February 28, 2019
U.S.-Japan Trade Agreement Negotiations
Overview
Figure 1. Top U.S. Trade Partners, 2017
Under Trade Promotion Authority (TPA) procedures, on
October 16, 2018, the Trump Administration gave Congress
its official 90-day advance notification of intent to enter
into trade agreement negotiations with Japan. As the fourth-
largest U.S. trade partner, Japan is a longstanding U.S.
priority for trade negotiations, in particular following U.S.
withdrawal from the proposed Trans-Pacific Partnership
(TPP) in 2017, which included Japan. With initial TPA
requirements met, official negotiations could start at any
time. The precise scope of the negotiations remains
somewhat uncertain but areas of focus likely include trade
commitments on motor vehicles, agricultural goods,
services, and potentially policies affecting exchange rates.
Japan’s recent free trade agreements (FTAs) with major

non-U.S. markets set new rules and lower tariffs for Japan’s
Source: CRS with data from Bureau of Economic Analysis (BEA).
trading partners, disadvantaging U.S. exporters and further

incentivizing U.S. interest in new talks. Japan had preferred
a regional approach to trade negotiations, and urged the
Scope and Timing of Negotiations
United States to reconsider its TPP withdrawal. Some
The potential scope of the trade talks remains unclear, in
suggest Japan became more willing to enter bilateral talks
part due to differing characterizations by the two sides.
after President Trump in May 2018 launched a Section 232
Prime Minister Abe initially referred to the talks as goods-
investigation that could result in increased tariffs on
only negotiations, differing from other comprehensive
Japanese autos and auto parts—Japan’s top export to the
Japanese FTAs. Meanwhile, within specific negotiating
United States and a major source of the U.S. trade deficit
objectives released in December 2018—as required by TPA
with Japan. Japan strongly opposed U.S. Section 232 tariffs
30 days before talks can commence—the U.S. Trade
on imports of steel and aluminum—deemed a threat to U.S.
Representative (USTR) suggested a broad range of issues
national security—in place since March 2018.
will be covered, including trade in goods, services,
Bilateral Trade and Economic Relations
investment, intellectual property, state-owned enterprises,
The world’s third
and digital trade. USTR has indicated that it may pursue
-largest economy, Japan is the fourth-
negotiations with Japan in stages, in consultation with
largest U.S. trade partner, fourth-largest U.S. investment
Congress, which would represent a shift in approach from
partner, and second-largest foreign holder of U.S.
recent U.S. FTAs, which typically involve one
government debt. In 2017, U.S. exports to Japan totaled
comprehensive negotiation.
$114.7 billion, with $68.3 billion in goods and $46.4 billion
in services. U.S. imports totaled $171.3 billion, with goods
U.S. exporters in key sectors such as automobiles,
accounting for the bulk of imports ($138.3 billion), most
agriculture, and services have been challenged by
notably motor vehicles and parts ($55.5 billion). The stock
multiple tariff and non-tariff barriers for decades.
of U.S foreign direct investment (FDI) in Japan was valued
USTR, USJTA Negotiating Objectives, December 2018
at $129.1 billion in 2017, concentrated in finance and
insurance ($64.1 billion). Japanese FDI stock in the United

States totaled $469.1 billion in 2017, with manufacturing
Japan’s FTAs with Other Major Markets
accounting for the largest share ($157.3 billion).
In 2018, Japan concluded and ratified two major FTAs,
The size of the bilateral goods trade deficit, which at $70.0
which although excluding the United States, could have
significant implications for U.S. stakeholders. The Japan-
billion was the third-largest U.S. deficit in 2017, remains a
led Comprehensive and Progressive Agreement for Trans-
source of tension, as does the idea that the imbalance stems
Pacific Partnership (or TPP-11), which took shape after the
in part from various non-tariff barriers in the Japanese
U.S. withdrew from TPP, entered into force at the end of
market. Such concerns arguably peaked in the 1980s and
2018. Meanwhile, the European Union (EU) and Japan,
early 1990s, dissipating over the past two decades in the
face of Japan’s
which together accounted for more than one-quarter of total
domestic economic challenges, major
U.S. trade in 2017, entered into an FTA in February 2019.
Japanese investment in the United States, Japan’s increased
U.S. exporters to Japan worry that a reduction in tariffs for
economic openness, and a shift in U.S. focus to concerns
TPP-11 and EU countries, particularly on agricultural
over trade relations with China. Under the Trump
products such as Japan’s relatively high 38.5% beef tariff,
Administration, bilateral tension over the trade deficit has
will threaten the competitiveness of U.S. exports in the
returned to prominence in the relationship.
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U.S.-Japan Trade Agreement Negotiations
Japanese market. New rules in the FTAs have also led to
the government. Historically U.S. firms have found it
concerns that they may not reflect U.S. priorities. E-
difficult to enter segments of the Japanese market and argue
commerce provisions in the EU-Japan FTA, for example,
that Japan confers preferential treatment on insurance and
do not cover the free flow of data, unlike the recently
express delivery subsidiaries of Japan Post. Several TPP
negotiated U.S.-Mexico-Canada Agreement (USMCA) and
provisions were designed to level the playing field for
TPP-11 that prohibit related restrictions. Meanwhile, TPP-
services suppliers, and crafting similar provisions may be a
11 suspended 22, largely U.S. priority, provisions from the
negotiating priority for the United States in the new talks.
original TPP text, including some of relevance in Japan,
such as prohibiting cross-subsidization of express delivery
Currency
services by monopoly postal services (e.g., Japan Post).
Some U.S. stakeholders argue that the Japanese government
has at times made efforts to unfairly depress the value of
Key Sectors and Potential Provisions
the Japanese yen relative to the U.S. dollar to gain a trade
Agriculture
advantage, contributing to the U.S. trade deficit. A weaker
yen makes imports from Japan cheaper in the U.S. market,
Opening Japan’s highly protected agriculture market and
while increasing the cost of U.S. exports. Although Japan
reaching parity with exporters from Japan’s FTA partners,
has not intervened directly in foreign exchange markets
such as the EU, Australia, and Canada (a member of TPP-
since 2011, monetary stimulus under the “Abenomics”
11), is a major priority for U.S. industry in the proposed
program has put significant downward pressure on the yen.
talks. In 2017, Japan was the fourth largest U.S. agriculture
Japan remains on the U.S. Treasury Department’s currency
market, with exports of $11.9 billion. Japan’s import
monitoring list due to its large trade and current account
sensitivities in the sector, however, may limit its
surpluses with the United States. USMCA commitments,
concessions to those provided in the TPP (considered
Japan’s most ambitious commitments to date
which could serve as a template for talks with Japan,
). In
includes the first ever chapter on exchange rate policies in a
announcing new talks, Abe said Japan plans to limit new
negotiated U.S. FTA, and it goes further than the non-
agriculture market access to offers in existing FTAs.
binding declaration on currency in the proposed TPP.
Motor Vehicles
Issues for Congress
Motor vehicles have long been contentious in U.S.-Japan
Scope of Negotiations and TPA. The initial framing of the
trade relations. Three major factors influence bilateral
negotiations emphasized a focus on areas that produce
dynamics in the industry: (1) autos and parts are the top
“early achievements,” while USTR’s objectives suggest
U.S. import from Japan, accounting for more than one-third
talks aim to cover a broad agenda. The possibility that talks
of all goods imports; (2) despite being the third-largest
may proceed in stages raises some questions for U.S.
world auto market, Japan imports very few U.S.-made autos
stakeholders regarding what areas will be prioritized and
($2.3 billion in 2017) leading to a major bilateral U.S.
whether outcomes will meet congressional expectations or
deficit in the sector; and (3) major Japanese investment in
TPA requirements. The debate over pending ratification of
U.S. production facilities ($51.8 billion in 2017, or about
USMCA may also influence U.S. approaches to Japan talks.
one-third of Japan’s FDI in U.S. manufacturing facilities)
supports nearly 350,000 direct and indirect U.S. jobs, as per
Trade Deficit. Among top USTR objectives related to trade
the Japan Automobile Manufacturers Association.
in goods is to “improve the U.S. trade balance and reduce
the trade deficit with Japan.” The focus on deficits, which
Japan has no auto tariffs, but U.S. industry argues that non-
presumably will center on autos, is likely to be a source of
tariff barriers, including inequitable regulatory treatment,
tension; Japan and other countries generally view bilateral
have led to poor U.S. sales abroad. Japanese stakeholders
trade imbalances as just one aspect of trade relations and
counter that failure by U.S. industry to adjust to its market
less an indicator of a relationship’s “fairness.”
characteristics is to blame. TPP included commitments on
non-tariff issues, but arguably the most significant
Presidential Tariff Authorities. The March 2018
provisions affecting auto trade were the 25- and 30-year
imposition of U.S. Section 232 tariffs on Japanese metals
phase-out periods for the 2.5% and 25% U.S. car and light
imports created new uncertainties in the bilateral
truck tariffs, respectively. President Trump has repeatedly
relationship. Unlike other countries, Japan has not filed a
flagged the U.S. trade deficit in autos and noted that in the
dispute at the World Trade Organization (WTO), though it
new talks, U.S. aims include market access outcomes that
is considering retaliatory tariffs on U.S. products. While the
will increase U.S. production and employment in the sector.
Trump Administration indicated it would hold off on new
Establishing auto rules of origin in the agreement may be a
tariffs against Japanese autos as new trade talks proceed,
challenge given extensive U.S. supply chains links in North
the issue could feature prominently in the negotiations.
America and widespread Japanese sourcing in Asia.
For more information, see CRS Report RL33436, Japan-
Services
U.S. Relations: Issues for Congress.
The United States has a bilateral services trade surplus, and
Japan is a major market for U.S. service providers. For
Cathleen D. Cimino-Isaacs, Analyst in International Trade
example, the Japanese insurance market is the second
and Finance
largest in the world behind the United States, accounting for
Brock R. Williams, Specialist in International Trade and
nearly 30% of all U.S. foreign affiliate sales in the industry
Finance
in 2016 ($48.9 billion). Japan Post, the state-owned postal
service and among Japan’s largest banks and insurers, has
IF11120
moved toward privatization but remains majority-owned by
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U.S.-Japan Trade Agreement Negotiations


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