U.S.-Japan Trade Agreement Negotiations

Updated January 16, 2020
U.S.-Japan Trade Agreement Negotiations
The size of the bilateral goods trade deficit, which at $68
On October 7, 2019, after six months of formal
billion was the fourth-largest U.S. deficit in 2018, remains a
negotiations, the United States and Japan signed two
source of tension, as does the view by some observers that
agreements intended to liberalize bilateral trade. The U.S.-
the imbalance stems in part from various nontariff barriers
Japan Trade Agreement (USJTA) provides for limited tariff
in the Japanese market. Such concerns arguably peaked in
reductions and quota expansions to improve market access.
the 1980s and 1990s, dissipating over the past two decades
The U.S.-Japan Digital Trade Agreement covers rules on
in the face of Japan’s domestic economic challenges, major
digital aspects of international commerce. The agreements,
Japanese investment in the United States, and a shift in U.S.
which took effect on January 1, 2020, without formal action
focus to concerns over trade with China. The Trump
by Congress, constitute what the Trump and Abe
Administration has renewed focus on the trade deficit.
Administrations envision as “stage one” of a broader U.S.-
Japan trade agreement, with future negotiations expected in
Figure 1. Top U.S. Trade Partners, 2018
coming months. The Administration used delegated tariff
authorities in Trade Promotion Authority (TPA) to proclaim
the USJTA provisions, while the digital trade agreement,
which did not require changes to U.S. law, was treated as an
Executive Agreement.
As the fourth-largest U.S. trade partner, Japan is a high
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.

The USJTA does not include trade commitments on motor
Source: CRS with data from Bureau of Economic Analysis (BEA).
vehicles, a long-standing area of bilateral tension. In May
2019, following an investigation by the Department of
Japan’s FTAs with Other Major Markets
Commerce under Section 232 of the Trade Expansion Act
In 2018, Japan ratified two major FTAs, which exclude the
of 1962, President Trump proclaimed motor vehicle and
United States and could have significant implications for
parts imports, particularly from Japan and the EU, a threat
U.S. stakeholders. The Japan-led Comprehensive and
to U.S. national security. Such action grants the President
Progressive Agreement for Trans-Pacific Partnership (or
the authority to impose import restrictions, but some
TPP-11), which took shape after U.S. withdrawal from
analysts question whether that authority has now expired.
TPP, entered into force at the end of 2018. Meanwhile, the
USJTA does not address potential Section 232 tariffs, but
EU and Japan entered into an FTA in February 2019: these
USTR Lighthizer stated that the Administration has no
two trading partners accounted for nearly 30% of total U.S.
intent, “at this point,” to pursue additional Section 232
trade in 2018. U.S. exporters raise concerns that Japan’s
restrictions on autos. Japan strongly opposed U.S. Section
reduced tariffs and nontariff barriers on imports from TPP-
232 tariffs on imports of steel and aluminum in place since
11 and EU countries, particularly on agricultural products,
March 2018, but did not retaliate, unlike other U.S. trade
such as Japan’s relatively high 38.5% beef tariff, threaten
partners. Alleviating the auto tariff threat was a key
U.S. export competitiveness—Japan’s tariff reductions in
objective of Japan in the trade talks.
USJTA help alleviate such concerns. New rules in the FTAs
Bilateral Trade and Economic Relations
have also led to concerns that they may not reflect U.S.
priorities. E-commerce provisions in the EU-Japan FTA,
The world’s third-largest economy, Japan is the fourth-
for example, do not cover the free flow of data, unlike the
largest U.S. trade partner, fourth-largest U.S. investment
proposed U.S.-Mexico-Canada Agreement (USMCA).
partner, and largest foreign holder of U.S. government debt.
Meanwhile, TPP-11 also suspended 22, largely U.S.-
In 2018, U.S. exports to Japan totaled $121 billion, with
priority, provisions from the original TPP text.
$76 billion in goods and $45 billion in services. U.S.
imports totaled $179 billion, with goods accounting for the
Scope of U.S.-Japan Negotiations
bulk of imports ($144 billion), most notably motor vehicles
The Administration’s decision to pursue negotiations with
and parts ($56 billion). The stock of U.S. foreign direct
Japan in stages is a departure from past U.S. FTA practice,
investment (FDI) in Japan was valued at $125 billion in
which typically involves one comprehensive negotiation.
2018, concentrated in finance and insurance. Japanese FDI
U.S. negotiating objectives released in December 2018, as
stock in the United States totaled $484 billion in 2018, with
required by TPA, suggested a broad range of issues would
manufacturing accounting for the largest share.

U.S.-Japan Trade Agreement Negotiations
be covered in addition to tariffs and digital trade, including
Potential Provisions in Future Talks
services, investment, intellectual property, and state-owned
enterprises. The two countries aim to begin second stage
Motor Vehicles
talks as early as May 2020, but specific issues to be covered
Autos and parts account for more than one-third of U.S.
remain unclear. Several Members of Congress, U.S.
imports from Japan, and a reduction of U.S. 2.5% and 25%
businesses and stakeholders strongly advocate for a more
car and light truck tariffs, respectively, is likely to be a
comprehensive deal, while other stakeholders question
primary Japanese goal in next stage talks. Japan has no auto
whether there will be sufficient political momentum in both
tariffs, but imports few U.S.-made autos ($2.4 billion in
countries to make progress in future talks.
2018). U.S. industry argues this stems from nontariff
barriers, including discriminatory regulatory treatment,
while Japan argues that U.S. producers’ inability to cater to
Analysts also question the extent to which the limited deal
the Japanese market is to blame. President Trump has
adheres to Article XXIV of the General Agreement on
repeatedly flagged the U.S. autos trade deficit and noted
Tariffs and Trade (GATT) under the WTO that requires
FTAs cover “substantially all trade,” in particular given the
that U.S. goals in trade talks include market access
outcomes that will increase U.S. auto production and
exclusion of autos. Congress has historically taken issue
employment. While Japan buys few U.S. cars, Japanese
with other countries’ partial scope agreements, advocating
FDI in U.S. production facilities (valued at $51 billion in
for better adherence to Article XXIV within legislation.
2018) supports 170,000 U.S. jobs, according to the BEA.
Though adherence to Article XXIV has rarely been
challenged at the WTO, whether or not the U.S.-Japan deal
violates the letter or spirit of this WTO requirement likely
The United States has a bilateral services trade surplus, and
depends on the timeline and scope of next stage talks.
Japan is a major market for U.S. service providers. For
example, the Japanese insurance market is the second
Initial Trade Agreement Provisions
largest in the world behind the U.S. market, accounting for
The two agreements in the “stage one” deal cover some
nearly 30% of all U.S. foreign affiliate sales in the industry
industrial goods and agricultural trade and cross-border
in 2016 ($48.9 billion). Historically, U.S. firms have found
digital trade. Neither includes a formal dispute settlement
it difficult to enter segments of the Japanese market and
mechanism to enforce commitments.
argue that Japan confers preferential treatment on insurance
and express delivery subsidiaries of Japan Post, the state-
U.S.-Japan Trade Agreement (USJTA)
owned postal service and one of Japan’s largest banks and
The USJTA commitments cover about $14.4 billion ($7.2
insurers. Several TPP provisions were designed to address
billion each of U.S. imports and exports) or 5% of bilateral
such concerns, and crafting similar rules in future talks may
trade. The United States agreed to reduce or eliminate 241
be a negotiating priority for the United States.
tariffs on mostly industrial goods, including machine tools,
fasteners, steam turbines, bicycles and parts, and musical
Some U.S. stakeholders argue currency commitments
instruments, and certain niche agricultural products, such as
should be a priority in the negotiations, as exchange rates
green tea. The U.S. will also expand its global tariff-rate
have a significant effect on trade flows. A weaker yen
quota for beef imports. Japan agreed to reduce or eliminate
makes imports from Japan cheaper in the U.S. market while
tariffs on about 600 agricultural tariff lines, such as beef,
increasing the cost of U.S. exports. Japan has not intervened
pork, and cheese, and expand preferential tariff-rate quotas
directly in foreign exchange markets since 2011, but
for a limited number of U.S. products, such as wheat.
remains on the U.S. Department of the Treasury’s currency
Opening Japan’s highly protected agriculture market and
monitoring list. USMCA includes the first-ever U.S. FTA
reaching parity with exporters from Japan’s FTA partners is
commitments on exchange rates and could serve as a
a major priority for U.S. industry. In 2018, Japan was the
template in the next stage of Japan talks.
third-largest U.S. agriculture market, with exports of $12.9
Issues for Congress
billion. While U.S. industry generally supports the USJTA,
The Administration’s decision to pursue a trade agreement
certain sectors, including dairy and rice expressed concerns
with Japan in stages and enact the limited “stage one”
about the extent of new market access or lack of attention to
agreements without the approval of Congress, while
other key issues, such as geographical indications (GIs) and
considering U.S. tariff actions under Section 232, raises a
sanitary and phytosanitary standards (SPS), which are areas
number of questions for Congress including:
typically covered in comprehensive U.S. FTAs.
 What areas should USTR prioritize in future talks?
U.S.-Japan Digital Trade Agreement
 Do negotiated outcomes adhere to TPA requirements?
On digital trade, an area in which the two countries have
 What role should Congress play in limited agreements?
similar goals, USTR sees the agreement as “comprehensive
 Will a limited agreement make it easier or more difficult
and high standard” in line with rules set by the USMCA.
to address future bilateral trade liberalization?
Provisions include non-discriminatory treatment, and
 How do the agreements compare with the TPP, and how
commitments to prohibit or limit data localization barriers,
has U.S. TPP withdrawal affected U.S. economic and
restrictions on cross-border data flows, and transfer of
strategic interests in Japan and the Asia-Pacific?
source code or algorithms as conditions of market access.
 How do U.S. auto imports threaten national security?
For more information, see CRS Report R46140, “Stage
One” U.S.-Japan Trade Agreements

U.S.-Japan Trade Agreement Negotiations

Brock R. Williams, Specialist in International Trade and
Cathleen D. Cimino-Isaacs, Analyst in International Trade
and Finance

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https://crsreports.congress.gov | IF11120 · VERSION 11 · UPDATED