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
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