U.S.-Japan Trade Agreement Negotiations




Updated December 18, 2020
U.S.-Japan Trade Agreement Negotiations
Overview
The size of the bilateral goods trade deficit, which at $70
On October 7, 2019, after six months of formal
billion was the fourth-largest U.S. deficit in 2019, remains a
negotiations, the United States and Japan signed two
source of tension, as does the view by some observers that
agreements to liberalize bilateral trade. The U.S.-Japan
the imbalance stems in part from various nontariff barriers
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.
by Congress, constitute what the Trump and Abe
Administrations described as “stage one” of a broader U.S.-
Figure 1. Top U.S. Trade Partners, 2019
Japan trade agreement, but further talks have yet to
materialize. The Trump 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. The status of the
pending second stage bilateral talks remains of interest to
Congress but is uncertain under both Japan’s new Suga
Administration and the incoming Biden Administration.
As the fourth-largest U.S. trade partner, Japan has been 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
Source: CRS with data from Bureau of Economic Analysis (BEA).
to the Trans-Pacific Partnership (TPP) following U.S.
withdrawal), lower Japan’s tariffs on imports from several
Japan’s FTAs with Other Major Markets
countries, placing U.S. exporters at a disadvantage.
In recent years, Japan has concluded several major FTAs
The USJTA does not include trade commitments on motor
that exclude the United States, with potential implications
vehicles, a longstanding area of bilateral tension. In May
for U.S. stakeholders. The Japan-led Comprehensive and
2019, the Trump Administration took initial steps to
Progressive Agreement for Trans-Pacific Partnership (or
potentially impose increased tariffs on Japanese auto
TPP-11) took shape after U.S. withdrawal from TPP and
imports, proclaiming such imports a national security threat
entered into force at the end of 2018. Meanwhile, the EU
under Section 232 of the Trade Expansion Act of 1962. The
and Japan entered into an FTA in February 2019: these two
Administration declined to take further action, which some
trading partners accounted for nearly 30% of total U.S.
analysts link to Japan’s concessions in the USJTA, although
trade in 2019. In November 2020, Japan signed the
the agreement itself is silent on the issue. Japan strongly
Regional Comprehensive Economic Partnership (RCEP)
opposed U.S. Section 232 tariffs on imports of steel and
trade agreement, which will lower trade barriers among its
aluminum in place since 2018, but did not retaliate, unlike
15 Asian members, including China, once it takes effect.
other U.S. trade partners. Alleviating the auto tariff threat
U.S. exporters raise concerns that Japan’s reduced tariffs
was a key objective of Japan in the bilateral trade talks.
and nontariff barriers on imports from TPP-11, EU, and
potentially RCEP countries, threaten U.S. export
Bilateral Trade and Economic Relations
competitiveness for some products—Japan’s tariff
The world’s third-largest economy, Japan is the fourth-
reductions for certain agricultural goods in USJTA help
largest U.S. trade partner, fourth-largest U.S. investment
alleviate some such concerns. New rules in the FTAs have
partner, and largest foreign holder of U.S. government debt.
also led to concerns that they may not reflect U.S. priorities.
In 2019, U.S. exports to Japan totaled $125 billion, with
E-commerce provisions in the EU-Japan FTA, for example,
$75 billion in goods and $50 billion in services. U.S.
do not cover the free flow of data, unlike the U.S.-Mexico-
imports totaled $181 billion, with goods accounting for the
Canada Agreement (USMCA). Meanwhile, TPP-11 also
bulk of imports ($145 billion), most notably motor vehicles
suspended 22, largely U.S.-priority, provisions from the
original TPP text.
and parts ($54 billion). The stock of U.S. foreign direct
investment (FDI) in Japan was valued at $132 billion in
Scope of U.S.-Japan Negotiations
2019, concentrated in finance and insurance. Japanese FDI
The Trump Administration’s decision to pursue
stock in the United States totaled $619 billion in 2019, with
negotiations with Japan in stages was a departure from past
manufacturing accounting for the largest share.
U.S. FTA practice, which typically involves one
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U.S.-Japan Trade Agreement Negotiations
comprehensive negotiation. U.S. negotiating objectives
primary Japanese goal in next-stage talks. Japan has no auto
released in December 2018, as required by TPA, suggested
tariffs; it imports few U.S.-made autos ($2.5 billion in
a broad range of issues would be covered in addition to
2019). U.S. industry argues this stems from nontariff
tariffs and digital trade, including services, investment,
barriers, including discriminatory regulatory treatment,
intellectual property, and state-owned enterprises. The two
while Japan argues that U.S. producers’ inability to tailor to
countries committed to second stage negotiations, but talks
the Japanese market is the cause. Under the Trump
did not materialize in 2020. Several Members of Congress,
Administration, the U.S. autos trade deficit was a
U.S. businesses, and stakeholders strongly advocated for a
heightened issue and U.S. goals in trade talks included
more comprehensive deal; others questioned whether there
market access outcomes that increase U.S. auto production
will be sufficient political momentum in both countries to
and employment. While Japan buys few U.S. cars, Japanese
make further progress.
FDI in U.S. production facilities (valued at $51 billion in
2018) supports 170,000 U.S. jobs, according to the BEA.
Analysts also question the extent to which the limited deal
adheres to Article XXIV of the General Agreement on
Services
Tariffs and Trade (GATT) under the WTO that requires
The United States has a bilateral services trade surplus, and
FTAs cover “substantially all trade.” Some Members of
Japan is a major market for U.S. service providers. For
Congress have historically taken issue with other countries’
example, the Japanese insurance market is the second
partial scope agreements. Though adherence to Art. XXIV
largest in the world behind the U.S. market, accounting for
has rarely been challenged at the WTO, whether or not the
25% of all U.S. foreign affiliate sales in the industry in
U.S.-Japan deal violates the letter or spirit of this WTO
2018. Historically, U.S. firms have found it difficult to
requirement likely depends on the scope of next stage talks.
enter segments of the Japanese market and argue that Japan
confers preferential treatment on insurance and express
Initial Trade Agreement Provisions
delivery subsidiaries of Japan Post, the state-owned postal
service and one of Japan’s largest banks and insurers.
The two “stage one” agreements cover some industrial
Several TPP provisions were designed to address such
goods and agricultural trade and cross-border digital trade.
concerns, and crafting similar rules in future talks may be a
Neither includes a formal dispute settlement mechanism.
negotiating priority for the United States.
U.S.-Japan Trade Agreement (USJTA)
Currency
The USJTA commitments cover about 5% of bilateral
Some U.S. stakeholders argue currency commitments
trade. The United States agreed to reduce or eliminate 241
should be a priority in the talks, as exchange rates have a
tariffs on mostly industrial goods, including machine tools,
significant effect on trade flows. A weaker yen makes
fasteners, steam turbines, bicycles and parts, and musical
imports from Japan cheaper, while increasing the cost of
instruments, and certain niche agricultural products, such as
U.S. exports. Japan has not intervened directly in foreign
green tea. The U.S. will also expand its global tariff-rate
exchange markets since 2011, but remains on the U.S.
quota for beef imports. Japan agreed to reduce or eliminate
Treasury Department’s currency monitoring list. USMCA
tariffs on about 600 agricultural tariff lines, such as beef,
includes the first-ever U.S. FTA commitments on exchange
pork, and cheese, and expand preferential tariff-rate quotas
rates and could serve as a template in future Japan talks.
for a limited number of U.S. products, such as wheat.
Issues for Congress
Opening Japan’s highly protected agriculture market and
The Trump Administration’s decision to pursue a trade
reaching parity with exporters from Japan’s FTA partners is
agreement with Japan in stages and enact the limited “stage
a major priority for U.S. industry. In 2019, Japan was the
one” agreements without the approval of Congress raised a
fifth-largest U.S. agriculture market, with exports of $11.7
number of questions for Congress including:
billion. While U.S. industry generally supports the USJTA,

certain sectors, including dairy and rice expressed concerns
What areas should USTR prioritize in future talks?

about the extent of new market access or lack of attention to
Do negotiated outcomes adhere to TPA requirements?

other key issues, such as geographical indications (GIs) and
What role should Congress play in limited agreements?

sanitary and phytosanitary standards (SPS), which are areas
Will a limited agreement make it easier or more difficult
typically covered in comprehensive U.S. FTAs.
to address future bilateral trade liberalization?
 How do the agreements compare with the TPP-11, and
U.S.-Japan Digital Trade Agreement
how has U.S. TPP withdrawal affected U.S. economic
On digital trade, an area in which the two countries have
and strategic interests in Japan and the Asia-Pacific?
similar goals, the Trump Administration sees the agreement
As Congress prepares to engage with the incoming
as “comprehensive and high standard,” in line with rules set
Administration, key issues include whether the new
by the USMCA. Provisions include non-discriminatory
Administration will continue to pursue partial agreements
treatment, and commitments to prohibit or limit data
with Japan, or a more traditional comprehensive approach,
localization barriers, restrictions on cross-border data flows,
as well as possible U.S. return to regional engagement.
and transfer of source code or algorithms as conditions of
For more information, see CRS Report R46140, “Stage
market access.
One” U.S.-Japan Trade Agreements.
Potential Provisions in Future Talks
Cathleen D. Cimino-Isaacs, Analyst in International Trade
Motor Vehicles
and Finance
Autos and parts account for more than one-third of U.S.
Brock R. Williams, Specialist in International Trade and
imports from Japan, and a reduction of U.S. 2.5% and 25%
Finance
car and light truck tariffs, respectively, is likely to be a
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U.S.-Japan Trade Agreement Negotiations

IF11120


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