Order Code RL32649
CRS Report for Congress
Received through the CRS Web
U.S.-Japan Economic Relations:
Significance, Prospects, and Policy Options
Updated August 30, 2006
William H. Cooper
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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U.S.-Japan Economic Relations:
Significance, Prospects, and Policy Options
Summary
Japan and the United States are the two largest economic powers. Together they
account for over 40% of world domestic product, for a significant portion of
international trade in goods and services, and for a major portion of international
investment. This economic clout makes the United States and Japan powerful
actors in the world economy. Economic conditions in the United States and Japan
have a significant impact on the rest of the world. Furthermore, the U.S.-Japan
bilateral economic relationship can influence economic conditions in other countries.
The U.S.-Japan economic relationship is very strong and mutually
advantageous. The two economies are highly integrated via trade in goods and
services — they are large markets for each other’s exports and important sources of
imports. More importantly, Japan and the United States are closely connected via
capital flows. Japan is the largest foreign source of financing of the U.S. national
debt and will likely remain so for the foreseeable future, as the mounting U.S. debt
needs to be financed and the stock of U.S. domestic savings remains insufficient to
meet the demand. Japan is also a significant source of foreign private portfolio and
direct investment in the United States, and the United States is the origin of much of
the foreign investment in Japan.
The relative significance of Japan and the United States as each other’s
economic partner has diminished somewhat with the rise of China as an economic
power, and with U.S. economic ties with Canada and Mexico deepening as a result
of the North American Free Trade Agreement (NAFTA). Nevertheless, analyses of
trade and other economic data suggest that the bilateral relationship remains
important, and policy leaders of both countries face the challenge of how to manage
it.
During the last decade policy leaders seem to have made a deliberate effort to
drastically reduce the friction that prevailed in the economic relationship. On the one
hand, this calmer environment has stabilized the bilateral relationship and permitted
the two countries to focus their attention on other issues of mutual interest, such as
national security. On the other hand, as some have argued, the friendlier environment
masks serious problems that require more attention, such as continuing Japanese
failure to resolve long-standing market access barriers to U.S. exports of autos and
auto parts and flat glass and the failure of the two countries to reduce bilateral trade
imbalances. Failure to resolve any of these outstanding issues could cause heightened
friction between the two countries.
U.S. and Japanese leaders have several options on how to manage their
relationship including stronger reliance on the World Trade Organization; special
bilateral negotiating frameworks and agreements; or a free trade agreement. Each
option has its advantages and drawbacks and they are not necessarily mutually
exclusive. This report will be updated as events warrant.

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Contents
An Overview of U.S.-Japan Economic Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Japanese and U.S. Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
U.S.-Japanese Trade in Goods and Services . . . . . . . . . . . . . . . . . . . . . . . . . 3
U.S.-Japan Bilateral Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Bilateral Economic Relationship and Shifting U.S. and Japanese
Policy Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Bilateral Negotiating Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Negotiating Precedents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Bush Administration’s Economic Partnership . . . . . . . . . . . . . . . . . . . 11
The WTO Dispute Settlement Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . 11
Issues and Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Product-Specific Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Market Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Overarching Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
U.S. Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Japan’s Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Issues and Disputes in the WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Apples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Byrd Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Doha . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Prospects and Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
WTO Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Special Frameworks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Appendix A: Managing the U.S.-Japan Economic Relationship — A Brief
History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
List of Tables
Table 1. Key Comparative Economic Indicators for the United States and
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2. U.S. Merchandise Trade with Japan, 1997-2005 . . . . . . . . . . . . . . . . . . 3
Table 3. U.S. Trade in Services with Japan, 1997-2005 . . . . . . . . . . . . . . . . . . . . 5
Table 4. U.S.-Japanese Foreign Direct Investment (FDI) Positions, 1996-2004 . . 5

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U.S.-Japan Economic Relations:
Significance, Prospects, and Policy Options
Japan and the United States are the two largest economic powers. Together they
account for over 40% of world domestic product. This economic clout makes the
United States and Japan powerful forces by which they affect each other’s economic
conditions and the conditions of other countries. Economic conditions in the United
States and Japan have a significant impact on the rest of the world. Furthermore, the
U.S.-Japan bilateral economic relationship itself can influence economic conditions
in other countries.
The shape and tone of the U.S.-Japan bilateral relationship has changed
recently, with relations very tense during some periods and calm during others. The
means and manner by which the United States and Japan have managed their
economic relationship has also changed over time. Yet, the two countries remain
very important economic partners, accounting for significant shares of each other’s
foreign trade and investment, even though their relative significance has declined.
Thus, the U.S.-Japan economic relationship is important to U.S. national
interests and to the U.S. Congress. It has been the subject of oversight hearings and
trade legislation, and the Congress plays a critical role in shaping U.S. economic
policy toward Japan. To assist the Congress in fulfilling its responsibilities, this
report explores: (1) the significance and state of U.S.-Japan economic ties; (2) how
the ties have changed over time, (3) the possible options for managing the
relationship might be.
An Overview of U.S.-Japan Economic Trends
The U.S. and Japanese economies remain closely intertwined through trade and
capital flows. U.S. and Japanese political leaders have not always given U.S.-Japan
relationship the priority commensurate with its economic importance; nevertheless,
the data and other indicators suggest that the relationship bears attention.
The Japanese and U.S. Economies
The U.S. and Japanese economies are in some respects very similar. They are
large industrialized economies that have provided their residents with a high standard
of living. However, as Table 1 points out, they are very different in some critical
ways. The U.S. economy is roughly 2½ times larger than Japan’s both on a nominal

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CRS-2
and purchasing power parity (PPP) basis.1 The Japanese standard of living is slightly
lower than the U.S. standard of living measured on a nominal per capita/GDP basis
and even lower when measured on a PPP per capita/GDP basis. (The latter
measurement reflects the high cost in Japan for food, fuel and other basic necessities
compared to the United States.) Japan has also endured slow economic growth or
even recessions during the past decade while U.S. economic growth has been
generally robust. The U.S. average annual GDP growth rate during the last ten years
has been almost 3 times that of Japan’s. Exports are more important to the Japanese
economy than are imports as measured as ratios to GDP, while the opposite is the
case for the U.S. economy. The United States continually incurs current account
deficits, while Japan earns current account surpluses.
Furthermore, Japan has continually exceeded the United States in terms of
savings. The gross national savings rate in Japan is more than 2 ½ times that of the
United States (27.2% vs. 10.3%). Many economists consider the strong propensity
to save in Japan relative to the United States as the primary reason why the United
States has incurred current account trade deficits with Japan for many years, and why
Japan continues to be a major net creditor while the United States is a net debtor. At
the same time, Japan has built up a huge volume of public debt, and its debt burden
as a ratio of GDP is more than twice that of the United States. Japan’s public debt
has soared in the last decade as it has attempted to stimulate growth with extra
government spending.
Table 1. Key Comparative Economic Indicators
for the United States and Japan
Japan
United States
GDP (2005)
-Nominal (billions of $U.S.)
4,560
12,487
-PPP (billions of $U.S.)
3,879
12,487
Per Capita GDP (2005)
-Nominal
35,773
42,129
-PPP (U.S. Dollars)
30,433
42,129
Real GDP Growth Rates (2005)
2.6%
3.5%
Average Annual Real GDP Growth Rate
(1996-2005)
1.2%
3.3%
Exports as % GDP (2005)
14.3%
10.4%
Imports as % GDP (2005)
12.9%
16.2%
Current Account Balance as % of GDP (2005)
3.6%
-6.4%
Gross National Savings Rate (2005)
26.9%
10.4%
Recorded Unemployment Rates (2005)
4.4%
5.1%
Public Debt/GDP (2005)
158.0%
37.4%
Source: Economist Intelligence Unit
1 Purchasing power parity (PPP) measurements are the value of foreign currencies in U.S.
dollars based on the actual purchasing power of such currency. The PPP exchange rate is
then used to convert foreign economic data in national currencies into U.S. dollars.

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U.S.-Japanese Trade in Goods and Services
U.S.-Japanese bilateral trade in goods and services has grown over time,
although recently the level of bilateral trade turnover has plateaued. As Table 2
shows, U.S.-Japan total trade in goods attained a record level in 2000 but has
declined since then. U.S. exports to Japan dropped about 21% from $64.9 billion in
2000 to $51.4 billion in 2002, but have been increasing since then. U.S. imports
have increased recently from $118.0 billion in 2003 to $138.1 billion in 2005.
U.S. imports from Japan are concentrated within three main categories. About
75% of those imports in 2005 consisted of passenger cars and parts; computers and
components; office machinery parts; and electrical machinery (primarily video
cameras). U.S. exports to Japan are much more diverse, but a major portion of those
exports are in computers and components; gas turbines (turbojets, turbo-propellers,
etc); office machinery parts; electrical machinery (integrated circuits and electrical
apparatus for line telephone systems); optical and medical equipment; and
agricultural products such as wheat and meat.
Table 2. U.S. Merchandise Trade with Japan, 1997-2005
(billions of $ U.S.)
Year
U.S. Exports
U.S. Imports
Trade Turnover
U.S. Balances
1997
65.5
121.7
187.2
-56.1
1998
57.9
122.0
179.9
-64.1
1999
57.5
131.4
188.9
-73.9
2000
64.9
146.5
211.4
-81.6
2001
57.5
126.5
184.0
-69.0
2002
51.4
121.4
172.8
-70.0
2003
52.1
118.0
170.1
-66.0
2004
54.4
129.6
184.0
-75.2
2005
55.4
138.1
193.5
-82.7
Source: U.S. Department of Commerce, Bureau of the Census.
Although U.S.-Japan bilateral trade remains large, the importance of the United
States and Japan as their respective trade partners has been diminishing. In 1996,
Japan accounted for 10.8% of U.S. exports and was the second largest (next to
Canada) U.S. export market. By 2004, Japan accounted for 6.6% of U.S. exports and
had declined to the third largest U.S. export market (behind Canada and Mexico).
In 1996, Japan accounted for 14.5% U.S. imports and was the second largest (next
to Canada) source of U.S. imports. However, by 2004, it accounted for 8.8% and
declined to the fourth largest source behind Canada, China, and Mexico.
As late of as 2001, the United States was the largest source of Japanese imports,
accounting for 18.1%, but slipped to second place behind China since 2003. The

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CRS-4
United States has been and remains Japan’s most important export market. The
relative shares and rankings of countries in export and import markets of trading
partners have little significance in economic terms but often influence the shape and
management of trade policies.

The emergence of China and other East Asian countries has played a role in the
declining significance of the United States in Japan’s trade. In the last decade,
Japanese trade flows have shifted decidedly towards East Asia from the United
States. In 1994, 38.6% of Japanese exports went to and 33.0% of Japanese imports
came from ten of the largest economies in East Asia.2 By 2003, 44.9% of Japanese
exports and 42.4% of Japanese imports were with the ten countries of East Asia.
China is the fastest growing Japanese trade partner. China accounted for 67.8% of
the increase in total Japanese exports and 41.1% of the increase in total Japanese
imports between 2002 and 2003.3
Similarly, the geographic pattern of U.S. trade has shifted. Mexico and, to a
lesser degree, China have surpassed Japan in U.S. trade as noted above.
U.S.-Japan trade in services has increased, at least on the U.S. import side,
although it remains relatively modest.4 (See Table 3.) The United States exports a
variety of services to Japan in the form of travel services, passenger fares, and “other
transportation;” royalties and licensing fees; and other private services. U.S. imports
of services from Japan consisted mostly of transportation other than passenger fees,
royalties and licensing fees, and other private services. The United States has
realized surpluses in its bilateral trade in services with Japan, but those surpluses
have been declining.
2 China, Hong Kong, Indonesia, South Korea, Malaysia, Phillippines, Singapore, Thailand,
and Taiwan.
3 CRS calculations based on data found in World Trade Atlas trade data base. Global Trade
Information Services, Inc. Washington, D.C.
4 The data capture “cross-border” trade in services. Because they are intangible, most
services are bought and sold where the buyer and seller are located in close proximity, for
example, sold by a foreign-owned company in the country of the buyer. The data, therefore,
under report the volume of trade in services.

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CRS-5
Table 3. U.S. Trade in Services with Japan, 1997-2005
(billions of $ U.S.)
Year
U.S. Exports
U.S. Imports
Trade Turnover
U.S. Balances
1997
34.3
14.9
49.2
19.4
1998
30.7
14.8
45.5
15.9
1999
31.9
17.4
49.3
14.5
2000
33.7
18.8
52.5
14.9
2001
30.5
18.0
48.5
12.5
2002
30.4
18.9
49.3
11.5
2003
30.1
20.0
50.1
10.2
2004
36.0
21.3
57.3
14.8
2005
42.5
23.8
66.3
18.7
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
U.S.-Japan Bilateral Investment
Along with trade in goods and services, foreign direct (investments in
manufacturing facilities, businesses, and real estate) and portfolio investments
(investments in government securities, corporate stocks and bonds, and bank
deposits) between residents of the United States and Japan also define the economic
relationship. The value of portfolio and direct investments between the United States
and Japan exceeds the value of trade in goods and services. In addition, investments,
particularly foreign direct investments (Table 4) signify a long-term financial
commitment on the part of the investor.
Table 4. U.S.-Japanese Foreign Direct Investment (FDI)
Positions, 1996-2004
Historical-Cost Basis
(billions of $ U.S.)
Japanese FDI in U.S.
U.S. FDI in Japan
1996
116.1
34.6
1997
125.0
33.9
1998
134.3
41.4
1999
153.8
55.1
2000
159.7
57.1
2001
150.0
58.2
2002
152.0
65.7
2003
160.5
68.1
2004
176.9
80.2
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
Note: Figures are cumulative FDI.

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CRS-6
Foreign direct investment (FDI) consists of investments in real estate,
manufacturing plants, and retail facilities, in which the foreign investor owns 10%
or more of the entity. FDI can be new establishments or mergers with or acquisitions
of already established locally based enterprises. Investors seek to take advantage of
skilled labor or other resources of the local economy, to produce goods or services
tailored to the local market, to avoid foreign trade barriers, and for other reasons.
The United States has consistently been the largest source of FDI in Japan.
From 1996 to 2004, U.S. FDI in Japan more than doubled, albeit from a low base of
$34.6 billion to $80.2 billion. The sharp increase in investments was largely the
result of acquisitions by U.S. firms of Japanese entities that were facing bankruptcy,
rather than investments. However, $80.2 billion in U.S. FDI in Japan in 2004, pales
in comparison to U.S. FDI in some other, smaller, fully industrialized countries. For
example, U.S. FDI in 2004 totaled $201.9 billion in the Netherlands and $302.5
billion in the United Kingdom.5 The Japanese economy has been relatively “closed”
to foreign investment, and the level of foreign direct investment in Japan consistently
ranks among the lowest of industrialized countries.
Over the years, Japanese investors have established a strong presence in the
United States. Japanese FDI in the United States surged in the 1980s and continued
to increase in the 1990s. In the 1980s, Japanese investors acquired such high-profile
U.S. assets as Columbia Pictures, Rockefeller Center, and Pebble Beach Golf Course.
These investments followed surges in Japanese investments in the United States by
Japanese consumer electronics firms and auto producers. (Many of these acquisitions
were not profitable for Japanese investors.) The rapid increase of the investments
and their high visibility generated concerns in the United States of Japan “buying up
the United States.” By 2000, the level of Japanese FDI in the United States rose to
$159.7 billion but declined to $152.0 billion by 2002. In 2002, Japanese majority
owned affiliates in the United States employed 697,000 U.S. workers.6
Japan’s relative importance to the United States as a source of FDI has declined
markedly in recent years. In the 1980s, Japan became the largest source of FDI in
the United States surpassing the United Kingdom, the traditional leader. By 2002,
Japan had dropped to the fourth largest source of FDI far behind the United Kingdom
and France, and slightly behind the Netherlands ($154.8 billion). However, in 2004,
its ranking reached number 2 behind the United Kingdom.7
In addition to foreign direct investment, substantial amounts of capital flow
between the United States and Japan in the form of portfolio investments. At the end
of 2004 , U.S. investors held $333.3 billion in Japanese corporate stocks and $25.1
billion in Japanese bonds. Japanese investors held $178.3 billion in U.S. corporate
stocks and $215.6 billion in U.S. corporate bonds.8
5 U.S. Department of Commerce, Bureau of Economic Analysis.
6 Ibid.
7 Ibid.
8 Survey of Current Business. July 2005, p. 32-35.

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CRS-7
Japanese investors are by far the leading foreign holders of U.S. Treasury
securities that finance the U.S. national debt, and their importance has soared over
the last few years. By the end of April 2006, Japanese residents held $639.2. billion
in U.S. securities, or and more than the amount held by residents of Mainland China
($323.2 billion) and the United Kingdom ($166.8 billion).9 Japanese holdings of
U.S. Treasury securities are especially important, and underscore the debtor/creditor
link between the United States and Japan. As the U.S. government continues to
incur budget deficits and maintains a low national savings rate, the United States has
had to rely increasingly on foreign creditors to finance the rising national debt. This
has some potentially problematic implications for U.S. interest rates. For example,
if Japanese investors decided to switch their foreign investment from U.S. Treasury
securities to euro-denominated securities, or if Japan’s savings rate should decline
— for instance, as older Japanese citizens spend down their savings, and capital
begins to flow back to Japan, U.S. interest rates would likely rise, all other factors
remaining unchanged.
The Bilateral Economic Relationship and Shifting
U.S. and Japanese Policy Priorities
By necessity, the United States and Japan had long given their bilateral
economic relationship high priority. For Japan the importance of the relationship
has been rooted in: the emergence of the United States as the world’s largest
economic power; Japan’s dependence on the United States for national security,
especially during the Cold War; the dependence of Japanese manufacturing industries
— autos, consumer electronics, and others — on exports to the United States; and
the reliance of reform-minded Japanese political leaders on U.S. pressure, gaiatsu,
to press for economic reforms in a political system that strongly protects the status
quo.
For the United States, the importance of the economic relationship with Japan
has been grounded in: its reliance on Japan as a critical ally; the emergence of Japan
in the post-World War II period as an economic power in East Asia and the second
largest economy in the world; the advancing competition from Japanese
manufacturers in industries, for example autos and steel, which employ large
numbers of U.S. workers; the rising trade deficits with Japan; Japan’s emergence as
a major source of investment in the United States; and Japanese government policies
that have protected vulnerable sectors and assisted exporters often at the expense of
U.S. competitors.
For many years, the bilateral economic relationship was the centerpiece of U.S.
and Japanese foreign economic agendas, and Japan trade strongly influenced the
making of overall U.S. trade policy. For example, persistent and growing U.S. trade
deficits with Japan led the U.S. Congress to develop and pass major trade legislation,
such as the Super 301 provision of the Omnibus Trade and Competitiveness Act of
1988 (P.L. 100-418). Problems in U.S.-Japan economic relations, especially the
9 U.S. Department of the Treasury, at [http://www.treas.gov/tic/].

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CRS-8
notion that Japan was out-competing the United States, dominated the trade policy
debate. Many scholarly and popular books and journals were written on the subject.10
While the United States and Japan consider their bilateral economic relationship
important, it has diminished as a priority and has merged with a wider range of issues
and concerns. One possible reason for the shift may be Japan’s decade of poor
economic performance which changed the popular perception in the United States of
Japan as an economic threat to the United States. From 1980 through 1990, Japan’s
real (adjusted for inflation) average GDP growth rate was 4.1% per year; it fell to
1.4% from 1991 to 2000 and to 0.9% from 2001 to 2003.11
A second reason for the shift in priorities may be the rise of China as a trade
power. Since 2000, the U.S. bilateral trade deficit with China has exceeded the
deficit with Japan, and the gap between the two deficits continues to grow. In 2003,
the U.S. trade deficit with Japan was $70.0 billion, the one with China was $103.1
billion. The growing deficit with China has forced U.S. policymakers to address
actions by China that U.S. companies have asserted are unfair. These include barriers
to U.S. exports, inadequate protection of intellectual property rights, an arguably
undervalued exchange rate, and sales of products in the United States at less than fair
value. For Japan, China has emerged as a major economic competitor and/or partner
in the region requiring more attention.
Other possible reasons for the shift in policy priorities might include the following:
! Foreign policy and national security concerns have trumped
commercial concerns especially after the events of September 11,
2001, and the increasing instability on the Korean peninsula caused
by North Korea’s nuclear ambitions.
! The establishment in 1995 of the World Trade Organization and a
restructured dispute settlement body has lessened the scope for U.S.
unilateral trade pressures to open Japan’s market further.
! The emergence also of a reform-oriented government under Prime
Minister Koizumi has diminished the perception that heavy-handed
gaiatsu is an effective policy to influence Japanese economic policy.
! Japan’s success in the 1990s at resisting U.S. pressure may have
created a sense that U.S. influence over Japan was limited.
The United States and Japan have been forging economic relations with other
countries and regions through free trade agreements (FTAs), which has reduced the
focus on their own bilateral relations. In the last few years, the United States, has
10 For example, Clyde V. Prestowitz, Trading Places: How We Allowed Japan to Take the
Lead (New York: Basic Books, 1988).
11 CRS calculations based on OECD data. For a review and analysis of the factors
contributing to Japanese economic problems, see CRS Report RL30176, Japan’s “Economic
Miracle”: What Happened?, by William H. Cooper.

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CRS-9
entered into FTAs with Jordan (2001), Chile (2004), Singapore (2004), Australia
(2005), and Morocco, and other agreements have either been completed or are still
under negotiation. The Bush Administration has also launched initiatives with the
ASEAN members — the Enterprise for ASEAN Initiative — and countries of the
Middle East — the Middle East Free Trade Initiative — which could lead to free
trade arrangements. The FTAs are part of the Bush Administration’s “competitive
liberalization”trade strategy which focuses on pursuing trade agreements on multiple
fronts.
Japan entered into its first FTA with Singapore in November 2002. In addition
to the Singapore agreement, Japan is building its economic presence in East Asia by
negotiating FTAs with South Korea, Malaysia, Thailand, the Phillippines, and
Mexico.
The agreement with Mexico is noteworthy because Japan had to make
concessions on agricultural imports before Mexico would conclude the agreement.
Japan avoided this step with Singapore since agricultural trade is not an important
issue between the two countries. Japan was compelled to make the concessions and
conclude the agreement because Japanese exporters face high tariff barriers in
Mexico and have been at a competitive disadvantage with U.S. and EU producers
who do not face similarly high tariffs under FTAs with Mexico.
The Bilateral Negotiating Framework
On June 30, 2001, President Bush and Prime Minister Koizumi announced the
formation of a new bilateral framework, the “U.S.-Japan Economic Partnership for
Growth” (The Economic Partnership). In so doing, the Bush Administration
continued a tradition of creating special frameworks as mechanisms for discussing
bilateral economic issues with Japan, a unique approach in U.S. trade policy.
Negotiating Precedents
The special bilateral frameworks have served several purposes: to define the
issues that plague the relationship; to establish goals and methodologies to resolve
problems; and to create the bureaucratic structures and momentum to launch and
maintain the negotiations. The frameworks shared characteristics that reflected the
dominance of the United States in the relationship and the nature of the trade issues:
! Their objectives were largely one-way: Japan was to remove
obstacles to trade and investment, while the United States was not
required to make concessions.

! They were intended to pressure Japan to reduce or remove
government policies or practices that acted as informal barriers to
imports and investment.
! They contained an explicit or implicit penalty for Japan, such as
restrictions on Japanese exporters’ access to U.S. markets.

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CRS-10
! They were largely outside the General Agreement on Tariffs and
Trade (GATT)/WTO trade structure which did not cover targeted
Japanese policies and practices.
! They were designed to affect areas that would reap the greatest
benefits to U.S. exporters and investors even though the most-
favored-nation (MFN) principle that binds all GATT/WTO members
by requiring that the concessions Japan made should apply to its
trade with all WTO members.
The Reagan Administration introduced the first multi-sector negotiating
framework — the Market-Oriented Sector-Selective (MOSS) talks with Japan in
March 1985. The MOSS talks covered Japanese trade in five areas:
telecommunications; medical equipment and pharmaceuticals; forestry products;
electronics; and auto parts.12 In 1989, President George H. W. Bush launched with
Prime Minister Uno the Structural Impediments Initiative (SII) that targeted a broad
range of Japanese macroeconomic policies, practices and other structural factors that
underlay the persistent U.S.-Japan trade imbalances, focusing on the inability of U.S.
exporters and investors to penetrate or increase their presence in the Japanese market.
In 1993, the Clinton Administration negotiated the United States-Japan
Framework for a New Economic Partnership. At the insistence of the Clinton
Administration, “objective criteria” were to be used to determine whether Japan was
fulfilling its obligations under the framework. This element proved highly
controversial, and the two countries never agreed on the role the “objective criteria”
would play or, for that matter, what they would be. Japan did not want to be bound
by what it termed “managed trade.” Nevertheless, by June 1997, the United States
and Japan had addressed, if not resolved, the major issues under the Framework. In
its place, the Clinton Administration got Japan to agree to another, more loosely
shaped format, the Enhanced Initiative on Deregulation and Competition Policy (the
Enhanced Initiative). This format did not have the specific results-oriented elements
of the previous framework.
The Reagan, Bush (I), and Clinton Administrations also negotiated sector-
specific trade issues with Japan outside of the framework format. For example, the
Reagan Administration obtained so-called voluntary export restraint (VER)
agreements under which Japan agreed to limit exports of autos and steel products to
the United States. In 1985, the United States and Japan (along with other G7
industrialized countries) negotiated the Plaza Accord to promote realignment of the
dollar and the yen. Other agreements were directed at market access in Japan for
constructions services, telecommunications equipment, certain agricultural products,
autos and auto parts, flat glass, among others.
Of particular note is the 1986 semiconductor agreement in which the Reagan
Administration got Japan to agree to cease dumping semiconductors in the United
12 For more details about the history of the special U.S.-Japan bilateral frameworks, see
Appendix A.

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CRS-11
States and to open its market to U.S. exporters of semiconductors. The
semiconductor agreement was a milestone in U.S.-Japanese trade relations because
it included in a side-letter that established a minimum target of 20% share of the
Japanese market for U.S. exporters of semiconductors to attain. The United States
imposed sanctions in 1987 in the form of higher tariffs on imports of selected
Japanese electronic products when the share did not reach 20%. The semiconductor
agreement is considered to have been the model for the objective criteria measures
that the Clinton Administration demanded in the Framework it used with Japan. The
sanctions that resulted from the semiconductor agreement were also a reason Japan
strongly resisted the use of objective criteria. In 1991, the semiconductor agreement
was renewed with the 20% share embedded directly in the agreement language. It
expired in 1996 and was replaced by a pact among several countries to monitor
semiconductor trade.
The Bush Administration’s Economic Partnership
The Bush Administration’s Economic Partnership framework closely follows
on the Clinton Enhanced Initiative. The Economic Partnership emphasizes
macroeconomic and structural issues that have hampered Japanese economic growth
but also examines issues of the U.S. economy.
The Economic Partnership consists of several initiatives or dialogues to include
participation from subcabinet-level leaders from both governments and participation
from members of the business communities and other non-government sectors from
both countries. The U.S.-Japan Subcabinet Economic Dialogue provides overall
direction for the Economic Partnership. Other elements of the Economic Partnership
include the Regulatory Reform and Competition Policy Initiative (with working
groups on telecommunications, information technologies, energy, and medical
devices and pharmaceuticals, plus a cross-sectoral working group); the Financial
Dialogue that examines such issues as banking reform; the Investment Initiative that
discusses requirements to improve the investment climate in Japan; and the Trade
Forum that operates to resolve sector-specific trade issues and to catch potential
problems before they get worse and to monitor sector-specific agreements already in
effect. Each one of these elements contributes to an annual report to the President
and the Prime Minister in which participants record progress and make
recommendations for the coming year.
The Economic Partnership also includes a forum for U.S. and Japanese private
sector representatives to work on pertinent issues and to provide input to the
government participants. Issues that the United States and Japan discuss under the
Economic Partnership are detailed below. The United States has not negotiated any
new sector-specific agreements although bilateral discussions of pending issues
continue under previous agreements.
The WTO Dispute Settlement Mechanism
In addition to negotiations under the Economic Partnership framework, the
United States and Japan are using the dispute settlement mechanism in the World
Trade Organization (WTO) more frequently to resolve bilateral issues. In so doing,

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CRS-12
the United States and Japan have helped to depoliticize their trade disagreements,
leaving it to panel members selected from trading partner nations to adjudicate the
disputes. Furthermore, the WTO has provided a forum in which Japan has felt
comfortable challenging U.S. trade practices.
Increased reliance on the WTO has reflected a major shift in Japan’s strategy in
dealing with the United States in trade. In 1995, Japan filed a dispute with the WTO
as a counter-complaint against a U.S. complaint against Japan on the sale of autos
and auto parts. (For details, see Appendix A.) The two countries reached a resolution
outside the WTO, but it was the first time that Japan had challenged the United States
rather than acceding to U.S. demands. Japan was emboldened to shift its strategy
in 1997 when the WTO ruled against the United States on its complaint against Japan
regarding the marketing of Kodak and Fuji film in Japan.13 However, the United
States has also challenged Japan successfully in the WTO. These and other major
pending issues in U.S.-Japan economic relations are discussed below.
Issues and Prospects
Recently, U.S.-Japan economic ties have become less contentious.
Nevertheless, they still face many complex issues. Some of these issues are
longstanding while others have developed more recently.
Product-Specific Issues
A number of product-specific issues have lingered stubbornly. They largely
involve Japanese barriers and continue to be discussed under product agreements
signed by previous U.S. and Japanese administrations.
Agriculture. Access for U.S. agricultural products to Japan’s highly protected
market is a decades-long issue and remains so, albeit with some progress. Japan has
been the largest market for a number of exports of U.S. agricultural products. For
several years, the most contentious issue pertained to Japanese imports of U.S. beef.
Japan imposed a ban on December 24, 2003, in response to the discovery of “mad
cow” disease on a Washington State ranch. In April 2004, the two countries agreed
to form an experts working group to develop arrangements to resolve Japanese
government concerns. The Japanese government claimed that U.S. beef inspection
procedures were inadequate. U.S. officials countered that 100% inspections are
inefficient, unnecessary, and not scientific. The binational working group aimed to
produce an agreement that would again allow U.S. beef exports to Japan.14
13 Saaida M. Pekkanen, “The Politics of Japan’s WTO Strategies,” Orbis, Winter 2004,
pp. 135-147.
14 International Trade Reporter, May 27, 2004, pp. 891-892.

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CRS-13
On October 23, 2004, the United States and Japan announced an agreement in
principle that would allow U.S. exports of beef to Japan to resume.15 On February 8,
2005, U.S. Agriculture Secretary Mike Johanns announced that Japan had accepted
the U.S. method for determining the age of cattle that were the source of processed
beef and had agreed in principle to allow the importation of beef less than 20 months
old. However, Japanese government officials contended that it is up to the Food
Safety Commission, an independent Japanese government body, to make the final
decision on lifting a ban. The issue had become more complicated with the discovery
of a second U.S. cow with the “mad cow disease” with the subsequent request by the
Japanese government for more data from the United States. Until it imposed the ban,
Japan was by far the largest market for U.S. beef and veal exports.16
On December 12, 2005, the Japanese government lifted its two-year ban on
imports of U.S. beef. Under new Japanese government regulations, U.S. beef
producers will be able to export beef from cattle 20 months old or younger. (At the
same time, the U.S. government announced it is lifting its ban on imports of Japanese
beef that was imposed in 2001 after the discovery of a case of BSE in Japan.)
Agriculture Secretary Mike Johanns said that he expected U.S. beef exports to Japan
to resume within a week to ten days of the announcement but that it was too soon to
estimate how much of their pre-embargo market in Japan U.S. beef exporters would
be able to recapture. Prior to the embargo, Japan was the largest market for U.S. beef
exports, having exported $1.4 billion in beef in 2003.
However, in January 2006, Japan reimposed a ban on beef imports from the
United States after having lifted it in December 2005. Japan reimposed the ban after
government inspectors found bone material in beef shipments from the United States,
among the first shipments to have arrived after the ban was lifted. The presence of
the bone material violated the procedures U.S. and Japanese officials had agreed
upon that allowed the resumption of the U.S. beef shipments. U.S. Secretary of
Agriculture Johanns expressed regret that the prohibited material had entered the
shipments.
Japan’s re-imposition of the ban raised concern and objection in the Congress.
For example, on June 21, 2006, S. 3435 (Conrad) was introduced and would impose
sanctions on U.S. imports from Japan, if Japan does not lift its ban on imports of U.S.
beef by August 31, 2006. On June 22, the Senate Appropriations Committee
approved agricultural appropriations legislation (H.R. 5384). Section 757 of the bill
that contains a Sense of the Senate resolution that the United States should imposed
sanctions against Japan if Japan has not lifted the ban on imports of U.S. beef by the
date of the bill’s enactment.
But, on July 27, 2006, Japan announced that it would lift the ban. The first
shipment of beef arrived on August 7. It is not clear when, or even if, U.S. exporters
will regain their pre-ban shares of the Japanese beef market.
15 Washington Trade Daily, Oct. 25, 2004.
16 U.S. Department of Agriculture, Economic Research Service, FATUS Export
Aggregations.

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CRS-14
In 1995, Japan opened its domestic rice market to imports from the United
States and other countries after much outside pressure, including the threat of U.S.
sanctions. However, the United States has asserted that most Japanese rice imports
are diverted to government-held stocks or redistributed as food aid and do not reach
Japanese consumers.17 Japan accounted for 11% of U.S. rice exports in 2003.18
Market Access. In 1995 the United States and Japan concluded an agreement
to improve access of foreign flat glass (used in the making of car windows, for
example) to the Japanese domestic market. The agreement was in response to
complaints by U.S. producers that they cannot enter a market which has been
effectively controlled by three Japanese companies. U.S. manufacturers have alleged
that a combination of anticompetitive private-sector business practices and Japanese
government regulations restricted entry into the market. Under the 1995 agreement
the Japanese government pledged to revise building regulations to encourage the use
of foreign-produced glass and to more vigorously enforce the Anti-Monopoly Law
against anticompetitive practices. Japanese private sector consumers and wholesalers
pledged to broaden their source of supplies to include foreign glass. The agreement
expired at the end of 1999. Negotiations to extend the agreement failed. The United
States still raises concerns about anti-competitive conditions in the Japanese flat glass
market under the Trade Forum of the Economic Partnership framework.
On December 3, 2000, the five-year bilateral pact on trade in autos and auto
parts expired. Under the agreement Japan agreed to change regulations that the
United States claimed discouraged the import of U.S.- made cars and auto parts. The
United States pressed Japan to renew the agreement, but Japan refused, claiming that
increases in Japanese auto parts imports made the agreement obsolete. The United
States insisted on a forum to continue to raise and discuss market access in Japan,
particularly regulations and practices that continue to keep imports in Japan at low
levels. In October 2001, the two countries established the Automotive Consultative
Group (ACG). U.S. officials press Japan to improve transparency in regulating the
market and have cited declining Japanese imports of foreign made autos and auto
parts. The issues are also part of the broader Economic Partnership framework.
Services. Market access in Japan for U.S. and other foreign insurance
providers has been the subject of bilateral trade agreements and discussion for some
time. Current U.S. concerns center around making sure that Japan adheres to its
agreements with the United States, especially as Japan’s domestic insurance industry
and government regulations of the industry are restructured.

Specifically, American firms have complained that little public information is
available on insurance regulations and on how those regulations are developed,
thereby, making it difficult to know how to get approval for doing business in Japan.
They also assert that government regulations favor insurance companies that are tied
to business conglomerates — the keiretsu — making it difficult for foreign
companies to enter the market.
17 Office of the United States Trade Representative, 2004 Trade Policy Agenda and 2003
Annual Report (Apr. 2004), p. 181.
18 U.S. Department of Agriculture, Foreign Agricultural Service.

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CRS-15
The United States and Japan concluded agreements in 1994 and 1996 on access
to the Japanese market for U.S. providers of life and non-life insurance and also on
maintaining competitive conditions for foreign providers in the specialty insurance
market — cancer insurance, hospitalization, nursing care, and personal accident
insurance. U.S. and Japanese officials continue to meet under those two agreements,
and U.S. providers have been able to expand their presence in Japan under them,
according to the Office of the U.S. Trade Representative (USTR).
However, the United States has raised concerns about Kampo, the government-
owned insurance company under the Japan Postal Service, which offers insurance
services that directly compete with U.S. and other privately owned providers. The
United States has also raised questions about the activities of regulated and
unregulated insurance cooperatives, kyosai, claiming that these entities do not have
to adhere to the same regulations that bind traditional private insurance companies,
creating an unfair competitive advantage.19 A Japanese government privatization
framework released on July 31, 2006, generated statements from the American
Chamber of Commerce in Japan and from the American Council of Insurers arguing
that the privatization plan would allow Kampo to compete with foreign insurance
providers by offering new products before it has been completely privatized.20
Japanese government procurement of construction services has been another
long-running issue. In 1994, Japan agreed under the U.S.-Japan Public Works
Agreement to adhere to transparent procedures in soliciting bids for public
construction projects above a certain value threshold. The United States has
complained that Japanese construction companies have been allowed to collude in
submitting bids (called dango in Japanese) restricting competition from U.S. and
other outside construction companies. The United States has argued that these
practices continue despite the agreement and has urged the Japanese government to
clamp down on them. Under a separate agreement, the 1991 U.S.-Japan Major
Projects Arrangement, Japan agreed to follow transparent procedures on specific
projects. The United States has urged Japan to broaden the coverage to include all
projects. Despite some progress, market access in public procurement of
construction services will likely continue to be an issue.
Overarching Issues
For more than a decade, U.S.- Japanese bilateral economic discussions have
concentrated less on the product-specific issues and more on fundamental factors that
cut across many aspects of the U.S. and Japanese economies. The two countries
have been addressing these issues within the Economic Partnership framework.21
19 Office of the United States Trade Representative, 2004 Trade Policy Agenda and 2003
Annual Report (Apr. 2004), p. 178.
20 Inside U.S. Trade. August 11, 2006.
21 The following discussion reflects the recommendations of the U.S. Government and the
Japanese Government under the Economic Partnership. See Annual Reform
Recommendations from the Government of the United States to the Government of Japan
(continued...)

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CRS-16
U.S. Concerns.
Many of the issues of concern to the United States fall under
Japanese government regulations. Regulatory reform in Japan is not a new issue for
the United States but has gained prominence in the last decade. Government
regulations underlay many of the problems U.S. firms have with Japan. Some of
these regulations are products of the immediate post-World War II era when Japan
was rebuilding its economy. Others came later. These regulations have contributed
to inefficiency and low productivity in some economic sectors. They have been a
factor in the limited choices that Japanese consumers have had in food and other
products and also have resulted in the extremely high prices that Japanese residents
have historically paid for many necessities.
Japanese policymakers have recognized the adverse economic effects of
government regulations but have had difficulty in streamlining them. Recent
Japanese governments have undertaken deregulation and have succeeded somewhat.
The government of Prime Minister Koizumi initiated a program of Special Zones for
Structural Reform throughout Japan that encourage deregulation in local areas. U.S.
firms have been able to participate in the zones. But, in many cases, reformers run
up against the powerful elements of the permanent bureaucracies of the ministries —
Ministry of Finance, Ministry of Agriculture, and Ministry of Construction — that
implement the regulations and that would lose authority if extensive deregulation
were to take place.
The United States has focused its recommendations to Japan on the following
areas:
! In telecommunications, the United States has argued, among other
things, that Nippon Telephone and Telegraph (NTT), which has
near monopoly control over land lines, charges extraordinarily high
rates for competitive companies to gain access to communications
lines and for competitive wireless subscribers to terminate calls to
land-line recipients. The United States has pressed the Japanese
government to be less biased toward NTT in developing and
implementing regulations.
! Regarding information technologies, the United States has pressed
Japan to extend copyright protection for older sound recordings, to
promote electronic commerce (e-commerce), and to encourage
competition in soliciting bids for government procurement of
information technologies.
! In the energy sector, the United States has recommended that Japan
pursue liberalization of its power industry in order to promote
21 (...continued)
under the U.S.-Japan Regulatory Reform and Competition Policy Initiative (Oct. 14, 2004),
at [http://www.mac.doc.gov/japan/source/menu/dereg/rri.10-14-2004.pdf]; and
Recommendations by the Government of Japan to the Government of the United States
Regarding Regulatory Reform and Competition Policy (Oct. 14, 2004), at
[http://www.mofa.go.jp/region/n-america/us/report0410-1.pdf].

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CRS-17
competition and to reduce costs. Japan should also ensure
transparency and fairness when regulating activities in the industry,
according to the United States.
! Japanese government procurement of medical devices and
pharmaceuticals continues to be an issue for the United States. U.S.
negotiators press their Japanese counterparts to take into account the
value of innovative drugs when determining eligibility of drugs for
government reimbursement to patients. U.S. companies claim that
their pharmaceuticals tend to cost more than generic drugs because
they are the latest innovations. The United States would also like
Japan to accelerate the approval process for marketing of new
medical devices and pharmaceuticals. On November 18, 2005,
S.Con.Res. 67 (Coleman) was introduced urging Japan to uphold its
1986 commitments to opening its markets to U.S. medial equipment
and pharmaceuticals.
! While noting the progress that Japan has made in improving the
competitive conditions and efficiency in its financial sector, the
United States has recommended that Japan eliminate unnecessary
regulatory barriers and improve transparency. The United States has
also been pressing Japan to resolve the high volume of non-
performing bank loans that have plagued the Japanese financial
system for more than a decade.
! In competition policy, the United States encouraged Japan to
increase the authority and resources of the Japan Fair Trade
Commission (JFTC) to clamp down on anticompetitive practices
that violate Japan’s Antimonopoly Act (AMA), its primary antitrust
statute. Japan has done so. The United States has recommended
that the government should stiffen penalties for violations of the
AMA through higher fines and prison terms. The United States also
wants Japan to further restrict bid-rigging on government
procurement contracts.
! In the area of commercial law, the United States has recommended,
among other things, that Japan adopt modern merger techniques to
accelerate economic restructuring, to increase share holder
participation through proxy voting, to protect whistleblowers, and to
promote alternative dispute resolution mechanisms within the
business community to make dispute resolution more efficient.
! Regarding goods distribution, the United States wants Japan to
improve the efficiency of cargo handling and customs clearance at
airports. The United States encourages Japan to remove barriers that
might inhibit the development of express carrier industry.
Japan’s Concerns. Japan’s concerns regarding the U.S. regulatory
environment span many sectors of the U.S. economy:

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CRS-18
! Japan has cited some customs regulations and practices the United
States has implemented since September 11, 2001, as unnecessarily
hindering the movement and people and goods. In particular, Japan
has cited visa restrictions and requirements that have burdened
Japanese residents in the United States and those arriving in the
United States on business or pleasure. Japan has encouraged the
United States to make sure that regulations imposed to stop
terrorism still meet international standards and do not unnecessarily
hinder commerce.
! Japan has long complained about U.S. government protection of the
domestic maritime industry. In particular, Japan wants the United
States to remove subsidies for the industry, to eliminate cargo
preference measures that discriminate against foreign carriers in
shipping between U.S. ports, including the export of Alaskan oil.
! Japan has been challenging U.S. antidumping measures. (This
issue is discussed later in section on issues raised in the WTO.)
! Japan has asserted that U.S. government review of foreign direct
investments in the United States for national security reasons
creates unpredictable conditions for Japanese investors. The
Japanese government notes that the definition of “national
security”under the governing statute, the Exon-Florio provision
(section 751 of the Defense Production Act of 1950), is ambiguous
making it difficult for foreign investors to conduct business in the
United States.
! In the area of intellectual property rights, Japanese officials have
recommended that the United States change regulations for granting
patents. For example, Japan claims that the United States should
adopt a “first-to-file” principle when determining conflicting patent
claims rather than the “first-to-invent” principle it now uses, the only
country to do so, Japan asserts. Japan argues that it is much more
difficult to determine patent rights under the “first-to-invent”
procedure.
! Japan raises the issue of U.S. economic sanctions for foreign
policy objectives, that are applied to enterprises of third countries.
In particular, Japan has cited the sanctions imposed under the Iran
and Libya Sanctions Act of 1996, the Cuban Liberty and Democratic
Solidarity Act of 1996, and the Burmese Freedom and Democracy
Act of 2003, claiming these sanctions are not legitimate under
international law and should be removed.
Issues and Disputes in the WTO
Both the United States and Japan have pursued complaints against one another
in the WTO, either as a sole complainant or with other members. Japan has targeted

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CRS-19
primarily U.S. trade remedy laws and the United States has targeted primarily
Japanese sanitary and phytosanitary (SPS) regulations.
The United States has filed four complaints against Japan since the
establishment of the WTO in January 1995. In three cases, the United States has
either prevailed or the case was resolved to U.S. satisfaction.
Apples. The most recent case filed on March 1, 2002, involved Japanese
government regulations affecting imports of U.S. apples. The United States charged
that Japanese quarantine requirements to protect Japanese apple orchards from
fireblight are excessive, are not based on accepted science, and violate Japanese
obligations under the WTO Agreement on the Application of Sanitary and
Phytosanitary Measures. A WTO Dispute Panel found in favor of the United States
on July 15, 2003, and the WTO Appellate Body upheld the findings on November
26, 2003. The WTO adopted the findings on December 10, 2003. Japan was to
comply with the ruling by June 30, 2004. Japan did change its procedures, but the
United States has asserted that the procedures still do not comply with the WTO
ruling. On July 19, 2004, the USTR announced that it would seek the authority from
the WTO Dispute Settlement Body to retaliate against Japan but has suspended that
request until a WTO panel rules on whether Japan has complied with the original
finding.22 On August 30, 2005, the United States and Japan reached an agreement
whereby the United States has removed its request for retaliation authorization in
exchange for revised and less restrictive Japanese apple quarantine regulations.23
Japan has filed seven complaints against the United States since January 1995.
Of the seven, two were resolved to Japan’s satisfaction before completion. The
United States prevailed in a third case. Japan prevailed against the United States in
the four other cases.
Byrd Law. Japan, together with other major trading partners, has challenged
U.S. trade laws and actions in the World Trade Organization (WTO). For example,
Japan and others challenged the U.S. 1916 Antidumping Law and the so-called Byrd
Amendment (which allows revenues from countervailing duty and antidumping
orders to be distributed to those who had been injured). In both cases, the WTO
ruled in Japan’s favor. Legislation to repeal the 1916 law was passed by the 108th
Congress. In November 2004, the WTO authorized Japan and the other countries to
impose sanctions against the United States. In September 2005, Japan imposed 15%
tariffs on selected imports of U.S. steel products as retaliation, joining the EU and
Canada. It is the first time that Japan has imposed punitive tariffs on U.S. products.
In the meantime, a repeal of the Byrd Amendment was included in the conference
report for S. 1932, the Deficit Reduction Act of 2005, that received final
congressional action on action February 1, 2006, and was signed by the President into
law (P.L. 109-171) on February 8, 2006. The measure phases out the program over
22 International Trade Reporter, July 29, 2004, p. 1283.
23 International Trade Reporter, September 8, 2005. p. 1428.

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a period ending October 1, 2007.24 Although Japan has praised the repeal of the Byrd
Amendment, it has criticized the delayed termination of the program and announced
on August 4, 2006, that it would continue the sanctions while the Byrd Amendment
remains in force.25
Doha. More broadly, Japan and the United States are major supporters of the
Doha Development Agenda (DDA), the latest round of negotiations in the WTO.
Yet, the two have taken divergent positions in some critical areas of the agenda. For
example, the United States, Australia, and other major agricultural exporting
countries have pressed for the reduction or removal of barriers to agricultural imports
and subsidies of agricultural production, a position strongly opposed by Japan. At
the same time, Japan and others have argued that national antidumping laws and
actions that member countries have taken should be examined during the DDA, with
the possibility of changing them, a position that the United States has opposed.
Prospects and Policy Options
The U.S.-Japan economic relationship is very strong and mutually important.
The two economies are highly integrated via trade in goods and services. More
importantly, Japan and the United States are connected via capital flows. Japan is the
largest foreign source of financing of the U.S. national debt and is expected to remain
so for the foreseeable future, as the mounting U.S. debt needs to be financed and the
stock of U.S. domestic savings remains insufficient to meet the demand. Japan is
also a significant source of foreign private portfolio and direct investment in the
United States, and the United States is the origin of much of the stock of foreign
investment in Japan.
The relative significance of Japan and the United States as each other’s
economic partner has diminished somewhat with the rise of China as an economic
power, and with deepening U.S. economic ties with Canada and Mexico as a result
of the North American Free Trade Agreement (NAFTA). Nevertheless, analyses of
trade and other economic data suggest that policy leaders of both countries face the
challenge of successfully managing a critical economic relationship.
During the last decade, policy leaders seem to have made a deliberate effort to
drastically reduce the friction that prevailed in the economic relationship. On the one
hand, this calmer environment has stabilized the bilateral relationship and permitted
the two countries to focus their attention on other issues of mutual interest, such as
national security. On the other hand, as some have argued, the friendlier environment
masks serious problems that require more attention, such as continuing Japanese
failure to resolve long-standing market access barriers to U.S. exports of autos and
flat glass, and the continuing presence of bilateral trade imbalances. Failure to
24 For more information on the Byrd Amendment, see CRS Report RL33045, The Continued
Dumping and Subsidy Offset Act (“The Byrd Amendment”), by Jeanne J. Grimmett and
Vivian C. Jones.
25 International Trade Daily. August 8, 2006.

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resolve any of these outstanding issues could cause friction to heighten between the
two countries.
As Japan and the United States continue to manage their economic relationship
they have at least three options on how to proceed. These are not necessarily
mutually exclusive options but could be employed more or less in tandem.
WTO Reliance. One option would be to rely increasingly on the WTO dispute
settlement mechanism to resolve bilateral issues by taking more lingering issues to
the WTO for resolution.26 This option could help to promote stability in the bilateral
relationship by containing political friction like that which erupted in the 1980s and
1990s. In addition, it could lessen the perception that many Japanese have had that
the United States was acting unilaterally in making its demands on Japan to open up
its markets and in threatening to limit market access to Japanese exporters in
retaliation. The WTO could provide at the least the semblance of neutrality where
both countries could anticipate fair treatment by their peers.
A potentially major constraint on the use of this option is the limited scope of
the WTO’s coverage. A number of longstanding issues in U.S.-Japan economic ties
pertains to competition policy, that is, how governments use their authority to ensure
fair competition among producers. Although the WTO membership is in the midst
of the Doha Development Agenda (DDA) round of negotiations to broaden the WTO
rules, they have removed competition policy from the agenda. However, the WTO
could be used to resolve issues that come under its purview which may grow as
negotiations in the Doha Development Agenda round progress.
Special Frameworks. A second option would be to discuss economic ties
through a special framework and/or sector-specific agreements. These frameworks
allow each country to raise issues that are not subject to international rules but
nevertheless cause problems in the relationship. In addition, they provide a forum
for officials to address issues before they emerge as full-fledged disputes. However,
the record with respect to special frameworks, such as the Market-Oriented Sector-
Selective (MOSS) talks and the Structural Impediments Initiative (SII) is mixed.
While the United States and Japan have achieved some successes, a number of issues
seems to have lingered over the years reappearing in successive frameworks.
Similarly, the record of sector-specific agreements, such as flat-glass and autos and
auto parts reflects only partial success.
FTA. A third option would be for the United States and Japan to form a
comprehensive bilateral free trade agreement (FTA). This option might prove
attractive because tariffs and other customs restrictions on U.S.-Japan bilateral trade
are already low or non-existent, providing a foundation on which to build an FTA.
In addition, proponents would argue that the two countries could construct the FTA
26 See, for example, C. Fred. Bergsten, Takatoshi Ito, and Marcus Noland, No More
Bashing: Building a New Japan-United States Economic Relationship (Washington, D.C.:
Institute for International Economics, 2001), arguing that the WTO should play a more
important role in U.S. trade policy management with Japan and that “bashing” of Japan no
longer has a role.

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to cover policies and practices that are critical to the relationship. For example, the
FTAs that the United States has concluded recently go beyond trade in goods and
address services, foreign investment, and intellectual property rights. A U.S.-Japan
FTA would fit into current Japanese and U.S. trade strategies to use FTAs to
strengthen economic ties with Asian partners.
Critics of the FTA option have pointed out U.S. agricultural producers (and
WTO rules) would require that Japan allow free trade to include access to its
agricultural markets — a step that it has been very reluctant to take. Critics have also
asserted that an FTA between two economic powers such as Japan and the United
States could dramatically undermine multilateral efforts in the WTO.

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Appendix A: Managing the U.S.-Japan Economic
Relationship — A Brief History
For the United States and Japan, managing their economic relationship has
meant cooperating in areas of mutual agreement and addressing problems in a
manner that meets the national interest of each country while maintaining the
integrity of the alliance. While the two countries have succeeded in doing this, by
and large, trade frictions became heated at times, making relations difficult.
The United States dominated the economic relationship with Japan for many
years after World War II. The United States was by far the largest economy in the
world, and Japan was dependent on the United States for national security. The
United States set the agenda, and the issues on the agenda were driven by the U.S.
demands for Japan to curb exports to the United States and/or to remove barriers to
U.S. exports and investments.
Until recently the United States and Japan, largely at the instigation of the
United States, had used special bilateral frameworks and agreements to conduct their
government-to-government economic relations. Some of these mechanisms were
designed to address trade and investment barriers in Japan that were product-specific,
for example semiconductors and autos, and others were designed “generic” barriers
that affected many sectors, the Japanese retail distribution system.
The Reagan Administration introduced the first multi-sector negotiating
framework — the Market-Oriented Sector-Specific (MOSS) talks — with Japan in
March 1985. The process resulted from discussions between President Reagan and
Prime Minister Nakasone to find a way to deal with trade issues that had been
clouding the relationship for some time. The initial set of negotiations covered four
sectors: telecommunications, medical equipment and pharmaceuticals, forestry
products, and electronics. The two countries added auto parts later. The sectors were
selected because of the potential for U.S. companies to increase exports to the
Japanese markets if the barriers were removed. They were also sectors in which
multiple Japanese government barriers to imports existed. The United States and
Japan reached agreement in all of the MOSS sectors. A 1988 General Accounting
Office (GAO) study concluded that U.S. exports in each of the selected sectors
except auto parts increased but that improved market access does not necessarily
guarantee huge increases in exports.27 Macroeconomic trends and other factors also
play a role that could trump market access.
In March 1989, President George H.W. Bush with Prime Minister Uno launched
the Structural Impediments Initiative (SII) that targeted a broad range of Japanese
macroeconomic policies and practices and structural factors that underlay the
persistent U.S.-Japan trade imbalances and the inability of U.S. exporters and
investors to penetrate or increase their presence the Japanese market. The SII was
a pioneering effort in that U.S. negotiators targeted Japanese barriers that were cited
27 U.S. General Accounting Office, U.S.-Japan Trade: Evaluation of the Market-Oriented
Sector-Selective Talks, GAO/NSIAD-880205, July 1988. p. 57.

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by not only American exporters and investors, but also by Japanese academics,
business leaders, and politicians. In so doing, the U.S. side sought to increase the
possibility of a successful outcome if it had a domestic constituency in Japan that
would be working to achieve the same goal. In addition, the targeted policies and
practices were ones that were fundamental to Japanese economic life and had not
been subject to bilateral negotiation. These targets were: Japan’s high savings-low
investment imbalance that many economists attribute its perennial current account
surpluses; the Japanese retail distribution system, particularly its Large-Retail Store
Law that favored small “mom and pop” enterprises at the expense of larger
operations, such as Toys R Us; land use policies that inhibited the market entry of
new firms and kept land prices high; the keiretsu business conglomerates that both
Japanese and U.S. experts blamed as a barrier to the entry of new Japanese and
foreign firms to the Japanese market; exclusionary business practices, such as the
formation of cartels to limit competition; and business pricing practices under which
Japanese companies would sell products at a premium in Japan so that they could
undersell their competitors in the U.S. market.
The SII also included U.S. policies and practices, such as the low U.S. savings
rate, that Japanese negotiators asserted was a cause of U.S. trade deficits. This
element was an attempt to make the format more balanced. However, it was
generally understood that the real focus of the SII was Japanese barriers. The SII
process operated throughout the four years of the first Bush Administration. U.S. and
Japanese negotiators met periodically and reported annually on progress made in
resolving the offensive policies and practices. The results of the SII process are
mixed. On the one hand, it focused attention of policymakers of both sides on
fundamental causes of problems that cut across many sectors and economic activities.
The SII is also credited with placing enough pressure on Japan to change its Large-
Retail Store Law. Some observers also argued that by selecting policies and practices
that many Japanese themselves wanted changed, the United States lessened the
unilateral thrust of previous negotiations. On the other hand, many of the problems
that had plagued the U.S.-Japan relationship before the SII remain, such as the trade
imbalances.
The Clinton Administration negotiated is own bilateral framework with Japan.
The “United States-Japan Framework for a New Economic Partnership” borrowed
elements from the MOSS and the SII processes by including some sector- specific
goals along with overall structural and macroeconomic issues. These goals were
included in five “baskets.” This framework departed from the others in several
important ways. It obligated the President and the Prime Minister to meet at least
twice a year to review progress under framework. At the insistence of the Clinton
Administration, “objective criteria” were to used to determine whether Japan was
fulfilling its obligations under the framework. This element proved highly
controversial, and the two countries never agreed on the role the “objective criteria”
would play or, for that matter, what they would be. The United States argued the
criteria were to be targets Japan was to meet while Japan did not want to be bound
by such criteria and argued that the criteria were to be guidelines. The differences
over “objective criteria” reached the summit level and strained U.S.-Japan relations.
The United States and Japan reached agreements in most of the areas, including
medical equipment procurement, intellectual property rights protection, financial

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services, insurance, and flat glass, among others, but not without some acrimony.
For example, the United States was on the brink of imposing tariff-sanctions on
Japan, and both countries were poised to take one another to the WTO before they
reached agreement on Japanese imports of autos and auto parts. U.S.-Japanese trade
friction reached its peak during the period of that the Framework that roughly
corresponds to the first Clinton Administration. The friction was due in part to the
long-running frustration that U.S. exporters and investors were experiencing with the
same obstacles that previous agreements were supposed to have addressed. The
“results-oriented” strategy was intended to provide a clear indicator of whether Japan
had removed the barriers. But Japan resisted such objective indicators, because, it
argued, the problems in U.S.-Japan trade stemmed from private sector practices and
not government policies. The Framework raised the issues to the summit level to
ensure that both sides took the issues seriously. By doing so, however, the
Framework increased the risk that failure to achieve results would sour the entire
relationship.
With the completion of the auto and auto parts agreement in 1995, most trade
issues in the Framework had been completed. The Clinton Administration closed
the books on the Framework. In its place, it got Japan to agree in June 1997 to
another, more loosely shaped format, the Enhanced Initiative on Deregulation and
Competition Policy (the Enhanced Initiative). This format did not have the results-
oriented elements of the previous Framework. It was a mechanism for exchanging
views on some of the fundamental aspects of the Japanese economy that limited
competition and were likely preventing Japan from emerging from the economic
malaise that had set in. These issues had not received as much attention in previous
negotiations. The United States focused on getting Japan to change regulations and
competition policies affecting telecommunications, medical devices and
pharmaceuticals, and financial services, as well as more generic issues such as
competition policy and regulation transparency.28
The Enhanced Initiative marked a turning point in the overall U.S.-Japan
relationship as economic relations became less prominent. While negotiators
continued to meet to exchange views and monitor progress under the Initiative and
previous agreements, the issues did not have the importance at the summit level they
once had. National security issues had become more dominant in the bilateral
relationship.
28 Edward J. Lincoln, Troubled Times: U.S.-Japan Trade Relations in the 1990s
(Washington, D.C., Brookings Institution Press, 1999), pp. 158-166.

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