Updated April 26, 2019
U.S.-Japan Trade Agreement Negotiations
Overview
face of Japan’s domestic economic challenges, major
In April 2019, the United States and Japan held their first
Japanese investment in the United States, Japan’s increased
round of negotiations toward a new bilateral trade
economic openness, and a shift in U.S. focus to concerns
agreement. The Trump Administration is pursuing the talks
over trade relations with China. The Trump Administration,
with Japan under U.S. Trade Promotion Authority (TPA)
however, has renewed U.S. focus on the trade deficit.
procedures, potentially allowing for expedited legislative
consideration of a concluded agreement. As the fourth-
Figure 1. Top U.S. Trade Partners, 2018
largest U.S. trade partner, Japan is a long-standing U.S.
priority for trade negotiations, in particular following the
2017 U.S. withdrawal from the proposed Trans-Pacific
Partnership (TPP), which included Japan. The two parties
continue to negotiate on the precise scope of the talks, but
both sides appear to prioritize quick results over a more
comprehensive negotiation. Key issues are likely to include
trade commitments on motor vehicles, agricultural goods,
and services, as well as areas where the two nations have
largely similar goals, such as digital trade. Currency
commitments are a priority among some U.S. stakeholders,
but Japan opposes including them in the trade talks.
Japan’s recent free trade agreements (FTAs) with major

non-U.S. trading partners set new rules and lower tariffs
Source: CRS with data from Bureau of Economic Analysis (BEA).
among the parties, disadvantaging U.S. exporters and

further incentivizing U.S. interest in new talks. Japan had
Scope and Timing of Negotiations
preferred a regional approach to trade negotiations, and
The potential scope of the trade talks remains unclear, in
urged the United States to reconsider its TPP withdrawal.
part due to differing characterizations by the two sides.
Some suggest Japan became more willing to enter bilateral
Prime Minister Abe initially referred to the talks as goods-
talks after President Trump in May 2018 launched a Section
only negotiations, differing from other comprehensive
232 investigation that could result in increased tariffs on
Japanese FTAs. Meanwhile, U.S. negotiating objectives
Japanese autos and auto parts—Japan’s top export to the
released in December 2018, as required by TPA, suggested
United States and a major source of the U.S. trade deficit
a broad range of issues would be covered, including trade in
with Japan. Japan strongly opposed U.S. Section 232 tariffs
goods, services, investment, intellectual property, state-
on imports of steel and aluminum—deemed a threat to U.S.
owned enterprises, and digital trade. USTR indicated that it
national security—in place since March 2018.
may pursue negotiations with Japan in stages, in
consultation with Congress, which would represent a shift
Bilateral Trade and Economic Relations
in approach from past U.S. FTAs, which typically involve
The world’s third-largest economy, Japan is the fourth-
one comprehensive negotiation.
largest U.S. trade partner, fourth-largest U.S. investment
partner, and second-largest foreign holder of U.S.
U.S. exporters in key sectors such as automobiles,
government debt. In 2018, U.S. exports to Japan totaled
agriculture, and services have been challenged by
$121.1 billion, with $75.7 billion in goods and $45.4 billion
multiple tariff and nontariff barriers for decades.
in services. U.S. imports totaled $179.1 billion, with goods
USTR, USJTA Negotiating Objectives, December 2018
accounting for the bulk of imports ($144.6 billion), most
notably motor vehicles and parts ($56.0 billion). The stock
Japan’s FTAs with Other Major Markets
of U.S foreign direct investment (FDI) in Japan was valued
In 2018, Japan concluded and ratified two major FTAs,
at $129.1 billion in 2017, concentrated in finance and
which exclude the United States and could have significant
insurance ($64.1 billion). Japanese FDI stock in the United
implications for U.S. stakeholders. The Japan-led
States totaled $469.1 billion in 2017, with manufacturing
Comprehensive and Progressive Agreement for Trans-
accounting for the largest share ($157.3 billion).
Pacific Partnership (or TPP-11), which took shape after the
U.S. withdrawal from TPP, entered into force at the end of
The size of the bilateral goods trade deficit, which at $67.6
2018. Meanwhile, the European Union (EU) and Japan,
billion was the fourth-largest U.S. deficit in 2018, remains a
which together accounted for more than one-quarter of total
source of tension, as does the idea that the imbalance stems
U.S. trade in 2018, entered into an FTA in February 2019.
in part from various nontariff barriers in the Japanese
U.S. exporters raise concerns that Japan’s reduced tariffs on
market. Such concerns arguably peaked in the 1980s and
imports from TPP-11 and EU countries, particularly on
early 1990s, dissipating over the past two decades in the
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U.S.-Japan Trade Agreement Negotiations
agricultural products such as Japan’s relatively high 38.5%
express delivery subsidiaries of Japan Post. Several TPP
beef tariff, threaten U.S. export competitiveness. New rules
provisions were designed to level the playing field for
in the FTAs have also led to concerns that they may not
services suppliers, and crafting similar rules in the new
reflect U.S. priorities. E-commerce provisions in the EU-
talks may be a negotiating priority for the United States.
Japan FTA, for example, do not cover the free flow of data,
Currency and Other Issues
unlike the recently negotiated U.S.-Mexico-Canada
Some U.S. stakeholders argue currency commitments
Agreement (USMCA). Meanwhile, TPP-11 also suspended
should be a priority in the negotiations, as exchange rates
22, largely U.S.-priority, provisions from the original TPP
have a significant effect on trade flows and the U.S. trade
text, including some of relevance in Japan, such as
deficit. A weaker yen makes imports from Japan cheaper in
prohibiting cross-subsidization of express delivery services
the U.S. market while increasing the cost of U.S. exports.
by monopoly postal services (e.g., Japan Post).
Although Japan has not intervened directly in foreign
Key Sectors and Potential Provisions
exchange markets since 2011, monetary stimulus under the
“Abenomics” program has put significant downward
Agriculture
pressure on the yen. Japan remains on the U.S. Treasury
Opening Japan’s highly protected agriculture market and
Department’s currency monitoring list due to its large trade
reaching parity with exporters from Japan’s FTA partners is
and current-account surpluses with the United States.
a major priority for U.S. industry. In 2018, Japan was the
USMCA includes the first-ever U.S. FTA commitments on
fourth-largest U.S. agriculture market, with exports of
exchange rates and could serve as a template in the Japan
$12.9 billion. Japan’s import sensitivities, however, may
talks (TPP included a nonbinding declaration on currency).
limit its concessions to those provided in TPP-11
Japan opposes including currency provisions in the talks.
(considered Japan’s most ambitious commitments to date).
Digital Trade and Other Issues
Prime Minister Abe stated Japan plans to limit new
On a number of trade issues, such as digital trade and state-
agriculture market access to offers in existing FTAs.
owned enterprises, the two countries have largely similar
Motor Vehicles
goals. Commitments on these topics may also be included;
Motor vehicles have long been contentious in U.S.-Japan
USTR stated a need for “high standards in the area of
trade relations. Three major factors influence bilateral
digital trade” after the first round of negotiations.
dynamics in the industry: (1) autos and parts are top U.S.
Issues for Congress
imports from Japan (more than one-third of all goods
imports); (2) despite being the third-largest world auto
Scope of Negotiations and TPA. The initial framing of the
market, Japan imports few U.S.-made autos ($2.4 billion in
negotiations emphasized a focus on “early achievements,”
2018), leading to a major bilateral U.S. deficit in the sector;
while USTR’s objectives suggest talks aim to cover a broad
and (3) major Japanese investment in U.S. production
agenda. The possibility that talks may proceed in stages
facilities ($51.8 billion in 2017, or about one-third of
raises questions for U.S. stakeholders regarding what areas
Japan’s FDI in U.S. manufacturing) supports nearly
will be prioritized and whether outcomes will meet
350,000 direct and indirect U.S. jobs, per the Japan
congressional expectations or TPA requirements. Debate
Automobile Manufacturers Association.
over pending ratification of USMCA may also influence
U.S. approaches to talks with Japan.
Japan has no auto tariffs, but U.S. industry argues that
nontariff barriers, including discriminatory regulatory
Trade Deficit. Among top USTR objectives related to trade
treatment, disadvantage U.S. sales. Japanese stakeholders
in goods is to “improve the U.S. trade balance and reduce
counter that failure by U.S. industry to adjust to its market
the trade deficit with Japan.” The focus on deficits, which
characteristics is to blame. TPP included commitments on
presumably will center on autos, is likely to be a source of
nontariff issues, but arguably, the most significant
tension. Economists generally view trade deficits as driven
provisions affecting auto trade were the 25- and 30-year
by macroeconomic forces, such as aggregate savings rates,
phaseout periods for the 2.5% and 25% U.S. car and light
and less as an indicator of a trade relationship’s “fairness.”
truck tariffs, respectively. President Trump has repeatedly
U.S. Tariff Actions. The March 2018 imposition of U.S.
flagged the U.S. trade deficit in autos and noted that U.S.
Section 232 tariffs on Japanese steel and aluminum imports
goals in the new talks include market access outcomes that
created new uncertainties in the bilateral relationship.
will increase U.S. auto production and employment.
Unlike other countries, Japan has not filed a dispute at the
Establishing auto rules of origin in the agreement may be a
World Trade Organization (WTO), though it is considering
challenge given extensive U.S. supply chain links in North
retaliatory tariffs on U.S. products. While the Trump
America and widespread Japanese sourcing in Asia.
Administration indicated it would hold off on new tariffs
Services
against Japanese autos as new trade talks proceed, the issue
The United States has a bilateral services trade surplus, and
could feature prominently in the negotiations.
Japan is a major market for U.S. service providers. For
example, the Japanese insurance market is the second
For more information, see CRS Report RL33436, Japan-
largest in the world behind the U.S. market, accounting for
U.S. Relations: Issues for Congress.
nearly 30% of all U.S. foreign affiliate sales in the industry
Cathleen D. Cimino-Isaacs, Analyst in International Trade
in 2016 ($48.9 billion). Japan Post, the state-owned postal
and Finance
service, is among Japan’s largest banks and insurers; it has
moved toward privatization but remains majority-owned by
Brock R. Williams, Specialist in International Trade and
the government. Historically, U.S. firms have found it
Finance
difficult to enter segments of the Japanese market and argue
IF11120
that Japan confers preferential treatment on insurance and
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U.S.-Japan Trade Agreement Negotiations


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https://crsreports.congress.gov | IF11120 · VERSION 3 · UPDATED

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