U.S.-Japan Economic Relations:
Significance, Prospects, and Policy Options
William H. Cooper
Specialist in International Trade and Finance
August 13, 2013
Congressional Research Service
7-5700
www.crs.gov
RL32649
CRS Report for Congress
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epared for Members and Committees of Congress

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U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options

Summary
Japan and the United States are two major economic powers. Together they account for over 30%
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 potentially 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 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 a major foreign source of financing of the U.S.
national debt and will likely remain so for the foreseeable future, as the mounting U.S. public
debt needs to be financed and the stock of U.S. domestic savings remains insufficient to meet the
investment needs. 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. This trend is due in part to the rise of China and other emerging economic powers.
For example, China has overtaken Japan as the largest source of foreign financing of the U.S.
national debt. Nevertheless, analyses of trade and other economic data suggest that the bilateral
relationship remains important, and policy leaders from both countries face the challenge of how
to manage it. The trend is also due to the mediocre performance of the Japanese economy over
the last two decades, which was exacerbated by the global economic slowdown beginning in
2008, and other setbacks, including the tsunami, earthquake, and nuclear accidents that occurred
in March 2011. Japan is still struggling to achieve sustained economic recovery.
However, during the last decade, U.S. and Japanese policy leaders seem to have made a deliberate
effort to drastically reduce the friction that prevailed in the economic relationship during the
1970s, 1980s, and the first half of the 1990s. 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 Japan’s
continuing failure to resolve long-standing market access barriers to U.S. exports. Failure to
resolve any of these outstanding issues could heighten friction between the two countries.
More generally, other issues regarding U.S.-Japan economic relations may emerge on the agenda
of the 113th Congress. U.S. and Japanese leaders have several options on how to manage their
relationship, including stronger reliance on the World Trade Organization; special bilateral
discussion frameworks and agreements; or a free trade agreement such as the potential Trans-
Pacific Partnership (TPP) agreement in which Japan has decided to participate. Japan’s
participation in the TPP has renewed concerns of some Members of Congress over a number of
Japanese trade practices.

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U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options

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 ................. 8
Bilateral Trade Issues ................................................................................................................ 9
Japanese Import Restrictions on U.S. Beef ......................................................................... 9
Insurance, Express Delivery, and Japan Post .................................................................... 10
Market Access in Japan for U.S. Autos and Auto Parts .................................................... 10
“Zeroing” ........................................................................................................................... 11
Japan and the Trans-Pacific Partnership Agreement (TPP) and
Its Other FTA Initiatives ................................................................................................. 11
The Doha Development Agenda ....................................................................................... 13
Overarching Issues ............................................................................................................ 14
Prospects and Policy Options to Deepen Economic Ties .............................................................. 15
The TPP ................................................................................................................................... 15
Reliance on the WTO .............................................................................................................. 15
Special Frameworks ................................................................................................................ 15
The WTO Dispute Settlement Mechanism .............................................................................. 20

Tables
Table 1. Key Comparative Economic Indicators for the United States and Japan ........................... 2
Table 2. U.S. Merchandise Trade with Japan, 1998-2012 ............................................................... 4
Table 3. U.S. Trade in Services with Japan, 2002-2012 .................................................................. 5
Table 4. U.S.-Japanese Foreign Direct Investment (FDI) Positions, 1998-2011 ............................. 6

Appendixes
Appendix. Managing the U.S.-Japan Economic Relationship—A Brief History .......................... 17

Contacts
Author Contact Information........................................................................................................... 20

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U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options

apan and the United States are among the world’s largest economic powers. Together they
account for over 30% of world domestic product (2012 estimate). This economic clout makes
Jthe United States and Japan powerful forces that influence each other’s economies and those
of other countries. Economic conditions in the United States and Japan also 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 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.
The global financial crisis and economic downturn added another dimension to the relationship as
the two countries have grappled with the severe impact of the crisis on their respective economies
and simultaneously have worked with their partners in the G-20 to coordinate a multilateral
response. The impact of the March 11, 2011, earthquake and subsequent tsunami and nuclear
plant accidents in northern Japan added still another factor to the bilateral economic relationship.
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 Congress plays a
critical role in shaping U.S. economic policy toward Japan.
The United States and Japan have taken perhaps the most important step in years in forging a
closer economic relationship. After many months of internal political debate and changes in
political leadership, Japan expressed interest on March 15, 2013, in joining the negotiations to
establish the Trans-Pacific Partnership (TPP) trade agreement to which the United States is a
party. On April 12, after a series of informal bilateral discussions with Japan, the Obama
Administration stated that it would support Japan’s participation in the TPP and, with the other 10
TPP participants, in invited Japan to join. On July 23, 2013, Japan formally became a TPP
participant.
Congress must approve a TPP trade agreement in which the United States is a party before any
U.S. commitments could enter into force. To help the 113th Congress in fulfilling these and other
responsibilities regarding U.S.-Japan economic relations, this report explores the significance and
state of U.S.-Japan economic ties, major issues in the relationship, and the possible options for
managing the relationship.
An Overview of U.S.-Japan Economic Trends
The U.S. and Japanese economies remain closely intertwined through trade and capital flows.
Many argue that U.S. and Japanese political leaders have not always given the 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 both 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
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is roughly 2½ times as large as Japan’s both on a nominal 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 two decades, while U.S. economic growth had been stronger, although
both economies have suffered slow growth and even recession in the wake of the 2008-2009
financial crisis. The U.S. average annual GDP growth rate during the last 10 years (2003-2012)
has been almost two times that of Japan’s. Nevertheless, the economic recoveries in both
countries are expected to be fragile, especially in Japan.
Exports are slightly more important to the Japanese economy than are imports as measured as
ratios to GDP, while imports are more significant than exports in the U.S. economy. The United
States has continually incurred current account deficits. Japan had been earning current account
surpluses, although the surpluses have been decreasing due to diminishing demand for Japan’s
exports and increasing imports of energy.
Japan has continually exceeded the United States in terms of savings. 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
almost three times that of the United States. Japan’s public debt has soared in the last several
decades 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 (2012)
- Nominal (trillions of $U.S.)
6.0
15.7
- PPP (tril ions of $U.S.)
4.6
15.7
Per Capita GDP (2012)
- PPP ($U.S.)
36,200
49,800
Real GDP Growth Rates (2012)
2.2%
2.2%
Merchandise Exports (billions of $U.S.) (2012)
793
1,612
Imports (billions of $U.S.) (2012)
857
2,357
Current Account Balance (billions of $U.S.)
85
-487
Recorded Unemployment Rates (2012)
4.4%
8.2%
Public debt/GDP (2012)
218.9%
73.6%
Source: CIA, The World Factbook.
Japan was hit by two economic crises in the last few years that affected U.S.-Japan economic
relations. The first was the global financial crisis, which began to hit in 2008 and intensified in

1 Purchasing power parity (PPP) measurements are the value of foreign currencies in U.S. dollars based on estimates of
the 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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2009. Japan was hit hard by the decline in global demand for its exports, particularly in the
United States and Europe. Japan had become dependent on net export growth as the engine for
overall GDP growth, as domestic consumer demand and investment lagged.
The second crisis was the March 11, 2011, earthquake, tsunami, and nuclear accidents in
northeast Japan. The Japanese government has responded with a series of four supplemental fiscal
packages to finance reconstruction. The implementation of the reconstruction efforts has been
slower than expected, dampening the stimulus effect on economic growth. In addition, the
country has had to cope with electricity shortages and search for alternative sources of power,
including increased fossil fuel imports.
The two crises and the economic problems in Europe, among other factors, have adversely
affected Japan’s economic growth. Japan incurred growth rates of -1.1% in 2008 and -5.5% in
2009 but recovered in 2010 to expand by 4.7%. That recovery proved short-lived as Japan
experienced -0.5% growth in 2011 and an estimated 1.8% in 2012. The Economist Intelligence
Unit forecasts weak economic growth in Japan for the next few years.2
Prime Minister Abe has made it a priority of his administration to grow the economy and to
eliminate deflation, which has plagued Japan for many years. On assuming power, Abe’s
government announced a three-pronged economic program, popularly known as “Abenomics.”
The first prong, or “arrow” consists of $122 billion stimulus package aimed at spending on
infrastructure, particularly in areas affected by the March 2011 disasters. While the package is
expected to boost growth somewhat, it will also add to Japan’s already large public debt.3 With
the second “arrow,” the ostensibly independent Bank of Japan (Japan’s central bank) announced a
continued loose monetary policy with interest rates of 0%, quantitative easing measures, and a
target inflation rate of 2%.4 The third “arrow” is to consist of structural reforms, such as
agricultural reform, to improve long-term economic efficiency.
A likely by-product of these measures will be weakening of the yen. Some governments have
already charged that Japan’s monetary actions will spark a currency war because other countries
will try to counter the trade effects of a weaker yen.5
U.S.-Japanese Trade in Goods and Services
The growth in U.S.-Japanese bilateral trade in goods and services has been slow if not stagnant
over the past two decades, reflecting, at least in part, the anemic state of the Japanese economy.
Bilateral trade declined significantly in 2009 as a result of the global economic downturn. U.S.-
Japan trade has picked up since 2010 and, as Table 2 shows, regained its pre-2009 level in 2012.
U.S. imports from Japan are concentrated within three main categories. About three-quarters of
those imports have 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 them are in computers and components; gas turbines
(turbojets, turbo-propellers, etc.); office machinery parts; electrical machinery (integrated circuits

2 Economist Intelligence Unit, Country Report: Japan, February 2013, p. 34.
3 Ibid., p. 25.
4 Ibid., p. 27.
5 Ferguson, Niall, “Global Currency Wars Are Best Fought on the Quiet,” Financial Times, January 26-27, 2013, p. 7.
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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, 1998-2012
(billions of dollars)
Year
U.S. Exports
U.S. Imports
Trade Turnover
U.S. Balances
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
2006 59.6 148.2
207.8
-88.6
2007 62.7 145.5
208.2
-82.8
2008 66.6 139.2
205.8
-72.3
2009 51.2
95.9 147.1
-44.8
2010 60.5 120.3
180.8
-59.8
2011 66.2 128.8
195.0
-62.2
2012 70.0 146.4
216.4
-76.3
Source: U.S. Department of Commerce, U.S. Census Bureau.
Although Japan remains important economically to the United States, its importance has slid as it
has been edged out by other trade partners. In 1989, Japan was the largest source of U.S. imports
and the second-largest U.S. export market. By the end of 2009, Japan was the United States’
fourth-largest merchandise export market (behind Canada, Mexico, and China) and the fourth-
largest source for U.S. merchandise imports (behind Canada, Mexico, and China) and remained
so in 2012.
The data on merchandise trade may underestimate the relative importance of the United States to
Japan’s trade since a significant portion of Japanese exports to China are used as inputs to China’s
exports to the United States, possibly by Japanese-invested firms in China. Under a joint project,
the Organization for Economic Cooperation and Development (OECD) and the World Trade
Organization and (WTO) have created measurements of the value of bilateral exports and imports
based on the actual value added by country, including services used in the production of those
exports and imports as opposed to the final value of the exports and imports. According to the
OECD-WTO database, the United States accounted for close to 20% of Japanese exports in
value-added terms and was the largest market for Japanese exports, while China accounted for
15% of Japanese exports on a value-added basis, and was the second-largest export market.6

6 OECD-WTO Trade in Value-Added Initiative, http://www.oecd.org/valueadded.
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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. This trend reflects rapidly growing economies
in East Asia, as well as a shift in global production and the development of regional supply
chains. In the last decade, Japanese trade flows have shifted decidedly towards East Asia and
away from the United States. In 1994, 38.6% of Japanese exports went to and 33.0% of Japanese
imports came from nine of the largest economies in East Asia.7 In 2012, 51.3% of Japanese
exports and 40.8% of Japanese imports were with those same countries. China is the fastest-
growing Japanese trade partner.8 Similarly, the geographic pattern of U.S. trade has shifted.
Mexico and 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 remained
relatively modest as of 2011 (latest data available).9 (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.
Table 3. U.S. Trade in Services with Japan, 2002-2012
(billions of dollars)
Year
U.S. Exports
U.S. Imports
Trade Turnover
U.S. Balances
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
2006 42.0
25.5
67.5
16.5
2007 41.2
26.2
67.4
15.0
2008 42.3
25.7
68.0
16.6
2009 41.4
22.9
64.3
18.5
2010 45.4
25.8
71.2
19.6
2011 44.9
27.5
72.4
17.4
2012 47.0
29.7
76.7
17.3
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
U.S.-Japan Bilateral Investment
Along with trade in goods and services, foreign direct investment (FDI) (investments in
manufacturing facilities, businesses, and real estate) and portfolio investments (investments in

7 China, Hong Kong, Indonesia, South Korea, Malaysia, Philippines, Singapore, Thailand, and Taiwan.
8 CRS calculations based on data compiled by GTIS, Inc., World Trade Atlas.
9 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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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 FDI (Table 4), signify a long-term financial
commitment on the part of the investor.10
Table 4. U.S.-Japanese Foreign Direct Investment (FDI) Positions, 1998-2011
(historical-cost basis; billions of dollars)

Japanese FDI in U.S.
U.S. FDI in Japan
1998 134.3
41.4
1999 153.8
55.1
2000 159.7
57.1
2001 149.9
55.7
2002 147.4
66.5
2003 157.2
57.8
2004 175.7
68.1
2005 190.3
75.5
2006 204.0
84.4
2007 229.4
85.2
2008 234.7
99.8
2009 239.3
96.0
2010 252.1
102.6
2011 291.1
126.0
2012 308.3
134.0
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
Note: Figures are cumulative FDI.
The United States has consistently been the largest source of FDI in Japan. From 1998 to 2011
(latest data available), U.S. FDI in Japan has more than doubled. The sharp increase in
investments was largely the result of acquisitions by U.S. firms of Japanese entities that were
facing bankruptcy, rather than original or “greenfield” investments. The Japanese economy has
been relatively “closed” to foreign investment, and the level of FDI in Japan consistently ranks
among the lowest of industrialized countries.
Over the years, Japanese investors established a strong presence in the United States, especially in
autos, where Japanese manufacturers established a commercial presence in the United States to

10 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.
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circumvent restrictions on their exports to the U.S. market. Japanese car manufacturers have
gained larger shares of the U.S. domestic market.
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 $147.4 billion by 2002. The level of Japan’s FDI in the United
States has increased since, reaching $308.3 billion in 2012. 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. However, in 2004, its ranking reached number two
behind the United Kingdom and remained there at the end of 2012.11
In addition to FDI, substantial amounts of capital flow between the United States and Japan in the
form of portfolio investments. At the end of 2012 U.S. investors held $429.4 billion in Japanese
corporate stocks and $45.7 billion in Japanese bonds. Japanese investors held $319.8 billion in
U.S. corporate stocks and $337.3 billion in U.S. corporate bonds.12
Japanese investors are major private 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 May
2013, Japanese residents held $1,1111.1 billion in U.S. securities. At one time, Japanese investors
were the largest foreign holders of U.S. Treasury securities; however, beginning in September
2008, China surpassed them, but Japanese investors are catching up. As of the end of November
2012, Chinese investors held $1,315.9 billion in U.S. Treasury securities.13
Japanese holdings of U.S. Treasury securities underscore the debtor/creditor link between the
United States and Japan. The U.S. government continues to incur budget deficits and the United
States as a whole maintains a low national savings rate; as a result, 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 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.

11 Department of Commerce, Bureau of Economic Analysis.
12 Survey of Current Business. July 2013, pp. 18,19,21.
13 U.S. Department of the Treasury, http://www.ustreas.gov/tic/.
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The Bilateral Economic Relationship and Shifting
U.S. and Japanese Policy Priorities
By necessity, the United States and Japan have 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 significance 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, until recently, the second-largest economy (now the third-
largest economy) in the world; the advancing competition from Japanese manufacturers in
industries, for example autos and steel and high tech industries, including semiconductors and
computers, 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 Japanese trade strongly influenced the making of overall U.S.
trade policy. Many scholarly and popular books and journals were written on the subject.14
One 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 2012, the U.S. trade deficit with Japan was $76.3 billion;
the deficit with China was $315.1 billion. The growing deficit with China has induced U.S.
policymakers to address Chinese actions and policies 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. Also, the relative economic decline of Japan and its economic problems has meant
that Japan is not viewed as much as the “competitive threat” that it once was in the 1980s and
early 1990s. For Japan, China has emerged both as a major economic competitor and 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, for example, the increasing
instability on the Korean peninsula caused by North Korea’s nuclear ambitions
and the territorial disputes with China, have tended to trump commercial
concerns in U.S.-Japan alliance matters.

14 For example, Clyde V. Prestowitz, Trading Places: How We Allowed Japan to Take the Lead, New York: Basic
Books, 1988.
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• The establishment in 1995 of the World Trade Organization (WTO) and a
restructured dispute settlement body has lessened the scope for U.S. unilateral
trade pressures to open Japan’s market further.
• The United States and Japan have been forging economic relations with other
countries and regions through free trade agreements (FTAs), which have reduced
the focus on their own bilateral relations.
Bilateral Trade Issues
While U.S.-Japan economic ties have been fairly calm over the last two decades, a number of
issues remain the source of friction from time to time. In addition, the United States and Japan are
pursuing various options to tighten that relationship.
Japanese Import Restrictions on U.S. Beef
The issue first arose in December 2003 when Japan imposed a ban on imported U.S. beef (as did
some other countries) in response to the discovery of the first U.S. case of bovine spongiform
encephalopathy (BSE or “mad cow disease”) in Washington State. In the months before the
diagnosis in the United States, nearly a dozen Japanese cows infected with BSE had been
discovered, creating a scandal over the Agricultural Ministry’s handling of the issue (several more
Japanese BSE cases have since emerged). Japan had retained the ban despite ongoing
negotiations and public pressure from Bush Administration officials, a reported framework
agreement (issued jointly by both governments) in October 2004 to end it, and periodic
assurances afterward by Japanese officials to their U.S. counterparts that it would be lifted soon.
In December 2005, Japan lifted the ban after many months of bilateral negotiations, but re-
imposed it in January 2006 after Japanese government inspectors found bone material among the
initial beef shipments. The presence of the bone material violated the procedures U.S. and
Japanese officials had agreed upon. The then-U.S. Secretary of Agriculture Johanns expressed
regret that the prohibited material had entered the shipments.
In July 2006, Japan announced it would resume imports of U.S. beef from cattle 20 months old or
younger. The first shipments arrived in August 2006. Members of Congress had pressed Japan to
lift restrictions on imports of U.S. beef from even older cattle. U.S. officials met with Japanese
agricultural officials September 14-15, 2010, for technical discussions but produced no clear
indication of resolution of the issue. On August 4, 2011, a bipartisan group of Senators sent a
letter to Secretary of Agriculture Vilsack and to USTR Ron Kirk, urging them to press Japan (and
China) to end restrictions on imports of U.S. beef. In December 2011 Japan announced that it was
reassessing its BSE-related restrictions with the objective to raise the maximum age of cattle from
which U.S. beef can be exported to Japan.
On February 1, 2013, the Japanese government loosened its restrictions on beef imports from the
United States to allow beef from cattle 30 months or younger for the first time since December
2003. According to a joint press release from the Office of the United States Trade Representative
and the Department of Agriculture, the Japanese government’s Food Safety Commission would
continue to monitor shipments of U.S. beef and would consider the possibility of allowing U.S.
beef from cattle of any age to be imported into Japan.
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Insurance, Express Delivery, and Japan Post
Japan is the world’s second-largest insurance market, next to the United States. U.S.-based
insurance providers have found it difficult to access the market especially in life and annuity
insurance. They have been concerned about favorable regulatory treatment that the government
gives to the insurance subsidiary of Japan Post, the national postal system that holds a large share
of this market. For example, they cite subsidies to the insurance operations from revenues from
other Japan Post operations. Also, Japan Post-owned insurance companies are not subject to the
same regulations as other, privately owned insurance providers, both domestic and foreign-
owned. On October 1, 2007, the Koizumi government introduced reforms as part of a
privatization process. However, the successor government, led by the Democratic Party of Japan
(DPJ,) took steps to roll back the reforms. On April 27, 2012, the Diet passed legislation that
would appear to loosen regulatory requirements, according to U.S. industry sources.15 The bill is
reportedly a compromise package by the lawmakers from the DPJ, the LDP, and the Komeito
Party.16 The United States is also concerned about insurance sold by cooperatives that, they claim,
are regulated more leniently than private firms.
Similarly, the United States has also raised concerns about express delivery services and banking
services that Japan Post subsidiaries provide that may receive preferential regulatory and financial
treatment giving them an unfair advantage to privately owned domestic and foreign providers.17
The United States considers Japan’s treatment of insurance and the other services to be a
confidence building measure that must be addressed as part of Trans-Pacific Partnership (TPP).
(See discussion below.)
Market Access in Japan for U.S. Autos and Auto Parts
Auto and auto-parts-related trade and investment have been a very sensitive set of issues in the
U.S.-Japan economic relationship. The issue has its roots in the late 1970s and early 1980s, when
U.S. imports of Japanese-made vehicles surged as a result of the increase in U.S. consumer
demand for smaller vehicles, largely in response to the rapid increase in gasoline prices, while
demand for U.S.–manufactured cars plummeted. Facing pressure from the U.S. auto industry and
pressure from Congress in the form of limits on imports of Japanese made cars, the Reagan
Administration persuaded Japan to agree in 1981 to voluntary export restraints. Japanese
manufacturers responded to the restraints by establishing manufacturing facilities in the United
States and exporting high-valued, passenger cars. U.S. manufacturers asserted that Japan
employed various measures to restrict sales of foreign-made cars in Japan and the use of U.S.-
made parts in Japanese cars manufactured in the United States. These issues were the subject of
bilateral negotiations and agreements through the 1990s. The agreements were mostly in the form
of Japanese government pledges to ensure that government regulations did not impede the sale of
U.S.-made cars in Japan and voluntary efforts on the part of Japanese manufacturers to increase
the use of U.S.-made auto parts in cars made in the United States. The U.S. government pledged
to implement programs to promote the export of U.S.-made cars in Japan.

15 Inside U.S. Trade, April 27, 2012.
16 World Trade Online, April 5, 2012.
17 U.S. Mission to the World Trade Organization, Geneva, U.S. Statement on the Trade Policy Review of Japan,
February 19, 2013, http://www.geneva.usmission.gov.
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The intensity of the issue had subsided somewhat but has regained attention in the context of
Japan’s possible participation in the TPP negotiations. (See TPP discussion below.) The three
Detroit-based car manufacturers—Chrysler, Ford, and General Motors—charge that Japanese
government regulations continue to prevent them from obtaining their fair share of Japanese
domestic vehicle sales. They cite the traditionally small share of total cars sales in Japan that
consist of imported cars—around 6.7%.18
“Zeroing”
On January 10, 2008, Japan requested permission from the WTO to impose sanctions on U.S.
imports valued at around $250 million in retaliation for the failure of the United States to comply
with a January 2007 WTO decision against the U.S. practice of “zeroing” in antidumping duty
determinations. On April 24, 2009, a WTO compliance panel agreed with Japan that the United
States was not in compliance with the original WTO ruling. On August 18, 2009, the WTO
Appellate Body, having heard the U.S. appeal of the compliance panel decision, announced its
decision that the United States was not in compliance with the earlier determination, thus
upholding the compliance panel decision, opening the way for Japanese sanctions against the
United States.19 The practice of zeroing is one under which the U.S. Department of Commerce
treats prices of targeted imports that are determined to be above fair market value as zero
dumping margin rather than a negative margin. It results in higher overall dumping margins, and
U.S. trading partners have claimed and the WTO has ruled that the practice violates WTO rules.20
On May 5, 2010, Japan asked the WTO to proceed with authorizing Japan to impose the
sanctions. However, the United States and Japan decided to try to resolve the issue informally and
requested the WTO arbitration panel to suspend its work until September 8, 2011, at which time
the suspension would terminate and the panel would proceed.21 Japan subsequently announced
that it would postpone reactivation of the proceeding until November 7.22 On February 6, 2012,
the Office of the USTR announced that the United States had reached an agreement with Japan
whereby the United States would end the use of zeroing in its antidumping duty calculations and
would also recalculate antidumping duty margins in certain cases involving Japanese imports.
Japan would said it would withdraw its request for permission to impose sanctions against the
United States. A similar agreement was reached with the European Union.
Japan and the Trans-Pacific Partnership Agreement (TPP) and
Its Other FTA Initiatives
The TPP is an evolving regional free trade agreement (FTA). Originally formed as an FTA among
Singapore, New Zealand, Chile, and Brunei (the P-4), the TPP is now an agreement under
negotiation among the original four countries plus the United States, Australia, Canada, Mexico,
Peru, Malaysia, and Vietnam. The current 11 TPP partners have conducted a number of rounds of
negotiations. The negotiators envision a comprehensive arrangement to liberalize trade and to
cover broad range of trade and trade-related activities. But they also envision the TPP to be a “21st

18 CRS calculations based on data in Japan Automotive Manufacturers Association, Motor Vehicle Statistics for
Japan—2013, http://www.jama.org/pdf/MIJ2013.pdf.
19 International Trade Reporter, July 23, 2009.
20 International Trade Reporter, January 17, 2008.
21 International Trade Daily, December 16, 2010.
22 Inside U.S. Trade, September 16, 2011.
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century” framework for conducting trade within the Asia-Pacific region and, therefore, addressing
cross-cutting issues that are relevant now and will be in the future. These issues include
regulatory coherence; competitiveness and business facilitation, also known as transnational
supply and production chains; issues pertaining to small and medium-sized companies; economic
development; and the operations of state-owned enterprises. Therefore, while the 11 TPP
countries negotiate the agreement, they expect other economies in the region will seek to join in
those negotiations or will accede to the agreement after it has been concluded.23
As the second-largest East Asian economy and a crucial link in the Asian production networks,
Japan would seem to be a logical candidate for the TPP. Japan’s participation in the TPP is the
subject of debate within the Japanese political leadership and among other Japanese stakeholders.
On March 15, 2013, Prime Minister Abe announced that Japan would formally seek to participate
in the negotiations to establish the Trans-Pacific Partnership (TPP). In making the decision to
seek participation in the TPP, Prime Minister Abe had to confront influential domestic interests
that argued against the move. Among the most vocal have been Japanese farmers, especially rice
farmers, and their representatives. They have argued that Japanese agriculture would be severely
harmed by foreign competition as Japan would have to negotiate away high tariffs and other
protective measures on imports of agricultural products. Some Japanese health providers have
argued that Japan’s national health insurance system would be adversely affected because, they
claim, the TPP would force Japanese citizens to buy foreign-produced pharmaceuticals and
medical devices. In his March 15 statement, Prime Minister Abe acknowledged those domestic
sensitivities, but also insisted that Japan needed to take advantage of “this last window of
opportunity” to enter the negotiations, if it is to grow economically. Other Japanese business
interests, including manufacturers, strongly support the TPP.
The United States and Japan have been engaged in informal discussions since November 2011
when the government of then-Prime Minister Noda first expressed interest in the possibility of
seeking to join the TPP negotiations. At that time, the Obama Administration identified three
issues that Japan needed to address as “confidence building measures” if the United States were
to support Japan’s entry into the TPP: Japanese restrictions on imports of U.S. beef; market
access for U.S.-made cars; and insurance and express delivery issues. After further consultations
with Japan following Prime Minister Abe’s announcement, acting USTR Demetrios Marantis
announced that the United States would support Japan’s participation in the TPP negotiations on
April 12, 2013, subject to the consensus of all the TPP participants.
The beef issue appears to have been addressed with the February 1, 2013, Japanese action to
allow imports of U.S. beef from cattle younger than 30 months. Regarding the auto issue, Japan
agreed to increase the number of U.S.-made vehicles that can be imported under its Preferential
Handling Procedure (PHP) from 2,000 per vehicle “type” to 5,000 per vehicle “type.” In addition,
the two countries agreed to address in parallel negotiations issues regarding non-tariff measures
(NTMs) pertaining to auto trade, including transparency in regulations, standards, certification,
“green” and other new technology vehicles, and distribution. The parallel auto negotiations are
also to address the establishment of a special “safeguard” provision to deal with injurious surges
in auto imports and of a special tariff “snap-back” mechanism to deal with a partner’s failure to
fulfill the commitments on auto trade. Japan agreed that under the proposed TPP, U.S. tariffs on

23 For more information on the TPP, see CRS Report R42694, The Trans-Pacific Partnership Negotiations and Issues
for Congress, coordinated by Ian F. Fergusson.
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imports of Japanese motor vehicles will be phased out over a period equal to the longest phase-
out period in the agreement.
The activities of the government-run Japan Post, subsidiaries of which sell insurance and express
delivery services, were the main focus of USTR’s agreement with Japan on insurance. Japan
announced that the government would not approve new or modified cancer insurance products or
stand-alone medical insurance products for sale by Japan Post until it has been determined that a
“level-playing field” has been established in competition between private insurers and Japan Post.
The countries agreed to address additional “level-playing field” issues regarding insurance in the
actual TPP negotiations.
Furthermore, the two sides agreed to hold negotiations parallel to the TPP negotiations to address
issues regarding non-tariff measures (NTMs) in insurance, government procurement, competition
policy, express delivery, and sanitary and phytosanitary (SPS) measures. The parallel negotiations
are to achieve “tangible and meaningful” results by the completion of the main TPP negotiations
and will be legally binding at the time a TPP agreement would enter into force.
Japan’s membership in the TPP with the United States would constitute a de facto U.S.-Japan
FTA. A large segment of the U.S. business community has expressed support for Japanese
participation in the TPP, if Japan can resolve long-standing issues on access to its markets for
U.S. goods, services, and agriculture. However, the Detroit-based U.S. auto industry, the United
Autoworkers union, and Members of Congress with a large auto-industry presence in their
districts, have expressed strong opposition. Other segments of the U.S. business community have
expressed support for Japan’s entry into the TPP negotiations, although some have conditioned
their support on Japan’s willingness to address long-standing issues.
Along with the TPP, Japan is pursuing or considering other regional trade arrangements. On
November 20, 2012, Japanese, Chinese, and South Korean trade ministers announced the
launching of negotiations on a trilateral free trade agreement. The negotiations began in early
2013. The scope of the possible agreement remains undefined but would not likely match the
ambition of the TPP. Market access for agricultural products will likely be a point of contention
as the small but vocal agriculture interests in South Korea and Japan confront the possibility of
increased rice imports from China under an FTA arrangement.24
In addition, Japan, along with the 10 members of the Association of Southeast Asian Nations
(ASEAN), China, South Korea, Australia, New Zealand, and India, announced on November 20,
2012, their intention to begin negotiations to form a trade arrangement—the Regional
Comprehensive Economic Partnership (RCEP). While not ostensibly in conflict with the TPP,
some have suggested the RCEP could be an alternative to the more comprehensive TPP. While
RCEP would include some TPP partners, it is noteworthy for the absence of the United States and
the inclusion of China.25 Japan has also launched FTA negotiations with the European Union.
The Doha Development Agenda
Japan and the United States have been major supporters of the Doha Development Agenda
(DDA), the latest round of multilateral trade liberalizing negotiations in the WTO. Yet, the two

24 International Trade Reporter, May 31, 2012.
25 See, for example, Pakpahan, Beginda, Will RCEP Compete with the TPP?, EastAsiaForum,www.eastasiaforum.org.
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countries had taken divergent positions in some critical areas. For example, the United States,
Australia, and other major agricultural exporting countries pressed for the reduction or removal of
barriers to agricultural imports and subsidies of agricultural production, a position strongly
resisted by Japan and the European Union. 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.
In July 2006, WTO Director-General Pascal Lamy suspended the negotiations because, among
other reasons, the major participants could not agree on the modalities that negotiators would use
to determine how much they would liberalize their agricultural markets and reduce agricultural
subsides. Negotiators had been meeting from time to time to try to resuscitate the talks. However,
Lamy’s attempt to hold a ministerial meeting in December 2008 failed when the major parties to
the negotiators could not resolve their differences over establishing modalities in agricultural and
non-agricultural negotiations.26
Various groups of WTO members have been meeting to try to establish a foundation for
completing the negotiations without success to date. Smaller groups of WTO members have been
meeting to explore options other than a comprehensive agreement, such as a plurilateral services
agreement, expansion of the information technology agreement, and improvement in trade
facilitation. Japan and the United States are major participants in those discussions.
Overarching Issues
For more than a decade, U.S.-Japanese bilateral economic discussions have concentrated less on
the specific issues and more on fundamental factors that cut across many aspects of the U.S. and
Japanese economies, such as government regulations, intellectual property rights, competition
policies, and pharmaceutical and medical devices pricing practices. Given the complexity of
many of these issues, they have been the basis of discussion, negotiation, and disputes for many
years. The United States and Japan have addressed these issues within various frameworks over
the years with mixed results. (See discussion in the Appendix, “Managing the U.S.-Japan
Economic Relationship—A Brief History.”)
In November 2010, President Obama and then-Prime Minister Kan established the United States-
Japan Economic Harmonization Initiative (EHI), a framework similar to its predecessors, to
discuss these complex issues. In 2011 under the EHI, the two sides held several working-level
and ad hoc meetings and a high-level meeting at the Deputy USTR/Deputy Minister for Foreign
Affairs level.27 No meetings under the EHI have taken place since 2011 and will not likely take
place as long as the decision on Japan’s participation in the TPP remains outstanding.

26 For more information on the DDA, see CRS Report RL32060, World Trade Organization Negotiations: The Doha
Development Agenda, by Ian F. Fergusson.
27 Office of the USTR, Record of Discussion: U.S.-Japan Economic Harmonization Initiative, January 27, 2012.
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Prospects and Policy Options to Deepen
Economic Ties
Although the relative significance of the U.S.-Japan economic relationship has been diminished
somewhat with the rise of China and other emerging economic powers and Japan’s stagnant
economic performance, it remains important to the respective companies and the Asia-Pacific
region as a whole. As Japan and the United States continue to manage their economic
relationship, they have several options on how to deepen the relationship. These options are not
necessarily mutually exclusive but could be employed more or less in tandem.
The TPP
The TPP issue presents opportunities and challenges for the United States and Japan. On the one
hand, if successful, it could reinvigorate an economic relationship that has remained steady but
stagnant, by forcing the two countries to address long-standing, difficult issues, and allowing
them to raise their relationship to a higher level. On the other hand, failure to do so could indicate
that the underlying problems are too fundamental to overcome and could set back the
relationship. It could signify the failure of the United States and/or Japan to deal with domestic
opposition to a more open trade relationship.
Reliance on the WTO
With or without the TPP, the United States and Japan could continue to use the WTO and its
dispute settlement mechanism to resolve issues that come under the WTO’s aegis. 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 provides at the least the semblance of neutrality where both countries could
anticipate impartial treatment by their peers.
A potentially major constraint on the use of this option is the limited scope of the WTO’s
coverage and also the lack of progress in the DDA negotiations. A number of long-standing issues
in U.S.-Japan economic ties pertain to competition policy, that is, how governments use their
authority to ensure fair competition among producers. In addition, the failure of the WTO
members, at least so far, to complete the DDA round of negotiations may indicate the inability of
the 159-member body to expand its coverage, constraining its future relevance. Nevertheless, the
United States and Japan might continue to use the WTO process to resolve those issues that come
under its purview.
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 and negotiate on issues that
are not subject to international rules, such as regulatory policies and competition policies, but
nevertheless have caused problems in the bilateral relationship. In addition, they provide a forum
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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) (see Appendix) is mixed. While the United States
and Japan have achieved some successes, a number of issues seem to have lingered over the
years, such as government regulatory practices. Similarly, the record of sector-specific
discussions, such as on autos and auto parts trade and construction services, reflects only partial
success. The current Economic Harmonization Initiative (EHI) appears dormant for the time-
being, and its relevance may be overtaken if Japan joins the TPP.

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Appendix. 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 reform its economic and trade policies,
eliminate industrial policies, and boost domestic consumption. Sometimes these efforts led U.S.
policymakers to force Japan to curb exports of certain products, such as cars, to the United States
and/or to remove barriers to U.S. exports and investment.
Until recently, the United States and Japan, largely at the initiative 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 to address “generic” barriers that affected many sectors, such as 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 market 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.28 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 served as nontariff trade barriers and that prevented U.S.
exporters and investors from penetrating or increasing their presence in the Japanese market. The
SII was a pioneering effort in that U.S. negotiators targeted Japanese barriers that were cited by
not only American exporters and investors, but also by Japanese academics, business leaders, and

28 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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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, to which 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, which
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 George H. W.
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 its 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 the 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 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 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
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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.29
On June 30, 2001, President Bush and then-Prime Minister Koizumi announced the formation of
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.
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.
The Economic Partnership consisted 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 nongovernment sectors from both countries. The U.S.-Japan
Subcabinet Economic Dialogue provided overall direction for the Economic Partnership. Other
elements of the Economic Partnership included 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, which examined such issues as banking reform; the Investment Initiative, which
discussed requirements to improve the investment climate in Japan; and the Trade Forum, which
operated to resolve sector-specific trade issues, to catch potential problems before they got worse,
and to monitor sector-specific agreements already in effect. Each one of these elements
contributed to an annual report to the President and the Prime Minister in which participants
record progress and make recommendations for the coming year. The Obama Administration
continued this initiative but in November 2010 established the United States-Japan Economic
Harmonization Initiative with Japan, which now operates as the primary forum for discussions.

29 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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The WTO Dispute Settlement Mechanism
In addition, 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, 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 (discussed above). 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.30

Author Contact Information

William H. Cooper

Specialist in International Trade and Finance
wcooper@crs.loc.gov, 7-7749


30 Saaida M. Pekkanen, “The Politics of Japan’s WTO Strategies,” Orbis, Winter 2004, pp. 135-147.
Congressional Research Service
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