Updated October 3, 2019January 16, 2020
U.S.-Japan Trade Agreement Negotiations
Overview
On 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 October 7, 2019, after six months of formal
negotiations, the United States and Japan signed two
agreements intended to liberalize bilateral trade. The U.S.Japan Trade Agreement (USJTA) provides for limited tariff
reductions and quota expansions to improve market access.
The U.S.-Japan Digital Trade Agreement covers rules on
digital aspects of international commerce. The agreements,
which took effect on January 1, 2020, without formal action
by Congress, constitute what the Trump and Abe
Administrations envision as “stage one” of a broader U.S.Japan trade agreement, with future negotiations expected in
coming months. The Administration used delegated tariff
authorities in Trade Promotion Authority (TPA) to proclaim
the USJTA provisions, while the digital trade agreement,
which did not require changes to U.S. law, was treated as an
Executive Agreement.
The size of the bilateral goods trade deficit, which at $68
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 United States, and a shift in U.S.
focus to concerns over trade with China. The Trump
Administration has renewed focus on the trade deficit.
Figure 1. Top U.S. Trade Partners, 2018
As the fourth-largest U.S. trade partner, Japan is a high
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 agreementThe USJTA does not include trade
commitments on motor
vehicles, a long-standing area of
bilateral tension. On May 17, In May
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. ThisSuch action 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 import restrictions, but some
analysts question whether that authority has now expired.
USJTA does not address potential Section 232 tariffs, but
USTR Lighthizer stated that the Administration has no
intent, “at this point,” to pursue additional Section 232
restrictions on autos. Japan strongly opposed U.S. Section
232 tariffs on imports of steel and aluminum in place since
March 2018, but did not retaliate, unlike other U.S. trade
partners. Alleviating the auto tariff threat was a key
objective of Japan in the trade 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
$75.776 billion in goods and $45.4 billion in services. U.S.
imports totaled $179.1 billion, with goods accounting for
the the
bulk of imports ($144.6 billion), most notably motor
vehicles vehicles
and parts ($56.0 billion). The stock of U.S. foreign
direct 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 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
manufacturing accounting for the largest share.
Source: CRS with data from Bureau of Economic Analysis (BEA).
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 nearly 30% of total U.S.
trade in 2018. U.S. exporters raise concerns that Japan’s
reduced tariffs and nontariff barriers on imports from TPP11 and EU countries, particularly on agricultural products,
such as Japan’s relatively high 38.5% beef tariff, threaten
U.S. export competitiveness—Japan’s tariff reductions in
USJTA help alleviate such concerns. New rules in the FTAs have
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 cross-subsidization of express delivery
services by monopoly postal services (e.g., Japan Post).
https://crsreports.congress.gov
U.S.-Japan Trade Agreement Negotiations the original TPP text.
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
https://crsreports.congress.gov
U.S.-Japan Trade Agreement Negotiations
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 insecond stage
talks as early as May 2020, but specific issues to be covered
remain unclear. Several Members of Congress, U.S.
businesses and stakeholders strongly advocate for a more
comprehensive deal, while other stakeholders question
whether there will be sufficient political momentum in both
countries to make progress in future talks.
Analysts also question the extent to which the limited deal
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 autos. Congress has historically taken issue
with other countries’ partial scope agreements, advocating
for better adherence to Article XXIV within 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. According 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, USTR referred to the agreement as a
“gold standard” 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
The two agreements in the “stage one” deal cover some
industrial goods and agricultural trade and cross-border
digital trade. Neither includes a formal dispute settlement
mechanism to enforce commitments.
U.S.-Japan Trade Agreement (USJTA)
The USJTA commitments cover about $14.4 billion ($7.2
billion each of U.S. imports and exports) or 5% of bilateral
trade. The United States agreed to reduce or eliminate 241
tariffs on mostly industrial goods, including machine tools,
fasteners, steam turbines, bicycles and parts, and musical
instruments, and certain niche agricultural products, such as
green tea. The U.S. will also expand its global tariff-rate
quota for beef imports. Japan agreed to reduce or eliminate
tariffs on about 600 agricultural tariff lines, such as beef,
pork, and cheese, and expand preferential tariff-rate quotas
for a limited number of U.S. products, such as wheat.
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
third-largest U.S. agriculture market, with exports of $12.9
billion. While U.S. industry generally supports the USJTA,
certain sectors, including dairy and rice expressed concerns
about the extent of new market access or lack of attention to
other key issues, such as geographical indications (GIs) and
sanitary and phytosanitary standards (SPS), which are areas
typically covered in comprehensive U.S. FTAs.
U.S.-Japan Digital Trade Agreement
On digital trade, an area in which the two countries have
similar goals, USTR sees the agreement as “comprehensive
and high standard” in line with rules set by the USMCA.
Provisions include non-discriminatory treatment, and
commitments to prohibit or limit data localization barriers,
restrictions on cross-border data flows, and transfer of
source code or algorithms as conditions of market access.
Potential 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 (valued at $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 future talks may
be a negotiating priority for the United States.
Currency
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. Japan has not intervened
directly in foreign exchange markets since 2011, but
remains on the U.S. Department of the Treasury’s currency
monitoring list. USMCA includes the first-ever U.S. FTA
commitments on exchange rates and could serve as a
template in the next stage of Japan talks.
Issues for Congress
The Administration’s decision to pursue a limited scope
trade agreement
with Japan in stages, while considering
and enact the limited “stage one”
agreements without the approval of Congress, 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 the agreements compare with the TPP, and how
has U.S. TPP withdrawal affected U.S. economic and
strategic interests in Japan and the Asia-Pacific?
How do U.S. auto imports threaten national security?
For more information, see CRS Report RL33436, JapanU.S. Relations: Issues for Congress.
R46140, “Stage
One” U.S.-Japan Trade Agreements.
https://crsreports.congress.gov
U.S.-Japan Trade Agreement Negotiations
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
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