The Rising U.S. Trade Deficit With Japan: Overview and Policy Options

The Rising U.S. Trade Deficit With Japan: Overview and Policy Options

Order Code RS20400
Updated March 1, 2000
CRS Report for Congress
Received through the CRS Web
The Rising U.S. Trade Deficit With Japan:
Overview and Policy Options
(name redacted)
Specialist in Industry and Trade
Foreign Affairs, Defense, and Trade Division
Summary
The U.S. merchandise trade deficit with Japan reached $73.9 billion in 1999. It is
the largest bilateral deficit with any U.S. trading partner. In addition to the growing
deficit in goods trade (with almost all accounted for by trade in machinery and
transportation equipment), the bilateral deficit in investment income also has become
unusually large — so large that it outweighs the U.S. surplus in services trade with
Japan. As a result, the bilateral current account deficit — $75 billion in 1998 — exceeds
the merchandise trade deficit with Japan. Options for dealing with this deficit include
letting market forces cope with it, raising the value of the yen, opening export markets
in Japan, increasing U.S. investments in Japan, and reducing U.S. imports from Japan.
This report will be updated periodically.
Trade in Goods
The U.S. trade deficit in goods (merchandise) with Japan rose to $73.9 billion in
1999, up from $64.0 billion in 1998. The trade deficit with Japan is the largest that the
United States incurs with any of its trading partners – including the $68.7 billion deficit
with China. For 1999, the deficit was generated by U.S. imports of goods from Japan of
$131.4 billion and U.S. exports to Japan of $57.5 billion. In short, the United States buys
more than twice as much in goods from Japan as it sells there. The trade deficit with Japan
accounts for about a quarter of the overall U.S. merchandise trade deficit of $347.1 billion.
Figure 1 shows U.S. exports to, imports from, and the U.S. trade balance in goods
with Japan over the past two decades. As can be seen, the deficit has fluctuated around
$50 billion since the mid-1980s and has been growing since the mid-1990s. Changes in
the level of the deficit appear to be caused by changes in the yen-dollar exchange rate, in
macroeconomic conditions in the two countries, and in competitive conditions in certain
industries. In general, a strengthening of the yen (making imports from Japan more
expensive) has been followed by a drop in the level of the deficit in ensuing years, while
a weakening of the yen has had the opposite effect of increasing the deficit. When the
Congressional Research Service ˜ The Library of Congress

CRS-2
U.S. economy is
Figure 1. U.S.-Japan Merchandise Exports, Imports,
growing faster than
and Trade Balances, 1978-99
Japan’s, the bilateral
131.4
$Billion
123.6
deficit tends to grow,
150
107.268
119.1
121.7
150
89.802002
93.585999
90.432999
115.2
122
81.911003
84.574997
97.181
and vice versa. In
92.333
U.S. Imports 68.782997
recent years, Japan’s
57.134998
from Japan
100
48.584999
48.146999
47.949001
100
37.654999
37.743999
41.182999
64.3
67.5
65.5
economy has been in
30.867001
44.584
47.764
57.9
53.5
57.5
24.933001
26.396999
22.190001
26.618999
27.808001
17.490999
21.641001
20.667999
37.43
recession, while the
20.684
23.173
50
50
U.S. economy has been
12.85
21.6
U.S. Exports
growing.
to Japan
0
0
As shown in
Figure 2, virtually all
-50
-50
the trade deficit with
U.S. Deficit
Japan can be accounted
With Japan
-100
-100
for by trade in
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
m a c h i n e r y a n d
Year
t r a n s p o r t a t i o n
Source: Data from U.S. Department of Commerce
equipment. In 1999,
the United States imported $99.4 billion while exporting $24.1 billion of such products to
Japan for a sectoral deficit of $75.3 billion. This included trade in motor vehicles, aircraft,
and machine tools. There also were deficits of $4.8 billion in miscellaneous manufactured
articles and $4.9 billion in manufactured goods classified chiefly by material. On the other
hand, the United States ran a $14.8 billion surplus in trade with Japan in food, live animals,
beverages, tobacco, and
inedible crude materials.
Figure 2. U.S. Trade With Japan by Major
Commodity Classification, 1999
The U.S. trade imbalance
8.6
Food & Live Animals
0.3
8.3
with Japan arises primarily
2.2
Beverages & Tobacco
0.1
from trade in a handful of
2.1
3.6
products in which imports are
Crude Materials
0.2
3.4
0.8
exceptionally large. As shown
Mineral Fuels, Lubricants
0.3
0.5
in Table 1, the list of major
5.8
Chemicals
6.5
-0.7
U.S. imports from Japan is
2.9
Mnf. Goods Class. by Materials
7.8
headed by motor vehicles,
-4.9
24.1
office machines, electronic Machinery & Transp. Equipment
99.4
-75.3
8
c o m p o n e n t s , a n d
Misc. Manufactured Articles
12.8
-4.8
communications equipment.
1.4
Other
3.9
-2.5
These four categories account
-100
-50
0
50
100
150
for approximately half of all
$billion
U.S. imports from that
Exports
Imports
Balance
country. Imports of motor
vehicles and parts, in
Source: U.S. Department of Commerce
particular, have been running in
excess of $9 billion per quarter and have been rising since early 1997. Despite
considerable investment by Japanese automakers in production capacity in the United
States, at $39.5 billion in 1999, motor vehicles/parts remain the largest single product
imported from Japan. They are followed by computers/ office machines, electronic
components and accessories, and communications equipment. Other categories in which
imports have been increasing include communication equipment, audio/television

CRS-3
equipment, construction machinery, and engines/turbines. Imports have been declining in
photographic equipment and special industry machines. Steel mill product imports from
Japan rose from $0.508 billion in first quarter 1997 to $0.906 billion in third quarter 1998
and fell to $0.368 billion in fourth quarter 1999 as antidumping duties were imposed on
imports of hot rolled sheet and steel plates.1
Table 1. Major U.S. Imports from Japan, by 3-digit SIC Codes
Quarterly/Annual, 1997-99, Million Dollars
SIC
Description
1997
1998
1999
Total
1st
2nd
3rd
4th
Total
1st
2nd
3rd
4th
Total
371 MOTOR VEHICLES AND MOTOR
33,484 8,688 8,336 8,477 9,246
34,747
9,906 8,961 9,639 10,964
39,470
VEHICLE EQUIPMENT, AND PARTS
357 OFFICE, COMPUTING, AND 15,351 3,411 3,438 3,348 3,476 13,672 3,275 3,342 3,727 3,813
14,157
ACCOUNTING MACHINES, AND
PARTS AND ACCESSORIES
367 ELECTRONIC COMPONENTS AND
11,502 2,602 2,291 2,286 2,466
9,645
2,355 2,470 2,687
2,983
10,495
ACCESSORIES
366 COMMUNICATION EQUIPMENT AND
3,938 1,106 1,101 1,193 1,203
4,604
1,195 1,418 1,705
1,847
6,165
APPARATUS
386
PHOTOGRAPHIC EQUIPMENT AND
4,831 1,140
998 1,029
983
4,150
1,008
886
963
992
3,849
SUPPLIES
354
METALWORKING MACHINES AND
4,059
970
991 1,013
988
3,962
907
882
835
806
3,429
E Q U I P M E N T , A N D P A R T S ,
ACCESSORIES AND ATTACHMENTS
RADIO AND TV RECEIVING SETS;
365
PHONO-GRAPHS; RECORDERS;
2,614
641
700
759
726
2,826
686
761
841
788
3,075
MICROPHONES; LOUDSPEAKERS;
AUDIO AMPLIFIERS; & OTHER
AUDIO EQUIPMENT & ACCESSORIES
369
E L E C T R I C A L M A C H I N E R Y ,
3,006
728
723
742
757
2,948
746
758
846
907
3,257
APPARATUS, AND PARTS
382
INSTRUMENTS FOR MEASURING,
684
706
767
857
DETECTING, TESTING, AND/OR
2,546
713
650
630
621
2,613
3,014
CONTROLLING NONELECTRIC
QUANTITIES, AND PARTS &
ACCESSORIES
356
GENERAL INDUSTRIAL MACHINES
2,359
636
587
540
606
2,369
661
674
752
872
2,959
AND EQUIPMENT, AND PARTS AND
ATTACHMENTS
353
CONSTRUCTION, MINING, AND
1,705
538
573
440
438
1,988
620
618
420
377
2,036
M A T E R I A L S H A N D L I N G
MACHINERY
394
TOYS AND SPORTING, ATHLETIC,
2,592
371
538
525 1,141
2,575
380
499
722
917
2,517
A N D G Y M N A S T I C G O O D S ,
APPLIANCES, APPARATUS OR
ACCESSORIES
351
ENGINES AND TURBINES, AND
1,265
342
350
352
400
1,444
457
473
502
586
2,018
PARTS AND ACCESSORIES
286
INDUSTRIAL ORGANIC CHEMICALS
1,933
514
487
449
484
1,934
451
467
448
539
1,905
283
DRUGS
1,203
359
396
369
337
1,461
366
447
524
500
1,837
362
E L E C T R I C A L I N D U S T R I A L
1,586
382
367
347
342
1,438
372
448
522
464
1,806
APPARATUS
372
AIRCRAFT AND PARTS
1,646
412
494
485
492
1,882
427
431
449
390
1,697
355
SPECIAL INDUSTRY MACHINES
2,370
591
561
447
424
2,023
448
421
426
491
1,786
AND EQUIPMENT, AND PARTS,
ACCESSORIES AND ATTACHMENTS
331
BLAST FURNACE, STEEL WORKS,
1,807
602
783
906
898
3,189
511
412
411
368
1,702
ROLLING MILL, AND FINISHING
MILL PRODUCTS
Note: SIC=Standard Industrial Classification. Data are on a Census basis.
Source: U.S. Department of Commerce
Trade in Services and the Current Account
The United States runs a surplus in services trade with Japan, but that surplus
amounted to only $16.5 billion in 1998 as contrasted with the $65.3 billion deficit on
goods. (Details of services trade and the current account for 1999 are to be announced
1See: CRS Issue Brief 10023, Steel Imports: Effects on U.S. Industry and Proposed Legislative
Remedies, by Gwenell L. Bass.

CRS-4
in March 2000.) The combined balance on goods and services totaled $48.7 billion in
1998, up $10 billion from that in 1997, but still below the record $51.7 billion in 1994.
Table 2. U.S. Trade and Balances with Japan in Goods, Services, Investment
Income and Current Account, 1994-98 (million dollars)
U.S. Exports
U.S. Imports
Balance
Balance
Bal. on
Balance
on
on
Invest-
on
Year
Goods
Services
ment
Current
Goods
Services
Goods
Services
Income
Account
1994
51,813
29,556
119,137
13,920
-67,324
15,637
-11,014
-62,841
1995
63,108
34,376
123,453
15,108
-60,345
19,268
-15,738
-56,939
1996
65,961
34,148
115,171
14,060
-49,210
20,088
-16,214
-45,470
1997
64,599
35,014
121,658
15,470
-57,059
19,544
-25,214
-62,886
1998
58,595
31,737
121,850
15,197
-65,255
16,540
-26,443
-75,354
Source: U.S. Department of Commerce. Survey of Current Business, various issues.
Note: Data are on a balance-of-payments basis.
The balance on
Figure 3. U.S. Balances with Japan in Goods, Services,
current account is
Investment Income, and Current Account,
considered to be a
1994-1998 in billion dollars
broader measure of the
40
trading relationship
Services
19.3
20.1
19.5
between two countries.
20
15.6
16.5
It includes trade in
goods and services as
0
well as unilateral
-11
t r a n s f e r s ( e . g . ,
-20
-15.7
-16.2
r e m i t t a n c e s f r o m
-25.2
-26.4
immigrants) and the
-40
balance on income
-45.5
-49.2
from U.S. assets
-60
-56.9
-57.1
-60.3
-62.8
-62.9
abroad and foreign-
-67.3
-65.3
Investment
Current
owned assets in the
Income
-75.4
-80
Account
Goods
United States. As
shown in Figure 3, the
-100
1994
1995
1996
1997
1998
current account deficit
Source: Data from U.S. Department of Commerce
with Japan recently has
grown larger than the
deficit in goods trade. The deficit on current account did decline from $62.8 billion in
1994 to $45.5 billion in 1996 but grew to $75.4 billion in 1998. The expanding negative
balance in goods trade, of course, contributed to this increase, but the burgeoning deficit
in income from investments also has become significant. This is resulting from the fact
that the United States has become a net debtor nation — foreigners, particularly Japanese,
have invested more in the U.S. economy than Americans have invested abroad. The net
earnings flow from investments, therefore, has grown progressively larger in favor of
Japan. Prior to 1997, the U.S. surplus in services outweighed the deficit in investment

CRS-5
income and made the current account deficit smaller than the goods trade deficit. Since
1997, this has been reversed. The U.S. deficit in investment income now outweighs the
U.S. surplus in services trade with Japan.
At the end of 1998, Americans had holdings of $38.2 billion in direct investments
(where investors have a controlling interest in the enterprise) in Japan, while Japanese had
direct investments of $132.6 billion in the United States. In private holdings of stocks and
bonds, Americans had investments of $150.7 billion in Japan while Japanese had $190.4
billion in the United States.2 At the end of 1998, Japanese government and private
investors also held $292.6 billion in U.S. Treasury Securities.
Policy Options
Mainstream economic analysis of international trade flows pays little heed to
imbalances with individual trading partners. At any point in time, trade with some
countries will be in deficit while trade with others will be in surplus. In the United States
and other countries with relatively liberalized trade and capital flows, moreover, trade
imbalances tend to be influenced mostly by macroeconomic factors, such as capital flows
(resulting from differences in saving rates), exchange rates, and relative growth rates.3
With Japan, however, the bilateral trade deficit is unusually large, chronic, and has at times
become a flashpoint for trade friction. The macroeconomic flows, moreover, are
influenced greatly by the existing structure of trade. This structure includes protection of
certain industries, such as rice farming, in Japan. Changing the trade structure, would
change specific trade flows which, in turn, could affect macroeconomic variables such as
savings and investment. If Japan allowed more imports of rice, for example, the savings
rate of Japanese farmers would probably fall. U.S. trade policy also can affect specific
trade flows. In 1998-99, for example, U.S. antidumping duties on Japanese steel cut such
imports in half. U.S. exchange rate and monetary policies, moreover, affect the relative
value of the yen as well as U.S. growth rates which, in turn, affect trade balances.
The policy options dealing with the bilateral trade deficit with Japan primarily would
be to: (1) let market forces prevail, (2) raise the value of the yen, (3) open markets in
Japan further, (4) increase U.S. investments in Japan, (5) reduce U.S. imports from Japan,
and (6) encourage Japan to raise its economic growth rate.
The vast majority of the trading transactions between the United States and Japan are
governed by market forces. The trade and capital flows are so large that any government
intervention into the market, of necessity, would be at the margin. Still some policy
options are available.
Raising the value of the yen (or not intervening to stop its appreciation) is a policy
apparently being pursued by the United States. The value of the yen has risen from 131
yen per dollar in 1998 to about 105 yen per dollar at the end of 1999 and around 109 yen
2Scholl, Russell B. The International Investment Position of the United States at Yearend 1998.
Survey of Current Business, July 1999. p. 45.
3For discussion of trade deficits, see: CRS Report RS20364, America's Gowing Current Account
Deficit: What Does It Mean for the Economy? By (name redacted) and CRS Report 98-693 E,
The U.S. Trade Deficit: Trends, Theory, Policy, and Sustainability, by (name redacted).

CRS-6
per dollar in February 2000. Part of this appreciation is being caused by capital flowing
back into Japan as it recovers from recession. The Japanese government has been actively
intervening in foreign exchange markets to counter this appreciation. Its holdings of
foreign exchange (obtained by selling yen) have risen from $185 billion at the end of 1995
to $215 billion at the end of 1998 and further to $293 million dollars billion at the end of
January 2000. Over the past year, Japan has been weakening the yen by purchasing dollars
and other foreign currencies at the rate of about $5 billion per month. Yet it is a stronger
yen that is instrumental in reducing Japan’s trade surplus. How effective this intervention
has been in weakening the yen is an open question, but it indicates that the Japanese
government is taking fairly aggressive action to sustain its trade surplus.
Opening markets in Japan to U.S. exports and investment has long been pursued by
the United States.4 Although considerable progress has been made, access in some sectors
is still in dispute. These include insurance, glass, photo film, and several agricultural
products. Japan’s banking crisis and recession has opened the way for more foreign
participation in its financial markets, but the combination of past investment barriers and
the high cost of entering the market has worked to keep the level of foreign investment in
Japan relatively low. This imbalance in investment relations contributes significantly to the
deficit in investment income with Japan.
Under U.S. trade law, protection of specific U.S. industries from import competition
from Japan is possible for three basic purposes: (1) to act against dumping (exporting a
product at a lower price than in the home market), (2) to counter the effects of
government subsidies, and (3) to take “safeguard” action in response to an injury or
threatened injury to a U.S. industry caused by a surge in imports. As of December 1999,
the United States had 34 antidumping duty orders in effect on products from Japan. These
included hot rolled steel, stainless steel sheet and wire rod, vector supercomputers, forklift
trucks, color picture tubes, and drafting machines. Since the late 1970s, the United States
has imposed no countervailing duties for subsidies on products from Japan. After the U.S.
automobile industry lost its case in the early 1980s, safeguard action has been rarely used
in trade with Japan.
When the Japanese economy grows faster, it tends to draw in more imports, including
products from the United States. Throughout 1997 and 1998, the United States
encouraged Japan to pursue more aggressive fiscal and monetary policies and to ease
government regulations in order to stimulate its economy. In 1999, the Japanese economy
had begun to show signs of recovery, but late in the year dropped into negative growth
again. Much of the growth that did occur could be attributed to government spending.
4For a summary of these trade negotiations see CRS Issue Brief 97015, U.S.-Japan Economic
Ties: Status and Outlook, by (name redacted).

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