Updated September 12October 3, 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-standing U.S.
priority for trade negotiations, especially as recent Japanese
trade agreements, including the EU-Japan FTA and the
TPP-11 (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 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 JapanOn September 25, 2019, President Trump and Prime
Minister Abe announced they had finalized a limited
bilateral trade agreement consisting of tariff cuts on
agricultural and industrial goods and commitments on
digital trade. The two sides stated their intent to begin
negotiations on a more comprehensive deal after this initial
agreement enters into force. Congress will likely not have a
formal role in approving the “first stage” agreement, as the
Trump Administration intends to use delegated tariff
proclamation authorities in Trade Promotion Authority
(TPA) legislation to enact the agreed-upon tariff changes,
while the digital trade commitments are to take the form of
an Executive Agreement. Japan’s Diet, however, will have
to ratify the agreement before it can enter into force. The
Administration expects the agreement to take effect on
January 1, 2020. As the fourth-largest U.S. trade partner,
Japan is a priority for U.S. trade negotiations, especially as
recent Japanese free trade agreements (FTAs), including
with the European Union (EU) and the TPP-11 (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.
Notably, the limited agreement does not include trade
commitments on motor vehicles, a long-standing area of
bilateral tension. On May 17, 2019, following an
investigation by the U.S. Department of Commerce under
Section 232 of the Trade Expansion Act of 1962, President
Trump proclaimed 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. 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. USTR Lighthizer stated that in light of the new
agreement, the Administration has no intent, “at this point,”
to pursue additional Section 232 U.S. auto import
restrictions. 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. Alleviating the auto
tariff threat was a key objective of Japan in the recent 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 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 $125.5
billion in 2018, concentrated in finance and insurance.
Japanese FDI stock in the United States totaled $484.4
billion in 2018, with manufacturing accounting for the
largest share.
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 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 1990s, dissipating over the past two decades
in the face of Japan’s domestic economic challenges, major
Japanese investment in the U.S.United States, and a shift in U.S.
focus to
concerns over trade with China. The Trump
Administration,
however, has renewed 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 was unclear from the
onset, in part due to differing characterizations by the two
sides. Both sides appear to prioritize quick results over a
more comprehensive negotiation. Prime Minister Abe
initially referred to the talks as goods-only negotiations,
differing from other comprehensive Japanese FTAs.
Meanwhile, U.S. negotiating objectives released in
December 2018 suggested a broad range of issues would be
covered, including trade in goods, services, investment,
intellectual property, state-owned enterprises, and digital
trade. USTR indicated that it may pursue negotiations with
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 ratified two major FTAs, which exclude the
United States and could have significant implications for
U.S. stakeholders. The Japan-led Comprehensive and
Progressive Agreement for Trans-Pacific Partnership (or
TPP-11), which took shape after U.S. withdrawal from
TPP, entered into force at the end of 2018. Meanwhile, the
EU and Japan entered into an FTA in February 2019: these
two trading partners accounted for more than one-quarter of
nearly 30% of total U.S.
trade in 2018. U.S. exporters raise concerns that
Japan’s
reduced tariffs and nontariff barriers on imports
https://crsreports.congress.gov
U.S.-Japan Trade Agreement Negotiations
from TPP-11 from TPP11 and EU countries, particularly on agricultural
products,
such as Japan’s relatively high 38.5% beef tariff,
threaten 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 EU-Japan
FTA, for example,
do not cover the free flow of data, 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 crosssubsidizationcross-subsidization of express delivery
services by monopoly
postal services (e.g., Japan Post).
Announced 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 Goodshttps://crsreports.congress.gov
U.S.-Japan Trade Agreement Negotiations
Scope of U.S.-Japan Negotiations
The Administration’s decision to pursue negotiations with
Japan in stages is a departure from past U.S. FTA practice,
which typically involves one comprehensive negotiation.
U.S. negotiating objectives released in December 2018, as
required by TPA, suggested a broad range of issues would
be covered in addition to tariffs and digital trade, including
services, investment, intellectual property, and state-owned
enterprises. The two countries aim to begin the second stage
of talks within four months after entry into force of the
initial agreement. U.S. businesses advocate for continued
progress toward a more comprehensive deal with Japan,
while other stakeholders question whether there will be
sufficient political momentum in both countries to make
progress in future talks. Several analysts also question the
extent to which the limited agreement adheres to Article
XXIV of the General Agreement on Tariffs and Trade
(GATT) under the WTO that requires FTAs cover
“substantially all trade,” in particular given the exclusion of
auto trade. Congress has historically taken issue with other
countries’ partial scope agreements, advocating for better
adherence to Article XXIV, including in legislation.
Though adherence to Article XXIV has rarely been
challenged at the WTO, whether or not the U.S.-Japan deal
violates the letter or spirit of this WTO requirement likely
depends on the timeline and scope of next stage talks.
Initial Trade Agreement Provisions
The text of the initial agreement has not yet been released,
but according to official statements, it covers agricultural
and industrial goods market access and digital trade.
Market Access for 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. From 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 confirmedAccording to USTR, the agreement will lead
to “substantial market access” for over $7 billion of U.S.
agricultural exports through reduced or eliminated tariffs
and U.S.-specific quotas, benefiting various products,
including beef, pork, wheat, cheese, and wine. The
agreement is also to include U.S. tariff reductions for
certain niche products such as cut flowers, persimmons, and
green tea, and modifications to the U.S. global tariff rate
quota for beef. While U.S. industry generally supports the
agreement, certain sectors including dairy and rice
expressed concerns about the extent of new market access
or the lack of attention to other key issues, such as
geographical indications (GIs) and sanitary and phytosanitary standards (SPS), which are among the areas
typically covered in comprehensive U.S. FTAs.
Market Access for Industrial Goods
USTR stated that the agreement includes U.S. tariff cuts on
machine tools, fasteners, steam turbines, bicycles and parts,
and musical instruments. 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, LighthizerUSTR 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” that meets the rules set by the proposed
USMCA. Key provisions include prohibition of localization
barriers in the digital
space and commitments on
nondiscriminatory treatment and 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 autos trade deficit and noted that U.S. goals in
the talks include market access outcomes that will increase
U.S. auto production and employmentPotential Provisions in Future Talks
Motor Vehicles
Autos and parts account for more than one-third of U.S.
imports from Japan, and a reduction of U.S. 2.5% and 25%
car and light truck tariffs, respectively, is likely to be a
primary Japanese goal in next stage talks. Japan has no auto
tariffs, but imports few U.S.-made autos ($2.4 billion in
2018). U.S. industry argues this stems from nontariff
barriers, including discriminatory regulatory treatment,
while Japan argues that U.S. producers’ inability to cater to
the Japanese market is to blame. President Trump has
repeatedly flagged the U.S. autos trade deficit and noted
that U.S. goals in trade talks include market access
outcomes that will increase U.S. auto production and
employment. While Japan buys few U.S. cars, Japanese
FDI in U.S. production facilities ($51 billion in 2018)
supports 170,000 U.S. jobs, according to the BEA.
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). 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, the stateowned postal service and one of Japan’s largest banks and
insurers. Several TPP provisions were designed to address
such concerns, and crafting similar rules in thefuture talks may be
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. 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 intervened
directly in foreign exchange markets since 2011,
Japan but
remains on the U.S. Department of the Treasury’s
currency currency
monitoring list. 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).
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.
template in the Japan talks.
Issues for Congress
The Administration’s decision to pursue a limited scope
trade agreement with Japan in stages, while considering
U.S. tariff actions under Section 232, raises a number of
questions for Congress including:
What areas should USTR prioritize in future talks?
Do negotiated outcomes adhere to TPA requirements?
What role should Congress play in limited agreements?
Will a limited agreement make it easier or more difficult
to address future bilateral trade liberalization?
How do U.S. auto imports threaten national security?
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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