Updated June 5, 2019
U.S.-Japan Trade Agreement Negotiations
Overview
States totaled $469.1 billion in 2017, with manufacturing
In April 2019, the United States and Japan held their first
accounting for the largest share ($157.3 billion).
round of negotiations toward a new bilateral trade
The size of the bilateral goods trade deficit, which at $67.6
agreement. The Trump Administration is pursuing the talks
billion was the fourth-largest U.S. deficit in 2018, remains a
with Japan under U.S. Trade Promotion Authority (TPA)
source of tension, as does the idea that the imbalance stems
procedures, potentially allowing for expedited legislative
in part from various nontariff barriers in the Japanese
consideration of a concluded agreement. As the fourth-
market. Such concerns arguably peaked in the 1980s and
largest U.S. trade partner, Japan is a longstanding U.S.
early 1990s, dissipating over the past two decades in the
priority for trade negotiations, especially as recent Japanese
face of Japan’s domestic economic challenges, major
trade agreements, including the EU-Japan FTA and the
Japanese investment in the United States, Japan’s increased
TPP-11 (the successor to the Trans-Pacific Partnership
economic openness, and a shift in U.S. focus to concerns
(TPP) following U.S. withdrawal), lower Japan’s tariffs on
over trade relations with China. The Trump Administration,
imports from several countries, placing U.S. exporters at a
however, has renewed U.S. focus on the trade deficit.
disadvantage in the Japanese market. The two parties
continue to negotiate on the precise scope of the talks, but
Figure 1. Top U.S. Trade Partners, 2018
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.
On May 17, 2019, following an investigation by the U.S.
Department of Commerce, President Trump proclaimed
U.S. motor vehicle and parts imports, particularly from
Japan and the EU, a threat to U.S. national security. This
grants the President the authority to impose import
restrictions under Section 232 of the Trade Expansion Act

of 1962. The President directed the United States Trade
Source: CRS with data from Bureau of Economic Analysis (BEA).
Representative (USTR) to negotiate with Japan (and the

EU) to address this threat and report back within 180 days.
Scope and Timing of Negotiations
Japan strongly opposed U.S. Section 232 tariffs on imports
The potential scope of the trade talks remains unclear, in
of steel and aluminum in place since March 2018, but did
part due to differing characterizations by the two sides.
not retaliate against the tariffs, in contrast with several other
Prime Minister Abe initially referred to the talks as goods-
U.S. trade partners, including the EU and China. Given that
only negotiations, differing from other comprehensive
motor vehicles are the top Japanese export to the United
Japanese FTAs. Meanwhile, U.S. negotiating objectives
States, U.S. import restrictions on the sector would likely
released in December 2018, as required by TPA, suggested
create a strong backlash from Japan. President Trump has
a broad range of issues would be covered, including trade in
stated he is using the threat of auto tariffs to influence
goods, services, investment, intellectual property, state-
broader U.S.-Japan trade negotiations, but it is unclear what
owned enterprises, and digital trade. USTR indicated that it
auto outcomes the President seeks as part of the FTA talks.
may pursue negotiations with Japan in stages, in
Bilateral Trade and Economic Relations
consultation with Congress, which would represent a shift
The world’s third
in approach from past U.S. FTAs, which typically involve
-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
at $129.1 billion in 2017, concentrated in finance and
In 2018, Japan concluded and ratified two major FTAs,
insurance ($64.1 billion). Japanese FDI stock in the United
which exclude the United States and could have significant
implications for U.S. stakeholders. The Japan-led
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U.S.-Japan Trade Agreement Negotiations
Comprehensive and Progressive Agreement for Trans-
largest in the world behind the U.S. market, accounting for
Pacific Partnership (or TPP-11), which took shape after the
nearly 30% of all U.S. foreign affiliate sales in the industry
U.S. withdrawal from TPP, entered into force at the end of
in 2016 ($48.9 billion). Japan Post, the state-owned postal
2018. Meanwhile, the European Union (EU) and Japan,
service, is among Japan’s largest banks and insurers; it has
which together accounted for more than one-quarter of total
moved toward privatization but remains majority-owned by
U.S. trade in 2018, entered into an FTA in February 2019.
the government. Historically, U.S. firms have found it
U.S. exporters raise concerns that Japan’s reduced tariffs on
difficult to enter segments of the Japanese market and argue
imports from TPP-11 and EU countries, particularly on
that Japan confers preferential treatment on insurance and
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. Department
Opening Japan’s highly protected agriculture market and
of the Treasury’s currency monitoring list due to its large
reaching parity with exporters from Japan’s FTA partners is
trade 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 possibility that talks
market, Japan imports few U.S.-made autos ($2.4 billion in
may proceed in stages raises questions regarding what areas
2018), leading to a major bilateral U.S. deficit in the sector;
will be prioritized and whether outcomes will meet
and (3) major Japanese investment in U.S. production
congressional expectations or TPA requirements.
facilities ($51.8 billion in 2017, or about one-third of
Japan’s FDI
Trade Deficit. The Administration’s focus on deficits,
in U.S. manufacturing) supports nearly
which presumably will center on autos, is likely to be a
350,000 direct and indirect U.S. jobs, per the Japan
source of tension. Economists generally view trade deficits
Automobile Manufacturers Association.
as driven by macroeconomic forces and less as an indicator
Japan has no auto tariffs, but U.S. industry argues that
of a trade relationship’s “fairness.”
nontariff barriers, including discriminatory regulatory
U.S. Tariff Actions. President Trump’s declaration under
treatment, disadvantage U.S. sales. Japanese stakeholders
Section 232 that motor vehicle imports threaten U.S.
counter that failure by U.S. industry to adjust to its market
national security and its emphasis on “American owned”
characteristics is to blame. TPP included commitments on
production facilities is strongly opposed by Japanese auto
nontariff issues, but arguably, the most significant
firms, which have invested more than $50 billion dollars in
provisions affecting auto trade were the 25- and 30-year
the United States supporting 170,000 U.S. jobs, according
phaseout periods for the 2.5% and 25% U.S. car and light
to data from the Bureau of Economic Analysis. It also
truck tariffs, respectively. President Trump has repeatedly
raises questions over the definition of national security and
flagged the U.S. trade deficit in autos and noted that U.S.
congressional intent for the President’s use of Section 232.
goals in the new talks include market access outcomes that
will increase U.S. auto production and employment.
For more information, see CRS Report RL33436, Japan-
Establishing auto rules of origin in the agreement may be a
U.S. Relations: Issues for Congress.
challenge given extensive U.S. supply chain links in North
America and widespread Japanese sourcing in Asia.
Cathleen D. Cimino-Isaacs, Analyst in International Trade
Services
and Finance
The United States has a bilateral services trade surplus, and
Brock R. Williams, Specialist in International Trade and
Japan is a major market for U.S. service providers. For
Finance
example, the Japanese insurance market is the second
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U.S.-Japan Trade Agreement Negotiations

IF11120


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https://crsreports.congress.gov | IF11120 · VERSION 5 · UPDATED

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