Updated October 3, 2019
U.S.-Japan Trade Agreement Negotiations
Overview
billion in 2018, with manufacturing accounting for the
On September 25, 2019, President Trump and Prime
largest share.
Minister Abe announced they had finalized a limited
The size of the bilateral goods trade deficit, which at $67.6
bilateral trade agreement consisting of tariff cuts on
billion was the fourth-largest U.S. deficit in 2018, remains a
agricultural and industrial goods and commitments on
source of tension, as does the view by some observers that
digital trade. The two sides stated their intent to begin
the imbalance stems in part from various nontariff barriers
negotiations on a more comprehensive deal after this initial
in the Japanese market. Such concerns arguably peaked in
agreement enters into force. Congress will likely not have a
the 1980s and 1990s, dissipating over the past two decades
formal role in approving the “first stage” agreement, as the
in the face of Japan’s domestic economic challenges, major
Trump Administration intends to use delegated tariff
Japanese investment in the United States, and a shift in U.S.
proclamation authorities in Trade Promotion Authority
focus to concerns over trade with China. The Trump
(TPA) legislation to enact the agreed-upon tariff changes,
Administration, however, has renewed focus on the trade
while the digital trade commitments are to take the form of
deficit.
an Executive Agreement. Japan’s Diet, however, will have
to ratify the agreement before it can enter into force. The
Figure 1. Top U.S. Trade Partners, 2018
Administration expects the agreement to take effect on
January 1, 2020. As the fourth-largest U.S. trade partner,
Japan is a priority for U.S. trade negotiations, especially as
recent Japanese free trade agreements (FTAs), including
with the European Union (EU) and the TPP-11 (successor
to the Trans-Pacific Partnership (TPP) following U.S.
withdrawal), lower Japan’s tariffs on imports from several
countries, placing U.S. exporters at a disadvantage.
Notably, the limited agreement does not include trade
commitments on motor vehicles, a long-standing area of
bilateral tension. On May 17, 2019, following an
investigation by the U.S. Department of Commerce under
Section 232 of the Trade Expansion Act of 1962, President

Trump proclaimed motor vehicle and parts imports,
Source: CRS with data from Bureau of Economic Analysis (BEA).
particularly from Japan and the EU, a threat to U.S. national
security. This grants the President the authority to impose
Japan’s FTAs with Other Major Markets
import restrictions. The President directed the United States
In 2018, Japan ratified two major FTAs, which exclude the
Trade Representative (USTR) to negotiate with Japan (and
United States and could have significant implications for
the EU) to address this threat and report back within 180
U.S. stakeholders. The Japan-led Comprehensive and
days. USTR Lighthizer stated that in light of the new
Progressive Agreement for Trans-Pacific Partnership (or
agreement, the Administration has no intent, “at this point,”
TPP-11), which took shape after U.S. withdrawal from
to pursue additional Section 232 U.S. auto import
TPP, entered into force at the end of 2018. Meanwhile, the
restrictions. Japan strongly opposed U.S. Section 232 tariffs
EU and Japan entered into an FTA in February 2019: these
on imports of steel and aluminum in place since March
two trading partners accounted for nearly 30% of total U.S.
2018, but did not retaliate against the tariffs, in contrast
trade in 2018. U.S. exporters raise concerns that Japan’s
with several other U.S. trade partners. Alleviating the auto
reduced tariffs and nontariff barriers on imports from TPP-
tariff threat was a key objective of Japan in the recent talks.
11 and EU countries, particularly on agricultural products,
Bilateral Trade and Economic Relations
such as Japan’s relatively high 38.5% beef tariff, threaten
U.S. export competitiveness. New rules in the FTAs have
The world’s third-largest economy, Japan is the fourth-
also led to concerns that they may not reflect U.S. priorities.
largest U.S. trade partner, fourth-largest U.S. investment
E-commerce provisions in the EU-Japan FTA, for example,
partner, and largest foreign holder of U.S. government debt.
do not cover the free flow of data, unlike the proposed U.S.-
In 2018, U.S. exports to Japan totaled $121.1 billion, with
Mexico-Canada Agreement (USMCA). Meanwhile, TPP-11
$75.7 billion in goods and $45.4 billion in services. U.S.
also suspended 22, largely U.S.-priority, provisions from
imports totaled $179.1 billion, with goods accounting for
the original TPP text, including some of relevance in Japan,
the bulk of imports ($144.6 billion), most notably motor
such as prohibiting cross-subsidization of express delivery
vehicles and parts ($56.0 billion). The stock of U.S. foreign
services by monopoly postal services (e.g., Japan Post).
direct investment (FDI) in Japan was valued at $125.5
billion in 2018, concentrated in finance and insurance.
Japanese FDI stock in the United States totaled $484.4
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U.S.-Japan Trade Agreement Negotiations
Scope of U.S.-Japan Negotiations
Potential Provisions in Future Talks
The Administration’s decision to pursue negotiations with
Japan in stages is a departure from past U.S. FTA practice,
Motor Vehicles
which typically involves one comprehensive negotiation.
Autos and parts account for more than one-third of U.S.
U.S. negotiating objectives released in December 2018, as
imports from Japan, and a reduction of U.S. 2.5% and 25%
required by TPA, suggested a broad range of issues would
car and light truck tariffs, respectively, is likely to be a
be covered in addition to tariffs and digital trade, including
primary Japanese goal in next stage talks. Japan has no auto
services, investment, intellectual property, and state-owned
tariffs, but imports few U.S.-made autos ($2.4 billion in
enterprises. The two countries aim to begin the second stage
2018). U.S. industry argues this stems from nontariff
barriers, including discriminatory regulatory treatment,
of talks within four months after entry into force of the
while Japan argues that U.S. producers’ inability to cater to
initial agreement. U.S. businesses advocate for continued
the Japanese market is to blame. President Trump has
progress toward a more comprehensive deal with Japan,
repeatedly flagged the U.S. autos trade deficit and noted
while other stakeholders question whether there will be
that U.S. goals in trade talks include market access
sufficient political momentum in both countries to make
outcomes that will increase U.S. auto production and
progress in future talks. Several analysts also question the
employment. While Japan buys few U.S. cars, Japanese
extent to which the limited agreement adheres to Article
FDI in U.S. production facilities ($51 billion in 2018)
XXIV of the General Agreement on Tariffs and Trade
supports 170,000 U.S. jobs, according to the BEA.
(GATT) under the WTO that requires FTAs cover
“substantially all trade,” in particular given the exclusion of
Services
auto trade. Congress has historically taken issue with other
The United States has a bilateral services trade surplus, and
countries’ partial scope agreements, advocating for better
Japan is a major market for U.S. service providers. For
adherence to Article XXIV, including in legislation.
example, the Japanese insurance market is the second
Though adherence to Article XXIV has rarely been
largest in the world behind the U.S. market, accounting for
challenged at the WTO, whether or not the U.S.-Japan deal
nearly 30% of all U.S. foreign affiliate sales in the industry
violates the letter or spirit of this WTO requirement likely
in 2016 ($48.9 billion). Historically, U.S. firms have found
depends on the timeline and scope of next stage talks.
it difficult to enter segments of the Japanese market and
argue that Japan confers preferential treatment on insurance
Initial Trade Agreement Provisions
and express delivery subsidiaries of Japan Post, the state-
The text of the initial agreement has not yet been released,
owned postal service and one of Japan’s largest banks and
but according to official statements, it covers agricultural
insurers. Several TPP provisions were designed to address
and industrial goods market access and digital trade.
such concerns, and crafting similar rules in future talks may
be a negotiating priority for the United States.
Market Access for Agriculture
Currency
Opening Japan’s highly protected agriculture market and
Some U.S. stakeholders argue currency commitments
reaching parity with exporters from Japan’s FTA partners is
should be a priority in the negotiations, as exchange rates
a major priority for U.S. industry. In 2018, Japan was the
have a significant effect on trade flows. A weaker yen
fourth-largest U.S. agriculture market, with exports of
makes imports from Japan cheaper in the U.S. market while
$12.9 billion. According to USTR, the agreement will lead
to “substantial market access”
increasing the cost of U.S. exports. Japan has not intervened
for over $7 billion of U.S.
directly in foreign exchange markets since 2011, but
agricultural exports through reduced or eliminated tariffs
remains on the U.S. Department of the Treasury’s currency
and U.S.-specific quotas, benefiting various products,
monitoring list. USMCA includes the first-ever U.S. FTA
including beef, pork, wheat, cheese, and wine. The
commitments on exchange rates and could serve as a
agreement is also to include U.S. tariff reductions for
template in the Japan talks.
certain niche products such as cut flowers, persimmons, and
green tea, and modifications to the U.S. global tariff rate
Issues for Congress
quota for beef. While U.S. industry generally supports the
The Administration’s decision to pursue a limited scope
agreement, certain sectors including dairy and rice
trade agreement with Japan in stages, while considering
expressed concerns about the extent of new market access
U.S. tariff actions under Section 232, raises a number of
or the lack of attention to other key issues, such as
questions for Congress including:
geographical indications (GIs) and sanitary and phyto-

sanitary standards (SPS), which are among the areas
What areas should USTR prioritize in future talks?

typically covered in comprehensive U.S. FTAs.
Do negotiated outcomes adhere to TPA requirements?
 What role should Congress play in limited agreements?
Market Access for Industrial Goods
 Will a limited agreement make it easier or more difficult
USTR stated that the agreement includes U.S. tariff cuts on
to address future bilateral trade liberalization?
machine tools, fasteners, steam turbines, bicycles and parts,
 How do U.S. auto imports threaten national security?
and musical instruments. U.S. auto tariffs are not included.
Rules on Digital Trade
For more information, see CRS Report RL33436, Japan-
U.S. Relations: Issues for Congress
.
On digital trade, an area in which the two countries have
largely similar goals, USTR referred to the agreement as a
Cathleen D. Cimino-Isaacs, Analyst in International Trade
“gold standard” that meets the rules set by the proposed
and Finance
USMCA. Key provisions include prohibition of localization
Brock R. Williams, Specialist in International Trade and
barriers in the digital space and commitments on
nondiscriminatory treatment and cross-border data flows.
Finance
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U.S.-Japan Trade Agreement Negotiations

IF11120


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https://crsreports.congress.gov | IF11120 · VERSION 10 · UPDATED