he is not considering increased tariffs “at this moment.” 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 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 FDI in U.S. production facilities ($51 billion in 2018, one-third of Japan’s FDI in U.S. manufacturing, 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 autosautos trade deficit 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 it difficult to enter segments of the Japanese market and argue argue that Japan confers preferential treatment on insurance and and express delivery subsidiaries of Japan Post, the stateowned postal service and one of Japan’s largest banks and insurers. Several TPP . Several TPP provisions were designed to level the playing field for services suppliersaddress such concerns, 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. Department of the Treasury’s currency monitoring list. due to its large 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 possibility that talks may proceed in stages raises questions regarding what areas will be prioritized and whether outcomes will meet congressional expectations or TPA requirements. Trade Deficit. The Administration’s focus on deficits, which presumably will center on autos, is likely to be a source of tension. Economists generally view trade deficits as driven by macroeconomic forces and less as an indicator 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 declaration on currency). Issues for Congress Scope and TPA. As the agreement takes shape, there are questions regarding what areas will be prioritized, what areas may be subject to future talks, and if outcomes will meet TPA and congressional requirements. Chairman Grassley of the Senate Finance Committee has stated the agreement is not likely to require congressional action given certain delegated presidential tariff authorities, but other Members have raised questions about the appropriate congressional role. In reaction to the announced agreement, U.S. businesses advocated for continued progress toward a broader, comprehensive deal with Japan, similar to past U.S. FTAs. A narrow agreement could potentially violate the World Trade Organization (WTO) provision that requires FTAs cover “substantially all trade.” U.S. Tariff Actions. The President’s declaration that auto imports threaten U.S. national security and the emphasis on “American-owned” production facilities is opposed by Japanese firms, which have significant U.S. investments supporting 170,000 U.S. jobs, according to the BEA. 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 https://crsreports.congress.gov U.S.-Japan Trade Agreement Negotiations IF11120 Brock R. Williams, Specialist in International Trade and Finance Disclaimer This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you wish to copy or otherwise use copyrighted material. https://crsreports.congress.gov | IF11120 · VERSION 57 · UPDATED