U.S.-Japan Economic Ties: Status and Outlook

U.S.-Japan Economic Ties: Status and Outlook

Order Code IB97015
CRS Issue Brief for Congress
Received through the CRS Web
U.S.-Japan Economic Ties:
Status and Outlook
Updated September 30, 2003
William H. Cooper
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Overview of Japan-U.S. Economic Ties
Trends in U.S.-Japan Economic Ties
Japan’s Economic Problems
Major Issues
Steel Imports
Implementation of Agreements
Insurance
Autos and Autoparts
Flat Glass
Deregulation
Foreign Investment in Japan
Regional and Multilateral Negotiations
The Outlook for U.S.-Japan Economic Relations
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U.S.-Japan Economic Ties: Status and Outlook
SUMMARY
The U.S.-Japan relationship is a long-
ingly unfair one to the advantage of Japan, and
term one involving mutually accepted princi-
the U.S. deficit was considered to be the result
ples — regional economic and political stabil-
of unfair Japanese trade practices. Japan, on
ity; market-driven economies; and democratic
the other hand, argued that its growing advan-
systems of government. The relationship is
tage in trade was the result of the increasing
also complex, encompassing many factors.
competitiveness of Japanese-made products
and the inability of American products to
The United States and Japan are closely
compete in Japanese markets.
tied economically. Japan ranks third to Can-
ada and Mexico as the largest single-country
In the last few years, U.S.-Japan bilateral
market for U.S. exports. Japan is the leading
economic ties have become less tense, al-
market for U.S. agricultural exports. Japan is
though issues over imports of steel from
also the second largest supplier of U.S. im-
Japan, high Japanese tariffs on rice, and mar-
ports. The United States ranks as Japan’s
ket access in Japan for insurance, glass, and
number one export market and import sup-
photo film, have caused friction to increase
plier. The two economies are also tied by
recently. Moreover, differences have arisen
financial capital flows.
over how Japan should deal with its current
economic problems that have led to anemic or
Despite, or perhaps because of, the inter-
even negative economic growth since 1991.
dependence, U.S.-Japan ties have been bur-
dened by friction for many years. In the late
The United States and Japan work to-
1960s and the 1970s, these tensions derived
gether in multilateral fora, such as the World
from the growth in competition from Japanese
Trade Organization (WTO) and the
imports, first in labor-intensive goods, such as
Asian-Pacific Economic Cooperation (APEC)
wearing apparel, then later in more capital-
forum, a fledgling regional organization.
intensive goods, such as steel and cars. Since
the 1980s, as U.S. competitiveness in these
There is a long history of congressional
industries improved and/or as Japan’s compet-
interest in Japan because of Japan’s role as a
itiveness lessened, the emphasis of U.S. con-
world economic power and an important U.S.
cerns shifted to market access in Japan for
ally. Members are concerned about how trade
U.S.-made products, such as agricultural
and investment with Japan affects the United
products, semiconductors, cars and autoparts,
States as a whole and their constituencies in
and insurance.
particular. These U.S.-Japan ties are fre-
quently the subject of congressional commit-
For many on the U.S. side, especially
tee oversight hearings.
those adversely affected, the trading rela-
tionship with Japan was seen as an increas-
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
Japan announced on July 29 that it would raise tariffs on imported beef from 38.5% to
50.0% effective from August 1, 2003 through March 31, 2004. The increased tariffs are in
response to a surge in beef imports. U.S. Secretary of Agriculture Ann Veneman called the
higher tariffs "unnecessary and unwarranted.”
On May 23, during his Crawford, Texas summit meeting with Prime Minister Koizumi,
President Bush praised steps that the Japanese government was taking to deregulate its
economy and to return it to a path of sustained economic growth. However, on June 3, the
chairmen and ranking members of the Senate Finance Committee and House Ways and
Means Committees sent a joint letter to President Bush, stating that the United States needed
to press Japan to open its markets to U.S. exports of flat glass, financial services, autos, and
other products. The letter stated: “Although we understand that your recent meetings [in
Crawford] with the Prime Minister included discussions on economic issues, we urge you
to press Japan to continue to deregulate, reform its banking system, and open its markets to
U.S. goods, services, and farm products.”
Overview of Japan-U.S. Economic Ties
The U.S.-Japan relationship is a long-term one involving mutually accepted objectives
and principles — regional economic and political stability; market-driven economies; and
democratic systems of government. The relationship is also complex encompassing many
factors. During the Cold War, national security and defense matters largely defined the
relationship. But as the threat of the Soviet Union receded and eventually disappeared and
as U.S. and Japanese relations with China have changed, economic matters have become
more dominant in U.S.-Japan ties.
The United States and Japan are closely linked economically. Japan is the third largest
single-country U.S. export market and is actually the leading market for U.S. agricultural
exports, such as corn and wheat; for U.S. crude materials, such as wood; and for
U.S.-produced aircraft. Japan is also the second largest supplier of U.S. imports, including
cars, consumer electronics, telecommunications equipment, and computers. The United
States is Japan’s largest export market and import supplier.
The two economies are also tied by financial capital flows. Japan is one of the largest
sources of foreign portfolio capital (bank deposits, stocks, bonds, and other securities) and
of foreign direct investment (plants and real estate) in the United States. Likewise, the
United States is the largest source of foreign portfolio and direct investments in Japan.
Despite or perhaps because of the interdependence, U.S.-Japan ties had been burdened
by friction for many years. In the late 1960s and the 1970s, these tensions derived from the
growth in competition from Japanese imports, first in labor-intensive goods, such as wearing
apparel, then later in more capital-intensive goods, such as steel and cars. Since the 1980s,
as U.S. competitiveness in these industries improved and/or as Japan’s competitiveness
lessened, the emphasis of U.S. concerns shifted to market access in Japan for U.S.-made
products, such as agricultural products, semiconductors, cars and autoparts, and insurance.
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For many on the U.S. side, especially those adversely affected, the trading relationship
with Japan has been seen as increasingly unfair and favoring Japan, symbolized by the
imbalance in goods trade. Japan, on the other hand, has argued that its growing advantage
in trade has been the result of the increasing competitiveness of Japanese-made products and
the inability of American products to compete in Japanese markets.
U.S.-Japan trade friction subsided in the second half of the 1990s but differences over
imports of steel from Japan, high Japanese tariffs on rice, and market access in Japan for
insurance, and glass have caused friction to increase recently. But it has been Japan’s poor
economic performance since 1991 that has taken center stage in bilateral relations. The
United States and Japan also work together in multilateral fora, such as the World Trade
Organization (WTO) and the Asian-Pacific Economic Cooperation (APEC) forum, a
fledgling regional organization.
There is a long history of congressional interest in Japan because of its role as a world
economic power. Members are concerned about how trade and investment with Japan affect
the United States as a whole and their constituencies in particular. They are also concerned
about how tensions in economic relations affect the health of the U.S.-Japan alliance.
U.S.-Japan economic ties have been the impetus for major trade legislation and are
frequently the subject of congressional committee oversight hearings.
Trends in U.S.-Japan Economic Ties
For many years, the U.S.-Japan economic relationship has been clouded by persistent,
large imbalances. As Table 1 below indicates, the U.S. merchandise (exports and imports
of goods) trade deficit with Japan was a record $81.3 billion in 2000, but in 2001 the U.S.
deficit declined to $69.0 billion, but increased slightly to $70.1 billion in 2002. The deficit
is matching that pace in 2003 (based on data for the first seven months).
A more inclusive measure of trade balances is the balance on the current account, which
includes the balances in merchandise trade, investment income, trade in services, and
unilateral transfers. According to Department of Commerce data, the U.S. current account
deficit with Japan in 1999 was $87.8 billion and was $97.5 billion in 2000. In 2001, the
deficit declined to $78.3 billion but increased to $80.1 billion in 2002.
Economists generally attribute the persistent imbalances in U.S.-Japan trade to domestic
savings-investment imbalances in the two countries. Japan has a relatively high savings rate
that more than covers domestic (both private and government) investment requirements
while the United States has a lower savings rate that does not meet U.S. domestic private and
public investments needs. These imbalances are reflected in each country’s current account
balances with the world and with each other where Japan has consistently run surpluses
while the United States has run deficits.
Other factors, such as sudden changes in foreign exchange rates, can cause short-term
shifts in the trade balances. The Japanese yen depreciated in 2001 and into the beginning of
2002 in terms of the dollar, making U.S. exports to Japan more expensive and imports from
Japan cheaper causing U.S. exporters and import-sensitive producers some competitiveness
concerns. On January 2, 2001, the yen/dollar exchange rate was ¥114.75=$1.00. On
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February 26, 2002, the rate was ¥133.88 = $1.00, a 14.5% yen depreciation. However, the
yen has appreciated since then to ¥111.03 = $1.00 (Sept. 29 2003). The Bank of Japan has
intervened to dampen upward pressure on the yen.
Table 1. U.S. Merchandise Trade with Japan, 1992-2002
($ billions)
Year
Exports
Imports
Balances
1992
47.8
97.4
-49.6
1993
47.9
107.2
-59.4
1994
53.5
119.2
-65.7
1995
64.3
123.6
-59.3
1996
67.5
115.2
-47.6
1997
65.5
121.7
-56.1
1998
57.9
122.0
-64.1
1999
57.5
131.4
-73.9
2000
64.9
146.5
-81.6
2001
57.6
126.6
-69.0
2002
51.4
121.5
-70.1
2002*
29.9
68.8
-38.9
2003*
30.2
68.4
-38.1
* First seven months data
Source: U.S. Department of Commerce, Bureau of the Census. Exports are total exports
valued on a f.a.s. basis. Imports are general imports valued on a customs basis.
Japan’s Economic Problems
Japan’s economy has been anemic at best, and at times in decline, for most of the last
10 years. Economists and policymakers in Japan and in the United States have attributed
Japan’s difficulties to a number of factors. One has been the effects of the “burst” in the
economic “bubble,” in the early 1990s, which saw the value of land and other assets
collapse. The bursting of the bubble led to serious problems for Japan’s banking sector as
Japanese banks held loans made in the 1980s that had been backed up by inflated real estate.
These problems have dampened domestic demand. Furthermore, some analysts point to
Japanese fiscal policies that have emphasized budgetary restraint and increased taxes that
have also kept a lid on demand. To try to boost demand, the Japanese government has
implemented a series of fiscal stimulus packages since 1992.
In the longer term, Japanese and U.S. economists point to rigid government regulations
that stifle productivity in a number of sectors. The United States and others have been
pressuring Japan to undertake deregulation. (See section below on deregulation.)
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Except for some brief periods, Japan has incurred stagnant or negative economic
growth since 1991. In 2000, real GDP increased 1.5%, declined 0.5% in 2001, and increased
only 0.3% in 2002, and slightly over 1% for the first half of 2003. Independent analysts
remain skeptical of the long-term prospects for the Japanese economy given other indicators
showing weakness including declining business investment and an unemployment rate of
5.3% as of July 2003 (the latest data available). (For more information on Japan’s economic
problems, see CRS Report RL30176, Japan’s “Economic Miracle”: What Happened?.)
Major Issues
Besides the growing imbalance in bilateral trade, the United States and Japan confront
a range of issues, any or all of which could lead to sharpened tensions. The issues include
a sudden increase in steel imports from Japan and U.S. concerns over implementation of past
agreements. The United States and Japan also hold regular discussions over the latter’s
efforts at economic deregulation and on foreign investment in Japan.
U.S.-Japan Economic Partnership for Growth
At their June 30, 2001 summit meeting at Camp David, President Bush and Prime
Minister Koizumi announced the formation of a new bilateral framework for addressing
economic issues of mutual concern. The “U.S.-Japan Economic Partnership for Growth,”
(Economic Partnership) follows and draws from bilateral forums that previous U.S.
administrations established with their counterpart governments in Japan. In each case the
forum was designed to cover a broad range of complex issues.
The Economic Partnership consists of several initiatives or dialogues to include
participation from subcabinet level leaders from both governments and participation from
members of the business communities and other non-government sectors from both
countries. The U.S.-Japan Subcabinet Economic Dialogue will provide overall direction for
the Economic Partnership. Other elements of the Economic Partnership include: the
Regulatory Reform and Competition Policy Initiative (with working groups on
telecommunications, information technologies, energy, and medical devices and
pharmaceuticals, plus a cross-sectoral working group); the Financial Dialogue; the
Investment Initiative; and the Trade Forum. Each one of these elements will be responsible
for reporting to the president and the prime minister on the progress of their work.
Steel Imports
In 1998 the United States experienced a sharp increase in imports of various types of
steel products. Among the largest sources of the increases were Japan, Brazil, and Russia.
U.S. imports of steel from Japan jumped nearly 162% from 1997 to 1998, according to
Commerce Department data.
The surge caused the U.S. steel industry to seek remedies from the U.S. government and
steel companies and labor unions filed a number of antidumping and countervailing duty
cases. In August 5, 1999, the Clinton Administration announced a “steel action plan,” to
address concerns of the steel industry. Among other things the Administration pledged to
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enforce U.S. trade laws to remedy problems with antidumping and other practices by foreign
steel exporters. In announcing the plan, the Administration labeled Japan as the primary
source of the steel import surge in 1998. Subsequently, the United States requested bilateral
talks with Japan on the steel situation to which Japan agreed, but the two countries failed to
reach an agreement on what was to be done.

A number of Members of the 107th Congress are called for the Bush Administration to
take action to curtail steel imports. In addition, Japan has raised concerns over U.S. actions
to restrict steel imports from Japan and other countries and to bolster domestic producers.
Steel workers and firms have cited a surge in steel imports after 1997 as a reason for
financial problems they face. They claimed that dumping, government subsidies, and general
overcapacity in the world steel industry have strained their ability to compete. They
pressured the Clinton Administration and the Bush Administration as well as the Congress
to take action.
The 106th Congress passed and President Clinton signed the “Continued Dumping and
Subsidy Act of 2000" (P.L. 106-387), the so-called “Byrd Amendment,” enacted on October
28, 2000. The Act requires revenues from countervailing duty and antidumping orders to
be distributed to firms that have been injured by dumped and subsidized imports. On
December 21, 2001, nine countries, including Japan, requested consultations with the United
States as the first step in bringing their objections over the “Byrd amendment” to the World
Trade Organization (WTO). The countries claim that the law violates U.S. obligations in the
WTO.
In the meantime, the Bush Administration on June 22, 2001, submitted a request to the
U.S. International Trade Commission to investigate whether the surge in imports constitute
a substantial cause or threat of “serious injury” to the U.S. industry under the section 201
(escape clause) statute. On December 20, 2001, the Commission issued its determination
that domestic steel producers were being seriously injured or are threatened by serious injury
from imports of a number of steel products, including some from Japan.
On March 5, 2002, President Bush announced that the United States would impose
remedy tariffs on imports of selected steel products. The Administration’s decision came
after the U.S. International Trade Commission (USITC) determined, under the section 201
(escape clause) statute, that a surge in imports of steel products in 1998 from various
countries, including Japan, were a substantial cause or threat of “serious injury” to the U.S.
steel industry. In 1998, the total quantity of U.S. imports of steel products increased 35%
from the year before. The volume of U.S. imports of steel products from Japan soared 171%
in 1998 but has declined substantially since then. In 2001, Japan accounted for about 7%
of U.S. imports of steel products.1
On March 6, 2002 Prime Minister Koizumi’s government called the decision by the
Bush Administration to impose the higher tariffs regrettable and stated that the problems of
the U.S. steel industry were due to its lack of international competitiveness and not to
imports. On March 20, 2002, Japan requested formal consultations with the United States
1 United States International Trade Commission. U.S. Imports of Steel Products: Overall Trends
by Source Country [http://dataweb.usitc.gov/scripts/steel_monthly/].
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through the WTO dispute settlement body, stating that the U.S. action was not in compliance
with WTO rules.
On May 17, Japan notified the WTO of its intent to retaliate against U.S. safeguard
measures on steel imports by imposing tariffs on imports of U.S. steel worth $4.88 million.
In doing so, Japan cited Article 8 of the WTO Safeguard Agreement which allows immediate
retaliation if the country imposing the safeguard actions has done so without an absolute
increase in imports of the product.
On August 30, the Japanese government announced that it would withdraw its threat
to retaliate because, during a review, the United States ended up excluding some steel
products from the section 201 decision, including a number of products imported from Japan.
Nevertheless, Japan and several other steel exporting countries are pursuing their case in the
WTO’s Dispute Settlement Body. The WTO dispute panel that was established to hear the
case held its first hearing on October 29. Japan, the EU, Brazil, China, New Zealand,
Norway, South Korea, and Switzerland have argued that the United States did not follow
WTO rules in imposing the safeguard actions, an issue the United States strongly denies. On
March 26, 2003, the panel released its preliminary determination, ruling against the United
States. The panel reaffirmed that decision in its May 2 final ruling. In August 2003 the Bush
Administration filed an appeal of the ruling, and the decision on the appeal is expected in
November 2003. On May 22, however, another WTO dispute panel ruled in favor of the
United States in a case brought by the Japan against continued U.S. antidumping orders
against imports of surface-treated steel sheets.
Implementation of Agreements
Bilateral, sector-specific agreements or understandings under which Japan agrees to take
measures to open its markets to U.S. products or services in various sectors in response to
U.S. complaints have been a staple of the U.S.-Japan trade framework for decades. But the
agreements themselves are hardly ever the end of the issue. Disputes frequently arise over
whether the agreement is being implemented correctly. Recently, U.S. industry and
government officials have raised concerns about lack of progress under agreements reached
during the last 6 years on access to Japanese markets in several sectors, for example,
insurance, flat glass and autos. The Bush Administration has indicated that ensuring
compliance with these agreements is one of its trade policy priorities.
In his March 7, 2001, testimony before the House Ways and Means Committee, USTR
Zoellick indicated that the United States would continue to press Japan to restructure its
economy and take measures to stimulate economic growth. In the 2001 Trade Policy
Agenda/2000 Annual report, Zoellick stated that the United States would continue to monitor
Japanese compliance with trade agreements.
Insurance. Market access in Japan for U.S. financial services has been an issue of
growing importance in U.S.-Japanese relations. Financial services are heavily regulated,
limiting participation by U.S. and other foreign companies and restricting entry by new
domestic firms. Such has been the case with insurance. Specifically, American firms have
complained that little public information is available on insurance regulations and on how
those regulations are developed, thereby, making it difficult to know how to get approval for
doing business in Japan. They also assert that regulations favor insurance companies that
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are tied to business conglomerates— the keiretsu — making it difficult for foreign companies
to enter the market.
Japan is the largest insurance market in the world with the United States closely
following, but foreign insurers account for only a small portion of the Japanese market.
After years of negotiations, the United States got Japan to agree in October 1994 to take
measures to open its market for life insurance and nonlife insurance ( fire and auto
insurance). At the same time, Japan agreed to delay deregulation of the so-called third-sector
insurance market, which encompasses specialty insurance coverage — such as cancer,
hospitalization, nursing care, and personal accident — so as not to reduce the competitive
advantages foreign firms, particularly U.S. firms, had built in this market.
At the end of 1995 and early 1996, U.S. officials and the American insurance industry
were becoming concerned that Japan was reducing regulations on the third sector as well as
the others contrary to the agreement. After many months, U.S. and Japanese negotiators
reached agreement on December 15, 1996. Under the agreement, Japan would open life and
nonlife insurance market to foreign competition and limit domestic company entry into the
third sector until thirty months after it has made “substantial” progress in deregulating the
life and nonlife sectors But the United States has protested that Japan has already allowed
domestic companies to enter the third sector. Japan has argued that it has already made the
“substantial progress” stipulated in the agreement. The two sides have failed to agree to even
meet to work out their differences. On February 24 2000, the Japanese government Financial
Supervisory Agency announced that it would allow Japanese life and non-life insurance
companies to do business in the third sector beginning January 1, 2001.
In late August 2002, the American Council of Life Insurers (ACLI) announced that it
would urge the U.S. government to seek consultations with Japan regarding favorable
government treatment of Kampo, a government-owned insurance company. According to
ACLI, favorable tax and regulatory treatment gives Kampo unfair competitive advantages
over foreign and other domestic firms.
Autos and Autoparts. On June 28, 1995, the United States and Japan concluded an
agreement on the sale of U.S.-made cars and autoparts in Japan. The announcement came
hours before a deadline after which the Clinton Administration was prepared to impose
sanctions of 100% tariffs on 13 models of Japanese-made luxury cars. The agreement
covered Japanese business practices and government regulations that the United States
claims prevented U.S. manufacturers from gaining larger shares of the Japanese market in
three product areas: autos; original equipment and accessories for autos; and replacement
autoparts. On December 3, 2000, the bilateral pact on trade in cars and autoparts expired.
The United States pressed Japan to renew, but Japan resisted. On June 26, 2001, a bipartisan
group of members of the House and Senate sent a letter to President Bush urging him to push
for the pact’s renewal during his June 30 meeting with Koizumi. President Bush reportedly
raised the issue of the difficulty of U.S. exporters of cars and autoparts to penetrate the
Japanese market. On July 19, Assistant USTR Wendy Cutler proposed in a meeting with the
Ministry of Economy, Trade and Industry, that the United States and Japan form a bilateral
discussion forum on auto trade issues under which both sides would hold regular discussions.
Japan is reportedly still considering the proposal. In June 2002, the Office of the USTR
indicated its concern over a sharp increase in imports of autos and autoparts from Japan and
that it would be monitoring the trends closely.
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Flat Glass. In 1995 the United States and Japan concluded an agreement to improve
access of foreign flat glass producers to the Japanese domestic market. The agreement was
in response to complaints by U.S. producers that they were locked out of the Japanese market
which has been effectively controlled by three Japanese companies. U.S. manufacturers
alleged that a combination of anticompetitive private-sector business practices and Japanese
government regulations restricted entry into the market. Under the 1995 agreement the
Japanese government pledged to revise building regulations to encourage the use of foreign-
produced glass and to more vigorously enforce the Anti-Monopoly Law against
anticompetitive practices. Private sector consumers and wholesalers pledged to broaden their
source of supplies to include foreign glass. The agreement expired at the end of 1999.
Negotiations for an extension of the agreement failed with the United States pressing for an
extension and Japan resisting.
Deregulation
Underlying many of the market access problems U.S. firms have with Japan are the
large number of regulations that have been in place on many aspects of Japanese economic
activity. Some of these regulations are a product of the immediate post-war era when Japan
was rebuilding its economy. Others came later. These regulations have contributed to low
productivity in some economic sectors. They have been a factor in the limited choices that
Japanese consumers have had in food and other products and also have resulted in the
notoriously high prices that Japanese residents must pay for what Americans would consider
to be staples.
Japanese policymakers have recognized the adverse economic effects of government
regulations but the difficulty has been in implementing reforms. The Economic Planning
Agency of Japan released a study in November 1994 indicating the adverse productivity and
price effects of regulations and calling for regulatory reform. Recent Japanese governments
have promised to undertake deregulation but in many cases they run up against the powerful
elements of the permanent bureaucracies of the ministries — Ministry of Finance, Ministry
of Agriculture, and Ministry of Construction — that implement the regulations and that
would lose authority if extensive deregulation were to take place.
Deregulation is part of bilateral discussions under the U.S.-Japan Economic Partnership
for Growth initiative. The deregulation subgroup released its first report on June 26, 2002.
USTR Zoellick indicated that Japan had taken positive steps in deregulating important
sectors: telecommunications, pharmaceuticals and medical devices, information technology,
financial services, and energy. But he also indicated that the reforms did not quite meet the
recommendations that the United States presented to Japan In October 2001.
On December 20, 2002, after meetings with Japanese officials on telecommunications
trade, a U.S. negotiator expressed concern over the intention of NTT, the major Japanese
telecommunications company, to raise interconnection fees. A deal reached in July 2000
whereby Japan agreed to lower fees expired at the end of 2002. The United States argues
that the higher fees inhibit non-NTT telecommunications providers from participating in the
Japanese market. On May 23, 2003, during his Crawford, Texas summit meeting with Prime
Minister Koizumi, President Bush praised steps that the Japanese government was taking to
deregulate its economy and to return it to a path of sustained economic growth.
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Foreign Investment in Japan
The level of foreign direct investment in Japan is lower than in other fully industrialized
countries. Beginning in the 1950s, the Japanese government severely restricted foreign
direct investment to build up Japanese ownership in fledgling industries, such as the
automobile sector. Many U.S. companies that have a large presence in Japan, such as IBM
and Coca-Cola, originally established themselves before restrictions were put in place.
Although Japan has liberalized controls, foreign direct investment has remained low.
Some analysts point to the high costs of establishing business in Japan that results from high
price for land, especially in business centers like Tokyo. The yen appreciated sharply against
the dollar since 1985, which increased costs for dollar holders. Analysts and companies that
want to do business in Japan also cite Japanese government regulations that indirectly inhibit
foreign investment. For example, Japan’s Large Retail Store Law has protected small retail
outlets from competition by imposing burdensome requirements on foreign and domestic
entities that wanted to establish large, more efficient retail operations. As a result of pressure
from the United States and domestic consumers, the Japanese government revised the Large
Retail Store Law to ease entry. As a result, some American-owned chains, such as “Toys R
Us,” are becoming well-known in Japan. Japan’s demand for foreign capital is not as high
as the U.S. demand because of the high Japanese savings rate, and this factor probably
contributes to the lower level of foreign investment in Japan.
American business officials argue that trade follows foreign investment; that is, once
a foreign company has established itself abroad, it imports from the host country increasing
the home country’s exports. Economists have debated this notion..
The United States and Japan are pursuing talks on foreign investment. U.S. objectives
in the discussions are to get Japan to increase financial incentives for foreign investment,
change regulations that have made acquisitions and mergers difficult, extend the period in
which investors can carryover losses for tax purposes, and change taxation on real estate to
reduce the financial burden on investment. Foreign investment in Japan has increased rapidly
recently.
Regional and Multilateral Negotiations
The United States and Japan have been among the most important architects of the
General Agreement on Tariffs and Trade (GATT) and among the most significant members
of the World Trade Organization (WTO), the successor organization to and the implementing
body of the GATT. Both countries are also founding members of the Asian-Pacific
Economic Cooperation (APEC) forum, a fledgling body of 21 member economies of the
region.
While the United States and Japan continue to address many issues through bilateral
negotiations, both countries are relying to a greater extent than in the past on the multilateral
dispute settlement mechanism in the WTO. In part this trend is due to the GATT’s broader
coverage. As a result of the Uruguay Round agreements, the GATT (and therefore the
WTO), covers a broader range of trade practices pertaining to manufactured goods and also
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some previously uncovered practices affecting agricultural products, services, and foreign
investment. In addition, the Uruguay Round agreements helped to address fundamental
weaknesses in the GATT dispute settlement mechanism — the ability of a country to veto
a judgement rendered against it and the long process leading up to a judgement.
WTO members are struggling to meet a March 31, 2003, deadline to have in place the
“modalities” within which negotiations in a number of areas including, agriculture and
services, are to take place in the Doha Development Agenda (DDA) round of negotiations.
While Japan and the United States are in agreement in most areas, they have taken
diametrically opposing positions on agriculture. The United States has joined Australia and
other agricultural exporting countries in proposing that WTO members agree to a negotiating
modality that would severely cut tariffs and subsidies on agricultural products. Japan has
joined with EU in proposing a less radical approach. Agriculture has proved a major
stumbling block in the DDA negotiations including the September 2003 WTO Ministerial
Meeting in Cancun, Mexico.
The members of APEC have agreed to the goal of establishing free trade and investment
among them by 2010 for the fully industrialized countries and by 2020 for all countries. In
the meantime, each member economy has submitted an action plan outlining unilateral
measures it will take to liberalize and facilitate trade and investment. All members have
agreed on measures to open trade and investment in the region. The United States and Japan
have been the most influential economies in shaping and implementing the free trade agenda
of APEC. APEC is evolving into a body that supplements, rather than substitutes for,
multilateral negotiations. APEC’s principles of WTO compatibility and “open regionalism”
allow the forum to be a platform on which its members can develop a regional consensus on
issues of mutual interest.
The Outlook for U.S.-Japan Economic Relations
The size of their economies dictates that the United States and Japan will remain
significant economic players in the world economy and important partners for one another
for the foreseeable future. The scale of that importance might change over time as other
countries, especially Mexico and the Asian economies, increase their strength as trading
nations. Japan’s share of U.S. exports has declined from about l1.0% in the early 1990s to
7.4% in 2003 as Mexico has become a more important market. Also Japan’s share of U.S.
imports has dropped from 20.8% in 1987 to 9.6% in 2003 as Mexico and China have become
an increasingly significant source of U.S. imports.
Good indicators of the future climate in U.S.-Japan economic relations and the progress
they are making on pending and upcoming issues, include the following:
! the trade imbalance — an increasing U.S. trade deficit with Japan has often
led to growing tensions; economic growth and reform in Japan;
! the level of steel imports into the United States from Japan and the status
U.S. steel industry antidumping cases against Japanese steel; and
! agriculture negotiations in the WTO.
CRS-10

IB97015
09-30-03
FOR ADDITIONAL READING
CRS Products
CRS Issue Brief IB97004. Japan-U.S. Relations: Issues for Congress by Richard Cronin.
CRS Report RL30272. Global Financial Turmoil, the IMF, and the New Financial
Architecture, by Dick K. Nanto.
CRS Report RS20335. Japan’s Landmark Financial Deregulation: What It Means for the
United States, by Dick K. Nanto.
CRS Report RL30176. Japan’s “Economic Miracle”: What Happened?, by William H.
Cooper.
CRS-11