Updated September 12, 2019
U.S.-Japan Trade Agreement Negotiations
Overview
The size of the bilateral goods trade deficit, which at $67.6
In April 2019, the United States and Japan held their first
billion was the fourth-largest U.S. deficit in 2018, remains a
round of negotiations toward a new bilateral trade
source of tension, as does the view by some observers that
agreement. The Trump Administration is pursuing the talks
the imbalance stems in part from various nontariff barriers
with Japan under U.S. Trade Promotion Authority (TPA)
in the Japanese market. Such concerns arguably peaked in
procedures, potentially allowing for expedited legislative
the 1980s and 1990s, dissipating over the past two decades
consideration of a concluded agreement. As the fourth-
in the face of Japan’s domestic economic challenges, major
largest U.S. trade partner, Japan is a long-standing U.S.
Japanese investment in the U.S., and a shift in U.S. focus to
priority for trade negotiations, especially as recent Japanese
concerns over trade with China. The Trump Administration,
trade agreements, including the EU-Japan FTA and the
however, has renewed focus on the trade deficit.
TPP-11 (successor to the Trans-Pacific Partnership (TPP)
following U.S. withdrawal), lower Japan’s tariffs on
Figure 1. Top U.S. Trade Partners, 2018
imports from several countries, placing U.S. exporters at a
disadvantage. In August, President Trump and Prime
Minister Abe announced they reached an agreement on
“core principles” of a trade agreement covering agricultural
market access, some industrial goods tariffs, and rules on
digital trade. Both sides have released few details on the
exact terms, but indicate they aim to finalize and sign the
deal by late September.
The announced deal reportedly does not cover trade
commitments on motor vehicles, a long-standing area of
bilateral tension. President Trump has stated he is using the
threat of increased U.S. auto tariffs to influence the broader
negotiations. On May 17, 2019, following a Section 232

investigation by the U.S. Department of Commerce,
Source: CRS with data from Bureau of Economic Analysis (BEA).
President Trump proclaimed motor vehicle and parts

imports, particularly from Japan and the European Union
(EU), a threat to U.S. national security. This grants the
Scope and Timing of Negotiations
President the authority to impose import restrictions. The
The potential scope of the trade talks was unclear from the
President directed the U.S. Trade Representative (USTR) to
onset, in part due to differing characterizations by the two
negotiate with Japan (and the EU) to address this threat and
sides. Both sides appear to prioritize quick results over a
report back within 180 days. Japan strongly opposed U.S.
more comprehensive negotiation. Prime Minister Abe
Section 232 tariffs on imports of steel and aluminum in
initially referred to the talks as goods-only negotiations,
place since March 2018, but did not retaliate against the
differing from other comprehensive Japanese FTAs.
tariffs, in contrast with several other U.S. trade partners.
Meanwhile, U.S. negotiating objectives released in
Given that motor vehicles are the top Japanese export to the
December 2018 suggested a broad range of issues would be
United States, U.S. import restrictions on the sector would
covered, including trade in goods, services, investment,
likely create a strong backlash from Japan.
intellectual property, state-owned enterprises, and digital
trade. USTR indicated that it may pursue negotiations with
Bilateral Trade and Economic Relations
Japan in stages, however, in consultation with Congress.
The world’s third-largest economy, Japan is the fourth-
This would depart from past U.S. FTA practice, which
largest U.S. trade partner, fourth-largest U.S. investment
typically involves one comprehensive negotiation.
partner, and largest foreign holder of U.S. government debt.
In 2018, U.S. exports to Japan totaled $121.1 billion, with
Japan’s FTAs with Other Major Markets
$75.7 billion in goods and $45.4 billion in services. U.S.
In 2018, Japan ratified two major FTAs, which exclude the
imports totaled $179.1 billion, with goods accounting for
United States and could have significant implications for
the bulk of imports ($144.6 billion), most notably motor
U.S. stakeholders. The Japan-led Comprehensive and
vehicles and parts ($56.0 billion). The stock of U.S. foreign
Progressive Agreement for Trans-Pacific Partnership (or
direct investment (FDI) in Japan was valued at $125.5
TPP-11), which took shape after U.S. withdrawal from
billion in 2018, concentrated in finance and insurance.
TPP, entered into force at the end of 2018. Meanwhile, the
Japanese FDI stock in the United States totaled $484.4
EU and Japan entered into an FTA in February 2019: these
billion in 2018, with manufacturing accounting for the
two trading partners accounted for more than one-quarter of
largest share.
total U.S. trade in 2018. U.S. exporters raise concerns that
Japan’s reduced tariffs and nontariff barriers on imports
https://crsreports.congress.gov

---

U.S.-Japan Trade Agreement Negotiations
from TPP-11 and EU countries, particularly on agricultural
characteristics is to blame. TPP included commitments on
products, such as Japan’s relatively high 38.5% beef tariff,
nontariff issues, but arguably, the most significant
threaten U.S. export competitiveness. New rules in the
provisions affecting auto trade were the 25- and 30-year
FTAs have also led to concerns that they may not reflect
phaseout periods for the 2.5% and 25% U.S. car and light
U.S. priorities. E-commerce provisions in the EU-Japan
truck tariffs, respectively. President Trump has repeatedly
FTA, for example, do not cover the free flow of data, unlike
flagged the autos trade deficit and noted that U.S. goals in
the proposed U.S.-Mexico-Canada Agreement (USMCA).
the talks include market access outcomes that will increase
Meanwhile, TPP-11 also suspended 22, largely U.S.-
U.S. auto production and employment.
priority, provisions from the original TPP text, including
Services
some of relevance in Japan, such as prohibiting cross-
The United States has a bilateral services trade surplus, and
subsidization of express delivery services by monopoly
Japan is a major market for U.S. service providers. For
postal services (e.g., Japan Post).
example, the Japanese insurance market is the second
Announced Agreement in Principle
largest in the world behind the U.S. market, accounting for
nearly 30% of all U.S. foreign affiliate sales in the industry
USTR specified that the agreement covers market access in
in 2016 ($48.9 billion). Historically, U.S. firms have found
agriculture and some industrial goods, and digital trade.
it difficult to enter segments of the Japanese market and
Market Access in Agriculture and Goods
argue that Japan confers preferential treatment on insurance
Opening Japan’s highly protected agriculture market and
and express delivery subsidiaries of Japan Post, the state-
reaching parity with exporters from Japan’s FTA partners is
owned postal service and one of Japan’s largest banks and
a major priority for U.S. industry. In 2018, Japan was the
insurers. Several TPP provisions were designed to address
fourth-largest U.S. agriculture market, with exports of
such concerns, and crafting similar rules in the talks may be
$12.9 billion. From the onset of negotiations, Japan stated
a negotiating priority for the United States.
its plans to limit additional agriculture market access to
Currency and Other Issues
offers in existing FTAs, including the TPP-11. According to
Some U.S. stakeholders argue currency commitments
USTR Lighthizer, the announced agreement will “open up
should be a priority in the negotiations, as exchange rates
markets to over $7 billion” of U.S. agricultural exports, and
have a significant effect on trade flows. A weaker yen
“lead to substantial reductions in tariffs and nontariff
makes imports from Japan cheaper in the U.S. market while
barriers,” benefiting various products, including beef, pork,
increasing the cost of U.S. exports. Although Japan has not
wheat, dairy, wine, and ethanol. Few details were offered
intervened directly in foreign exchange markets since 2011,
on the specific tariff reductions for industrial goods, but
Japan remains on the U.S. Department of the Treasury’s
USTR confirmed U.S. auto tariffs are not included.
currency monitoring list. USMCA includes the first-ever
Rules on Digital Trade
U.S. FTA commitments on exchange rates and could serve
On digital trade, an area in which the two countries have
as a template in the Japan talks (TPP included a nonbinding
largely similar goals, Lighthizer referred to the announced
declaration on currency).
agreement as a “gold standard.” Many observers expect the
Issues for Congress
terms to largely reflect the content of the TPP-11 and
proposed USMCA. Key provisions in those agreements
Scope and TPA. As the agreement takes shape, there are
included prohibition of localization barriers in the digital
questions regarding what areas will be prioritized, what
space and commitments on cross-border data flows.
areas may be subject to future talks, and if outcomes will
meet TPA and congressional requirements. Chairman
Other Potential Provisions
Grassley of the Senate Finance Committee has stated the
U.S. negotiating objectives include several other issues of
agreement is not likely to require congressional action
importance to the U.S.-Japan trade relationship. It is unclear
given certain delegated presidential tariff authorities, but
to what extent these may be subject to future negotiations.
other Members have raised questions about the appropriate
congressional role. In reaction to the announced agreement,
Motor Vehicles
U.S. businesses advocated for continued progress toward a
The announced deal reportedly does not cover trade
broader, comprehensive deal with Japan, similar to past
commitments on autos or address pending U.S. Section 232
U.S. FTAs. A narrow agreement could potentially violate
tariffs. Following the announcement, President Trump
the World Trade Organization (WTO) provision that
indicated that he is not considering increased tariffs “at this
requires FTAs cover “substantially all trade.”
moment.” Three major factors influence bilateral dynamics
U.S. Tariff Actions. The President’s declaration that auto
in the industry: (1) autos and parts are top U.S. imports
imports threaten U.S. national security and the emphasis on
from Japan (more than one-third of all imports); (2) despite
“American-owned” production facilities is opposed by
being the third-largest world auto market, Japan imports
Japanese firms, which have significant U.S. investments
few U.S.-made autos ($2.4 billion in 2018), leading to a
supporting 170,000 U.S. jobs, according to the BEA. It also
major bilateral U.S. deficit in the sector; and (3) major
raises questions over the definition of national security and
Japanese FDI in U.S. production facilities ($51 billion in
congressional intent for the President’s use of Section 232.
2018, one-third of Japan’s FDI in U.S. manufacturing, per
For more information, see CRS Report RL33436, Japan-
the Japan Automobile Manufacturers Association).
U.S. Relations: Issues for Congress.
Japan has no auto tariffs, but U.S. industry argues that
nontariff barriers, including discriminatory regulatory
Cathleen D. Cimino-Isaacs, Analyst in International Trade
treatment, disadvantage U.S. sales. Japanese stakeholders
and Finance
counter that failure by U.S. industry to adjust to its market
https://crsreports.congress.gov

---

U.S.-Japan Trade Agreement Negotiations

IF11120
Brock R. Williams, Specialist in International Trade and
Finance


Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF11120 · VERSION 7 · UPDATED

---