U.S.-Japan Economic Relations:
Significance, Prospects, and Policy Options
William H. Cooper
Specialist in International Trade and FinanceFebruary 18, 2014

Congressional Research Service
7-5700www.crs.gov
RL32649

U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options

SummaryJapan and the United States are two major economic powers. Together they account for over 30%
of world domestic product, for a significant portion of international trade in goods and services,and for a major portion of international investment. This economic clout makes the United States
and Japan potentially powerful actors in the world economy. Economic conditions in the UnitedStates and Japan have a significant impact on the rest of the world. Furthermore, the U.S.-Japanbilateral economic relationship can influence economic conditions in other countries.
The U.S.-Japan economic relationship is strong and mutually advantageous. The two economies
are highly integrated via trade in goods and services—they are large markets for each other’sexports and important sources of imports. More importantly, Japan and the United States areclosely connected via capital flows. Japan is a major foreign source of financing of the U.S.
national debt and will likely remain so for the foreseeable future, as the mounting U.S. public
debt needs to be financed and the stock of U.S. domestic savings remains insufficient to meet theinvestment needs. Japan is also a significant source of foreign private portfolio and direct
investment in the United States, and the United States is the origin of much of the foreign
investment in Japan.
The relative significance of Japan and the United States as each other’s economic partner has
diminished. This trend is due in part to the rise of China and other emerging economic powers.
For example, China has overtaken Japan as the largest source of foreign financing of the U.S.
national debt. Nevertheless, analyses of trade and other economic data suggest that the bilateralrelationship remains important, and policy leaders from both countries face the challenge of how
to manage it. The trend is also due to the mediocre performance of the Japanese economy overthe last two decades, which was exacerbated by the global economic slowdown beginning in
2008, and other setbacks, including the tsunami, earthquake, and nuclear accidents that occurredin March 2011. Japan is still struggling to achieve sustained economic recovery.
However, during the last decade, U.S. and Japanese policy leaders seem to have made a deliberate
effort to drastically reduce the friction that prevailed in the economic relationship during the1970s, 1980s, and the first half of the 1990s. On the one hand, this calmer environment has
stabilized the bilateral relationship and permitted the two countries to focus their attention onother issues of mutual interest, such as national security. On the other hand, as some have argued,
the friendlier environment masks serious problems that require more attention, such as Japan’s
continuing failure to resolve long-standing market access barriers to U.S. exports. Failure to
resolve any of these outstanding issues could heighten friction between the two countries.
More generally, other issues regarding U.S.-Japan economic relations have emerged on theagenda of the 113th Congress. U.S. and Japanese leaders have several options on how to manage
their relationship, including stronger reliance on the World Trade Organization; special bilateral
discussion frameworks and agreements; or a free trade agreement such as the potential TransPacific Partnership (TPP) agreement in which Japan has decided to participate. Japan’s
participation in the TPP has renewed concerns of some Members of Congress over a number ofJapanese trade practices.

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U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options

Contents
An Overview of U.S.-Japan Economic Trends ................................................................................ 1
The Japanese and U.S. Economies ............................................................................................ 1
U.S.-Japanese Trade in Goods and Services.............................................................................. 4
U.S.-Japan Bilateral Investment ................................................................................................ 6
The Bilateral Economic Relationship and Shifting U.S. and Japanese Policy Priorities ................. 8
Bilateral Trade Issues ................................................................................................................ 9Japanese Import Restrictions on U.S. Beef ......................................................................... 9
Insurance, Express Delivery, and Japan Post .................................................................... 10
Market Access in Japan for U.S. Autos and Auto Parts .................................................... 11
Japan and the Trans-Pacific Partnership Agreement (TPP) and
Its Other FTA Initiatives................................................................................................. 11
The Doha Development Agenda ....................................................................................... 13
Overarching Issues ............................................................................................................ 14
Prospects and Policy Options to Deepen Economic Ties .............................................................. 14
The TPP ................................................................................................................................... 14
Reliance on the WTO .............................................................................................................. 15
Special Frameworks ................................................................................................................ 15
The WTO Dispute Settlement Mechanism .............................................................................. 19

TablesTable 1. Key Comparative Economic Indicators for the United States and Japan........................... 2
Table 2. U.S. Merchandise Trade with Japan, 1998-2013 ............................................................... 4
Table 3. U.S. Trade in Services with Japan, 2002-2012 .................................................................. 6
Table 4. U.S.-Japanese Foreign Direct Investment (FDI) Positions, 1998-2012 ............................. 7

Appendixes
Appendix. Managing the U.S.-Japan Economic Relationship—A Brief History .......................... 16

Contacts
Author Contact Information........................................................................................................... 19

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U.S.-Japan Economic Relations: Significance, Prospects, and Policy OptionsJapan and the United States are among the world’s largest economic powers. Together theyaccount for over 30% of world domestic product (2012 estimate). This economic clout makes
the United States and Japan powerful forces that influence each other’s economies and thoseof other countries. Economic conditions in the United States and Japan also have a significant
impact on the rest of the world. Furthermore, the U.S.-Japan bilateral economic relationship itself
can influence economic conditions in other countries.
The two countries remain very important economic partners, accounting for significant shares ofeach other’s foreign trade and investment, even though their relative significance has declined.
The global financial crisis and economic downturn added another dimension to the relationship as
the two countries have grappled with the severe impact of the crisis on their respective economies
and simultaneously have worked with their partners in the G-20 to coordinate a multilateral
response. The impact of the March 11, 2011, earthquake and subsequent tsunami and nuclear
plant accidents in northern Japan added still another factor to the bilateral economic relationship.
The U.S.-Japan economic relationship is important to U.S. national interests and to the U.S.
Congress. It has been the subject of oversight hearings and trade legislation, and Congress plays acritical role in shaping U.S. economic policy toward Japan.
The United States and Japan have taken perhaps the most important step in years in forging acloser economic relationship. After many months of internal political debate and changes inpolitical leadership, Japan expressed interest on March 15, 2013, in joining the negotiations toestablish the Trans-Pacific Partnership (TPP) trade agreement to which the United States is aparty. On April 12, after a series of informal bilateral discussions with Japan, the Obama
Administration stated that it would support Japan’s participation in the TPP and, with the other 10
TPP participants, it invited Japan to join. On July 23, 2013, Japan formally became a TPP
participant.

Congress must approve a TPP trade agreement in which the United States is a party before any
U.S. commitments could enter into force. To help the 113th Congress in fulfilling these and other
responsibilities regarding U.S.-Japan economic relations, this report explores the significance andstate of U.S.-Japan economic ties, major issues in the relationship, and the possible options for
managing the relationship.

An Overview of U.S.-Japan Economic Trends
The U.S. and Japanese economies remain closely intertwined through trade and capital flows.
Many argue that U.S. and Japanese political leaders have not always given the U.S.-Japan
relationship the priority commensurate with its economic importance; nevertheless, the data andother indicators suggest that the relationship bears attention.

The Japanese and U.S. Economies
The U.S. and Japanese economies are in some respects very similar. They are both large
industrialized economies that have provided their residents with a high standard of living.
However, as Table 1 points out, they are very different in some critical ways. The U.S. economy

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U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options

is roughly 2½ times as large as Japan’s both on a nominal and purchasing power parity (PPP)basis.1 The Japanese standard of living is slightly lower than the U.S. standard of living measured
on a nominal per capita/GDP basis and even lower when measured on a PPP per capita/GDP
basis. (The latter measurement reflects the high cost in Japan for food, fuel, and other basic
necessities compared to the United States.) Japan has also endured slow economic growth or evenrecessions during the past two decades, while U.S. economic growth had been stronger, althoughboth economies have suffered slow growth and even recession in the wake of the 2008-2009
financial crisis. The U.S. average annual GDP growth rate during the last 10 years (2003-2012)
has been almost two times that of Japan’s. Nevertheless, the economic recoveries in bothcountries are expected to be fragile, especially in Japan.
Exports are slightly more important to the Japanese economy than are imports as measured asratios to GDP, while imports are more significant than exports in the U.S. economy. The UnitedStates has continually incurred current account deficits. Japan had been earning current accountsurpluses, although the surpluses have been decreasing due to diminishing demand for Japan’s
exports and increasing imports of energy.
Japan has continually exceeded the United States in terms of savings. Many economists consider
the strong propensity to save in Japan relative to the United States as the primary reason why theUnited States has incurred current account trade deficits with Japan for many years and why
Japan continues to be a major net creditor while the United States is a net debtor. At the sametime, Japan has built up a huge volume of public debt, and its debt burden as a ratio of GDP isalmost three times that of the United States. Japan’s public debt has soared in the last several
decades as it has attempted to stimulate growth with extra government spending.
Table 1. Key Comparative Economic Indicators for the United States and Japan
Japan

United States

6.0
4.6

15.7
15.7

36,20049,800Real GDP Growth Rates (2012)

2.2%

2.2%

Merchandise Exports (billions of $U.S.) (2012)
Imports (billions of $U.S.) (2012)

793
857

1,612
2,357

Current Account Balance (billions of $U.S.)

85

-487

4.4%

8.2%

218.9%

73.6%

GDP (2012)- Nominal (trillions of $U.S.)- PPP (trillions of $U.S.)Per Capita GDP (2012)- PPP ($U.S.)

Recorded Unemployment Rates (2012)
Public debt/GDP (2012)
Source: CIA, The World Factbook.

Japan was hit by two economic crises in the last few years that affected U.S.-Japan economic
relations. The first was the global financial crisis, which began to hit in 2008 and intensified in
1
Purchasing power parity (PPP) measurements are the value of foreign currencies in U.S. dollars based on estimates ofthe purchasing power of such currency. The PPP exchange rate is then used to convert foreign economic data innational currencies into U.S. dollars.

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U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options

2009. Japan was hit hard by the decline in global demand for its exports, particularly in the
United States and Europe. Japan had become dependent on net export growth as the engine foroverall GDP growth, as domestic consumer demand and investment lagged.
The second crisis was the March 11, 2011, earthquake, tsunami, and nuclear accidents innortheast Japan. The Japanese government has responded with a series of four supplemental fiscal
packages to finance reconstruction. The implementation of the reconstruction efforts has beenslower than expected, dampening the stimulus effect on economic growth. In addition, thecountry has had to cope with electricity shortages and search for alternative sources of power,
including increased fossil fuel imports.
The two crises and the economic problems in Europe, among other factors, have adversely
affected Japan’s economic growth. Japan incurred growth rates of -1.1% in 2008 and -5.5% in2009 but recovered in 2010 to expand by 4.7%. The recovery proved short-lived as Japan
experienced -0.4% growth in 2011, only 1.4% in 2011, and an estimated 1.7% in 2013.
Prime Minister Abe has made it a priority of his administration to boost economic growth and toeliminate deflation, which has plagued Japan for many years. Abe is promoting a three-pronged,
or “three-arrow,” economic program. The first arrow consisted of a $122 billion fiscal stimulus
package aimed at spending on infrastructure, particularly in areas affected by the March 2011
disaster. While the package appears to have boosted growth somewhat, its effects appear to havelargely run their course and it has added to Japan’s already large public debt, which at over 200%of the country’s gross domestic product (GDP) is the highest of any advanced economy.
The second arrow consists of monetary stimulus to arrest deflation. As a result, under pressure
from Abe, the independent central bank (Bank of Japan, or BOJ) announced in the spring of 2013a continued loose monetary policy with interest rates of 0%, quantitative easing measures, and atarget inflation rate of 2%. The Japanese yen rapidly dropped in value against the U.S. dollar andother major currencies after that announcement. Although few observers think that the BOJ willreach its target, according to a number of measures it appears that inflationary pressures have reemerged in the economy, at least in part due to the rise in import prices resulting from the yen’s
depreciation.
The third arrow consists of economic reforms that are and will be aimed at restructuring the
agricultural, medical services, and electricity sectors (among others) and the promotion of newservices and industries. For Abe, Japan’s participation in the TPP is a catalyst for those growthpromoting reforms, but many of the established economic interests are deeply entrenched,particularly within his own party, the LDP. Critics argue that Abe has pursued structural reforms
cautiously, and has backtracked on many of them, such as liberalizing the sale ofpharmaceuticals. Abe’s government has said that in the spring of 2014 it will create a number of
special economic zones (SEZs), areas that have lower taxes and fewer regulations, in order tostimulate private-sector investment.
A likely by-product of these measures will be weakening of the yen. For the past five years, theyen had exhibited unprecedented strength in terms of the dollar. In January 2007 the yen’s
average value was ¥120.46=$1 during the month, but after rapid appreciation, it reached as highas ¥76.65=$1 in October 2011. Since that time, it has depreciated to ¥102.3=$1 on February 7,
2014.

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3U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options

U.S.-Japanese Trade in Goods and Services
The growth in U.S.-Japanese bilateral trade in goods and services has been slow if not stagnant
over the past two decades, reflecting, at least in part, the anemic state of the Japanese economy.
Bilateral trade declined significantly in 2009 as a result of the global economic downturn. U.S.Japan trade has picked up in 2010 and 21011 and, as Table 2 shows, regained its pre-2009 levelin 2012, but declined in 2013.
U.S. imports from Japan are concentrated within three main categories. About three-quarters of
those imports have consisted of passenger cars and parts; computers and components; officemachinery parts; and electrical machinery (primarily video cameras). U.S. exports to Japan aremuch more diverse, but a major portion of them are in computers and components; gas turbines(turbojets, turbo-propellers, etc.); office machinery parts; electrical machinery (integrated circuits
and electrical apparatus for line telephone systems); optical and medical equipment; andagricultural products, such as wheat and meat.
Table 2. U.S. Merchandise Trade with Japan, 1998-2013(billions of dollars)
Year

U.S. Exports

U.S. Imports

Trade Turnover

U.S. Balances

1998

57.9

122.0

179.9

-64.1

1999

57.5

131.4

188.9

-73.9

2000

64.9

146.5

211.4

-81.6

2001

57.5

126.5

184.0

-69.0

2002

51.4

121.4

172.8

-70.0

2003

52.1

118.0

170.1

-66.0

2004

54.4

129.6

184.0

-75.2

2005

55.4

138.1

193.5

-82.7

2006

59.6

148.2

207.8

-88.6

2007

62.7

145.5

208.2

-82.8

2008

66.6

139.2

205.8

-72.3

2009

51.2

95.9

147.1

-44.8

2010

60.5

120.3

180.8

-59.8

2011

66.2

128.8

195.0

-62.2

2012

70.0

146.4

216.4

-76.3

2013

65.1

138.5

203.6

-73.4

Source: U.S. Department of Commerce, U.S. Census Bureau.

Although Japan remains important economically to the United States, its importance has slid as it
has been edged out by other trade partners. In 1989, Japan was the largest source of U.S. imports
and the second-largest U.S. export market. By the end of 2009, Japan was the United States’s
fourth-largest merchandise export market (behind Canada, Mexico, and China) and the fourthlargest source for U.S. merchandise imports (behind Canada, Mexico, and China) and remained
so in 2013.

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The data on merchandise trade may underestimate the relative importance of the United States toJapan’s trade since a significant portion of Japanese exports to China are used as inputs to China’s
exports to the United States, possibly by Japanese-invested firms in China. Under a joint project,
the Organization for Economic Cooperation and Development (OECD) and the World Trade
Organization and (WTO) have created measurements of the value of bilateral exports and imports
based on the actual value added by country, including services used in the production of thoseexports and imports as opposed to the final value of the exports and imports. According to theOECD-WTO database, the United States accounted for close to 20% of Japanese exports invalue-added terms and was the largest market for Japanese exports, while China accounted for
15% of Japanese exports on a value-added basis, and was the second-largest export market.2
The emergence of China and other East Asian countries has played a role in the declining
significance of the United States in Japan’s trade. This trend reflects rapidly growing economies
in East Asia, as well as a shift in global production and the development of regional supply
chains. In the last decade, Japanese trade flows have shifted decidedly towards East Asia andaway from the United States. In 1994, 38.6% of Japanese exports went to and 33.0% of Japanese
imports came from nine of the largest economies in East Asia.3 In 2013, 50.7% of Japanese
exports and 40.9% of Japanese imports were with those same countries. China is the fastestgrowing Japanese trade partner.4 Similarly, the geographic pattern of U.S. trade has shifted.
Mexico and China have surpassed Japan in U.S. trade, as noted above.
U.S.-Japan trade in services has increased, at least on the U.S. import side, although it remained
relatively modest as of 2011 (latest data available).5 (See Table 3.) The United States exports avariety of services to Japan in the form of travel services, passenger fares, and “othertransportation”; royalties and licensing fees; and other private services. U.S. imports of services
from Japan consisted mostly of transportation other than passenger fees, royalties and licensing
fees, and other private services. The United States has realized surpluses in its bilateral trade inservices with Japan.

2OECD-WTO Trade in Value-Added Initiative, http://www.oecd.org/valueadded.
China, Hong Kong, Indonesia, South Korea, Malaysia, Philippines, Singapore, Thailand, and Taiwan.
4
CRS calculations based on data compiled by GTIS, Inc., World Trade Atlas.
5
The data capture “cross-border” trade in services. Because they are intangible, most services are bought and soldwhere the buyer and seller are located in close proximity, for example, sold by a foreign-owned company in the countryof the buyer. The data, therefore, under report the volume of trade in services.
3

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Table 3. U.S.Trade in Services with Japan, 2002-2012(billions of dollars)
Year

U.S. Exports

U.S. Imports

Trade Turnover

U.S. Balances

2002

30.4

18.9

49.3

11.5

2003

30.1

20.0

50.1

10.2

2004

36.0

21.3

57.3

14.8

2005

42.5

23.8

66.3

18.7

2006

42.0

25.5

67.5

16.5

2007

41.2

26.2

67.4

15.0

2008

42.3

25.7

68.0

16.6

2009

41.4

22.9

64.3

18.5

2010

45.4

25.8

71.2

19.6

2011

44.9

27.5

72.4

17.4

2012

47.0

29.7

76.7

17.3

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

U.S.-Japan Bilateral Investment
Along with trade in goods and services, foreign direct investment (FDI) (investments in
manufacturing facilities, businesses, and real estate) and portfolio investments (investments ingovernment securities, corporate stocks and bonds, and bank deposits) between residents of theUnited States and Japan also define the economic relationship. The value of portfolio and direct
investments between the United States and Japan exceeds the value of trade in goods andservices. In addition, investments, particularly FDI (Table 4), signify a long-term financial
commitment on the part of the investor.6

6
Foreign direct investment (FDI) consists of investments in real estate, manufacturing plants, and retail facilities, inwhich the foreign investor owns 10% or more of the entity. FDI can be new establishments or mergers with or
acquisitions of already established, locally based enterprises. Investors seek to take advantage of skilled labor or otherresources of the local economy to produce goods or services tailored to the local market, to avoid foreign trade barriers,and for other reasons.

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Table 4. U.S.-Japanese Foreign Direct Investment (FDI) Positions, 1998-2012(historical-cost basis; billions of dollars)
Japanese FDI in U.S.

U.S. FDI in Japan

1998

134.3

41.4

1999

153.8

55.1

2000

159.7

57.1

2001

149.9

55.7

2002

147.4

66.5

2003

157.2

57.8

2004

175.7

68.1

2005

190.3

75.5

2006

204.0

84.4

2007

229.4

85.2

2008

234.7

99.8

2009

239.3

96.0

2010

252.1

102.6

2011

291.1

126.0

2012

308.3

134.0

Source: U.S. Department of Commerce, Bureau of Economic Analysis.
Note: Figures are cumulative FDI.

The United States has consistently been the largest source of FDI in Japan. From 1998 to 2011(latest data available), U.S. FDI in Japan has more than doubled. The sharp increase ininvestments was largely the result of acquisitions by U.S. firms of Japanese entities that were
facing bankruptcy, rather than original or “greenfield” investments. The Japanese economy has
been relatively “closed” to foreign investment, and the level of FDI in Japan consistently ranks
among the lowest of industrialized countries.
Over the years, Japanese investors established a strong presence in the United States, especially inautos, where Japanese manufacturers established a commercial presence in the United States tocircumvent restrictions on their exports to the U.S. market. Japanese car manufacturers havegained larger shares of the U.S. domestic market.
Japanese FDI in the United States surged in the 1980s and continued to increase in the 1990s. In
the 1980s, Japanese investors acquired such high-profile U.S. assets as Columbia Pictures,
Rockefeller Center, and Pebble Beach Golf Course. These investments followed surges inJapanese investments in the United States by Japanese consumer electronics firms and auto
producers. (Many of these acquisitions were not profitable for Japanese investors.) The rapid
increase of the investments and their high visibility generated concerns in the United States ofJapan “buying up the United States.” By 2000, the level of Japanese FDI in the United States rose
to $159.7 billion but declined to $147.4 billion by 2002. The level of Japan’s FDI in the UnitedStates has increased since, reaching $308.3 billion in 2012. In the 1980s, Japan became the largest
source of FDI in the United States, surpassing the United Kingdom, the traditional leader. By
2002, Japan had dropped to the fourth-largest source of FDI, far behind the United Kingdom andCongressional Research Service

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U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options

France, and slightly behind the Netherlands. However, in 2004, its ranking reached number two
behind the United Kingdom and remained there at the end of 2012.7
In addition to FDI, substantial amounts of capital flow between the United States and Japan in theform of portfolio investments. At the end of 2012 U.S. investors held $429.4 billion in Japanese
corporate stocks and $45.7 billion in Japanese bonds. Japanese investors held $319.8 billion in
U.S. corporate stocks and $337.3 billion in U.S. corporate bonds.8
Japanese investors are major private foreign holders of U.S. Treasury securities that finance theU.S. national debt, and their importance has soared over the last few years. By the end of May
2013, Japanese residents held $1,1111.1 billion in U.S. securities. At one time, Japanese investors
were the largest foreign holders of U.S. Treasury securities; however, beginning in September
2008, China surpassed them, but Japanese investors are catching up. As of the end of November
2012, Chinese investors held $1,315.9 billion in U.S. Treasury securities.9
Japanese holdings of U.S. Treasury securities underscore the debtor/creditor link between the
United States and Japan. The U.S. government continues to incur budget deficits and the UnitedStates as a whole maintains a low national savings rate; as a result, the United States has had torely increasingly on foreign creditors to finance the rising national debt. This has some potentiallyproblematic implications for U.S. interest rates. For example, if Japanese investors decided toswitch their foreign investment from U.S. Treasury securities to euro-denominated securities, or if
Japan’s savings rate should decline as older Japanese citizens spend down their savings, andcapital begins to flow back to Japan, U.S. interest rates would likely rise, all other factors
remaining unchanged.

The Bilateral Economic Relationship and Shifting
U.S. and Japanese Policy Priorities
By necessity, the United States and Japan have long given their bilateral economic relationshiphigh priority. For Japan the importance of the relationship has been rooted in the emergence of theUnited States as the world’s largest economic power; Japan’s dependence on the United States fornational security, especially during the Cold War; the dependence of Japanese manufacturingindustries—autos, consumer electronics, and others—on exports to the United States; and thereliance of reform-minded Japanese political leaders on U.S. pressure, gaiatsu, to press for
economic reforms in a political system that strongly protects the status quo.
For the United States, the significance of the economic relationship with Japan has been grounded
in its reliance on Japan as a critical ally; the emergence of Japan in the post-World War II period
as an economic power in East Asia and, until recently, the second-largest economy (now the thirdlargest economy) in the world; the advancing competition from Japanese manufacturers inindustries, for example autos and steel and high tech industries, including semiconductors andcomputers, which employ large numbers of U.S. workers; the rising trade deficits with Japan;
Japan’s emergence as a major source of investment in the United States; and Japanese
7

Department of Commerce, Bureau of Economic Analysis.
Survey of Current Business. July 2013, pp. 18,19,21.
9U.S. Department of the Treasury, http://www.ustreas.gov/tic/.
8

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government policies that have protected vulnerable sectors and assisted exporters, often at theexpense of U.S. competitors.
For many years, the bilateral economic relationship was the centerpiece of U.S. and Japanese
foreign economic agendas, and Japanese trade strongly influenced the making of overall U.S.
trade policy. Many scholarly and popular books and journals were written on the subject.10
One reason for the shift in priorities may be the rise of China as a trade power. Since 2000, theU.S. bilateral trade deficit with China has exceeded the deficit with Japan, and the gap between
the two deficits continues to grow. In 2013, the U.S. trade deficit with Japan was $73.4 billion;
the deficit with China was $318.4 billion. The growing deficit with China has induced U.S.
policymakers to address Chinese actions and policies that U.S. companies have asserted are
unfair. These include barriers to U.S. exports, inadequate protection of intellectual property
rights, an arguably undervalued exchange rate, and sales of products in the United States at lessthan fair value. Also, the relative economic decline of Japan and its economic problems has meantthat Japan is not viewed as much as the “competitive threat” that it once was in the 1980s andearly 1990s. For Japan, China has emerged both as a major economic competitor and partner inthe region requiring more attention.
Other possible reasons for the shift in policy priorities might include the following:•

Foreign policy and national security concerns, for example, the increasing
instability on the Korean peninsula caused by North Korea’s nuclear ambitions
and the territorial disputes with China, have tended to trump commercial
concerns in U.S.-Japan alliance matters.

•

The establishment in 1995 of the World Trade Organization (WTO) and a
restructured dispute settlement body has lessened the scope for U.S. unilateral
trade pressures to open Japan’s market further.

•

The United States and Japan have been forging economic relations with othercountries and regions through free trade agreements (FTAs), which have reduced
the focus on their own bilateral relations.

Bilateral Trade Issues
While U.S.-Japan economic ties have been fairly calm over the last two decades, a number ofissues remain the source of friction from time to time. In addition, the United States and Japan are
pursuing various options to tighten that relationship.

Japanese Import Restrictions on U.S. Beef
The issue first arose in December 2003 when Japan imposed a ban on imported U.S. beef (as did
some other countries) in response to the discovery of the first U.S. case of bovine spongiform
encephalopathy (BSE or “mad cow disease”) in Washington State. In the months before thediagnosis in the United States, nearly a dozen Japanese cows infected with BSE had been
10

For example, Clyde V. Prestowitz, Trading Places: How We Allowed Japan to Take the Lead, New York: Basic
Books, 1988.

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discovered, creating a scandal over the Agricultural Ministry’s handling of the issue (several more
Japanese BSE cases have since emerged). Japan had retained the ban despite ongoingnegotiations and public pressure from Bush Administration officials, a reported frameworkagreement (issued jointly by both governments) in October 2004 to end it, and periodic
assurances afterward by Japanese officials to their U.S. counterparts that it would be lifted soon.
In December 2005, Japan lifted the ban after many months of bilateral negotiations, but reimposed it in January 2006 after Japanese government inspectors found bone material among theinitial beef shipments. The presence of the bone material violated the procedures U.S. andJapanese officials had agreed upon. The then-U.S. Secretary of Agriculture Johanns expressed
regret that the prohibited material had entered the shipments.
In July 2006, Japan announced it would resume imports of U.S. beef from cattle 20 months old or
younger. The first shipments arrived in August 2006. Members of Congress had pressed Japan tolift restrictions on imports of U.S. beef from even older cattle. U.S. officials met with Japanese
agricultural officials September 14-15, 2010, for technical discussions but produced no clear
indication of resolution of the issue. On August 4, 2011, a bipartisan group of Senators sent a
letter to Secretary of Agriculture Vilsack and to USTR Ron Kirk, urging them to press Japan (andChina) to end restrictions on imports of U.S. beef. In December 2011 Japan announced that it wasreassessing its BSE-related restrictions with the objective to raise the maximum age of cattle fromwhich U.S. beef can be exported to Japan.
On February 1, 2013, the Japanese government loosened its restrictions on beef imports from theUnited States to allow beef from cattle 30 months or younger for the first time since December
2003. According to a joint press release from the Office of the United States Trade Representative
and the Department of Agriculture, the Japanese government’s Food Safety Commission would
continue to monitor shipments of U.S. beef and would consider the possibility of allowing U.S.
beef from cattle of any age to be imported into Japan.

Insurance, Express Delivery, and Japan Post
Japan is the world’s second-largest insurance market, next to the United States. U.S.-based
insurance providers have found it difficult to access the market especially in life and annuity
insurance. They have been concerned about favorable regulatory treatment that the government
gives to the insurance subsidiary of Japan Post, the national postal system that holds a large shareof this market. For example, they cite subsidies to the insurance operations from revenues fromother Japan Post operations. Also, Japan Post-owned insurance companies are not subject to thesame regulations as other, privately owned insurance providers, both domestic and foreignowned. On October 1, 2007, the Koizumi government introduced reforms as part of a
privatization process. However, the successor government, led by the Democratic Party of Japan(DPJ,) took steps to roll back the reforms. On April 27, 2012, the Diet passed legislation thatwould appear to loosen regulatory requirements, according to U.S. industry sources.11 The bill isreportedly a compromise package by the lawmakers from the DPJ, the LDP, and the Komeito
Party.12 The United States is also concerned about insurance sold by cooperatives that, they claim,
are regulated more leniently than private firms.
11
12

Inside U.S. Trade, April 27, 2012.
World Trade Online, April 5, 2012.

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Similarly, the United States has also raised concerns about express delivery services and banking
services that Japan Post subsidiaries provide that may receive preferential regulatory and financial
treatment giving them an unfair advantage to privately owned domestic and foreign providers.13
The United States considers Japan’s treatment of insurance and the other services to be aconfidence building measure that must be addressed as part of Trans-Pacific Partnership (TPP).
(See discussion below.)Market Access in Japan for U.S. Autos and Auto Parts
Auto and auto-parts-related trade and investment have been a very sensitive set of issues in the
U.S.-Japan economic relationship. The issue has its roots in the late 1970s and early 1980s, when
U.S. imports of Japanese-made vehicles surged as a result of the increase in U.S. consumer
demand for smaller vehicles, largely in response to the rapid increase in gasoline prices, while
demand for U.S.–manufactured cars plummeted. Facing pressure from the U.S. auto industry andpressure from Congress in the form of limits on imports of Japanese made cars, the Reagan
Administration persuaded Japan to agree in 1981 to voluntary export restraints. Japanesemanufacturers responded to the restraints by establishing manufacturing facilities in the UnitedStates and exporting high-valued, passenger cars. U.S. manufacturers asserted that Japan
employed various measures to restrict sales of foreign-made cars in Japan and the use of U.S.made parts in Japanese cars manufactured in the United States. These issues were the subject ofbilateral negotiations and agreements through the 1990s. The agreements were mostly in the formof Japanese government pledges to ensure that government regulations did not impede the sale ofU.S.-made cars in Japan and voluntary efforts on the part of Japanese manufacturers to increase
the use of U.S.-made auto parts in cars made in the United States. The U.S. government pledged
to implement programs to promote the export of U.S.-made cars in Japan.
The intensity of the issue had subsided somewhat but has regained attention in the context ofJapan’s possible participation in the TPP negotiations. (See TPP discussion below.) The three
Detroit-based car manufacturers—Chrysler, Ford, and General Motors—charge that Japanese
government regulations continue to prevent them from obtaining their fair share of Japanese
domestic vehicle sales. They cite the traditionally small share of total cars sales in Japan thatconsist of imported cars—around 6.7%.14

Japan and the Trans-Pacific Partnership Agreement (TPP) and
Its Other FTA Initiatives
The TPP is an evolving regional free trade agreement (FTA). Originally formed as an FTA among
Singapore, New Zealand, Chile, and Brunei (the P-4), the TPP is now an agreement undernegotiation among the original four countries plus the United States, Australia, Canada, Japan,
Mexico, Peru, Malaysia, and Vietnam. The current 12 TPP partners have conducted a number ofrounds of negotiations and envision a comprehensive arrangement to liberalize trade and to coverbroad range of trade and trade-related activities. But they also envision the TPP to be a “21stcentury” framework for conducting trade within the Asia-Pacific region and, therefore, addressing
13

U.S. Mission to the World Trade Organization, Geneva, U.S. Statement on the Trade Policy Review of Japan,
February 19, 2013, http://www.geneva.usmission.gov.
14
CRS calculations based on data in Japan Automotive Manufacturers Association, Motor Vehicle Statistics forJapan—2013, http://www.jama.org/pdf/MIJ2013.pdf.

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cross-cutting issues that are relevant now and will be in the future. These issues include
regulatory coherence; competitiveness and business facilitation, also known as transnational
supply and production chains; issues pertaining to small and medium-sized companies; economic
development; and the operations of state-owned enterprises. Therefore, while the 12 TPP
countries negotiate the agreement, they expect other economies in the region will seek to join in
those negotiations or will accede to the agreement after it has been concluded.15
Japan’s participation in the TPP was the subject of debate within the Japanese political leadershipand among other Japanese stakeholders. On March 15, 2013, Prime Minister Abe announced thatJapan would formally seek to participate in the negotiations to establish the Trans-PacificPartnership (TPP). In making the decision he had to confront influential domestic interests thatargued against the move. Among the most vocal have been Japanese farmers, especially rice
farmers, and their representatives. They have argued that Japanese agriculture would be severely
harmed by foreign competition as Japan would have to negotiate away high tariffs and otherprotective measures on imports of agricultural products. Some Japanese health providers haveargued that Japan’s national health insurance system would be adversely affected because, theyclaimed, the TPP would force Japanese citizens to buy foreign-produced pharmaceuticals andmedical devices. In his March 15 statement, Prime Minister Abe acknowledged those domestic
sensitivities, but also insisted that Japan needed to take advantage of “this last window ofopportunity” to enter the negotiations, if it is to grow economically. Other Japanese businessinterests, including manufacturers, strongly support the TPP.
Prior to Japan’s entering the TPP negotiations, The Obama Administration had identified threeissues that Japan needed to address as “confidence building measures” if the United States wereto support Japan’s entry into the TPP: Japanese restrictions on imports of U.S. beef; market
access for U.S.-made cars; and insurance and express delivery issues.
The beef issue appears to have been addressed with the February 1, 2013, Japanese action toallow imports of U.S. beef from cattle younger than 30 months. Regarding the auto issue, Japanagreed to increase the number of U.S.-made vehicles that can be imported under its Preferential
Handling Procedure (PHP) from 2,000 per vehicle “type” to 5,000 per vehicle “type.” In addition,
the two countries agreed to address in parallel negotiations issues regarding non-tariff measures(NTMs) pertaining to auto trade, including transparency in regulations, standards, certification,“green” and other new technology vehicles, and distribution. The parallel auto negotiations arealso to address the establishment of a special “safeguard” provision to deal with injurious surges
in auto imports and of a special tariff “snap-back” mechanism to deal with a partner’s failure tofulfill the commitments on auto trade. Japan agreed that under the proposed TPP, U.S. tariffs onimports of Japanese motor vehicles will be phased out over a period equal to the longest phaseout period in the agreement.
The activities of the government-run Japan Post, subsidiaries of which sell insurance and expressdelivery services, were the main focus of USTR’s agreement with Japan on insurance. Japanannounced that the government would not approve new or modified cancer insurance products or
stand-alone medical insurance products for sale by Japan Post until it has been determined that a“level-playing field” has been established in competition between private insurers and Japan Post.

15

For more information on the TPP, see CRS Report R42694, The Trans-Pacific Partnership (TPP) Negotiations andIssues for Congress, coordinated by Ian F. Fergusson.

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The countries agreed to address additional “level-playing field” issues regarding insurance in theactual TPP negotiations.
Furthermore, the two sides agreed to hold negotiations parallel to the TPP negotiations to address
issues regarding non-tariff measures (NTMs) in insurance, government procurement, competition
policy, express delivery, and sanitary and phytosanitary (SPS) measures. The parallel negotiations
are to achieve “tangible and meaningful” results by the completion of the main TPP negotiations
and will be legally binding at the time a TPP agreement would enter into force.
A large segment of the U.S. business community supports Japanese participation in the TPP, if
Japan can resolve long-standing issues on access to its markets for U.S. goods, services, andagriculture. However, the Detroit-based U.S. auto industry, the United Autoworkers union, andMembers of Congress with a large auto-industry presence in their districts, have expressed strong
opposition. Other segments of the U.S. business community have expressed support for Japan’s
entry into the TPP negotiations, although some have conditioned their support on Japan’s
willingness to address long-standing issues.
Along with the TPP, Japan is pursuing or considering other regional trade arrangements. On
November 20, 2012, Japanese, Chinese, and South Korean trade ministers announced thelaunching of negotiations on a trilateral free trade agreement. The negotiations began in early
2013. The scope of the possible agreement remains undefined but would not likely match theambition of the TPP. Market access for agricultural products will likely be a point of contention
as the small but vocal agriculture interests in South Korea and Japan confront the possibility ofincreased rice imports from China under an FTA arrangement.16
In addition, Japan, along with the 10 members of the Association of Southeast Asian Nations(ASEAN), China, South Korea, Australia, New Zealand, and India, announced on November 20,
2012, their intention to begin negotiations to form a trade arrangement—the Regional
Comprehensive Economic Partnership (RCEP). While not ostensibly in conflict with the TPP,
some have suggested the RCEP could be an alternative to the more comprehensive TPP. While
RCEP would include some TPP partners, it is noteworthy for the absence of the United States andthe inclusion of China.17 Japan has also launched FTA negotiations with the European Union.

The Doha Development Agenda
Japan and the United States have been major supporters of the Doha Development Agenda(DDA), the latest round of multilateral trade liberalizing negotiations in the WTO. Yet, the twocountries had taken divergent positions in some critical areas. For example, the United States,
Australia, and other major agricultural exporting countries pressed for the reduction or removal of
barriers to agricultural imports and subsidies of agricultural production, a position strongly
resisted by Japan and the European Union. At the same time, Japan and others have argued thatnational antidumping laws and actions that member countries have taken should be examined
during the DDA, with the possibility of changing them, a position that the United States has
opposed.

16
17

International Trade Reporter, May 31, 2012.
See, for example, Pakpahan, Beginda, Will RCEP Compete with the TPP?, EastAsiaForum,www.eastasiaforum.org.

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U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options

In July 2006, WTO Director-General Pascal Lamy suspended the negotiations because, among
other reasons, the major participants could not agree on the modalities that negotiators would use
to determine how much they would liberalize their agricultural markets and reduce agricultural
subsides. Negotiators had been meeting from time to time to try to resuscitate the talks. However,Lamy’s attempt to hold a ministerial meeting in December 2008 failed when the major parties tothe negotiators could not resolve their differences over establishing modalities in agricultural andnon-agricultural negotiations.18
Various groups of WTO members have been meeting to try to establish a foundation forcompleting the negotiations without success to date. Smaller groups of WTO members have been
meeting to explore options other than a comprehensive agreement, such as a plurilateral services
agreement—the Trade in Services Agreement (TISA)—a d expansion of the information
technology agreement. In 2013, WTO members reached an agreement on improving tradefacilitation. Japan and the United States are major participants in those discussions.

Overarching Issues
For more than a decade, U.S.-Japanese bilateral economic discussions have concentrated less on
the specific issues and more on fundamental factors that cut across many aspects of the U.S. andJapanese economies, such as government regulations, intellectual property rights, competition
policies, and pharmaceutical and medical devices pricing practices. Given the complexity ofmany of these issues, they have been the basis of discussion, negotiation, and disputes for many
years. The United States and Japan have addressed these issues within various frameworks over
the years with mixed results. (See discussion in the Appendix, “Managing the U.S.-Japan
Economic Relationship—A Brief History.”)

Prospects and Policy Options to Deepen
Economic Ties
Although the relative significance of the U.S.-Japan economic relationship has been diminishedsomewhat with the rise of China and other emerging economic powers and Japan’s stagnant
economic performance, it remains important to the respective companies and the Asia-Pacificregion as a whole. As Japan and the United States continue to manage their economic
relationship, they have several options on how to deepen the relationship. These options are notnecessarily mutually exclusive but could be employed more or less in tandem.

The TPPThe TPP issue presents opportunities and challenges for the United States and Japan. On the one
hand, if successful, it could reinvigorate an economic relationship that has remained steady but
stagnant, by forcing the two countries to address long-standing, difficult issues, and allowing
them to raise their relationship to a higher level. On the other hand, failure to do so could indicatethat the underlying problems are too fundamental to overcome and could set back the18

For more information on the DDA, see CRS Report RL32060, World Trade Organization Negotiations: The Doha
Development Agenda, by Ian F. Fergusson.

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relationship. It could signify the failure of the United States and/or Japan to deal with domestic
opposition to a more open trade relationship.

Reliance on the WTO
With or without the TPP, the United States and Japan could continue to use the WTO and its
dispute settlement mechanism to resolve issues that come under the WTO’s aegis. This option
could help to promote stability in the bilateral relationship by containing political friction like thatwhich erupted in the 1980s and 1990s. In addition, it could lessen the perception that many
Japanese have had that the United States was acting unilaterally in making its demands on Japan
to open up its markets and in threatening to limit market access to Japanese exporters in
retaliation. The WTO provides at the least the semblance of neutrality where both countries could
anticipate impartial treatment by their peers.
A potentially major constraint on the use of this option is the limited scope of the WTO’s
coverage and also the lack of progress in the DDA negotiations. A number of long-standing issues
in U.S.-Japan economic ties pertain to competition policy, that is, how governments use theirauthority to ensure fair competition among producers. In addition, except for the completion of
the agreement on trade facilitation, the failure of the WTO members, to complete the DDA roundof negotiations may indicate the inability of the 159-member body to expand its coverage,
constraining its future relevance. Nevertheless, the United States and Japan might continue to use
the WTO process to resolve those issues that come under its purview.

Special Frameworks
A second option would be to discuss economic ties through a special framework and/or sectorspecific agreements. These frameworks allow each country to raise and negotiate on issues thatare not subject to international rules, such as regulatory policies and competition policies, butnevertheless have caused problems in the bilateral relationship. In addition, they provide a forum
for officials to address issues before they emerge as full-fledged disputes. However, the record
with respect to special frameworks, such as the Market-Oriented Sector-Selective (MOSS) talks,
and the Structural Impediments Initiative (SII) (see Appendix) is mixed. While the United States
and Japan have achieved some successes, a number of issues seem to have lingered over theyears, such as government regulatory practices. Similarly, the record of sector-specificdiscussions, such as on autos and auto parts trade and construction services, reflects only partial
success. The current Economic Harmonization Initiative (EHI) appears dormant for the timebeing, and its relevance may be overtaken if Japan joins the TPP.

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Appendix. Managing the U.S.-Japan Economic
Relationship—A Brief History
For the United States and Japan, managing their economic relationship has meant cooperating inareas of mutual agreement and addressing problems in a manner that meets the national interestof each country while maintaining the integrity of the alliance. While the two countries havesucceeded in doing this, by and large, trade frictions became heated at times, making relationsdifficult.
The United States dominated the economic relationship with Japan for many years after WorldWar II. The United States was by far the largest economy in the world, and Japan was dependent
on the United States for national security. The United States set the agenda, and the issues on theagenda were driven by the U.S. demands for Japan to reform its economic and trade policies,
eliminate industrial policies, and boost domestic consumption. Sometimes these efforts led U.S.
policymakers to force Japan to curb exports of certain products, such as cars, to the United States
and/or to remove barriers to U.S. exports and investment.
Until recently, the United States and Japan, largely at the initiative of the United States, had used
special bilateral frameworks and agreements to conduct their government-to-government
economic relations. Some of these mechanisms were designed to address trade and investment
barriers in Japan that were product-specific—for example, semiconductors and autos—and others
were designed to address “generic” barriers that affected many sectors, such as the Japanese retail
distribution system.
The Reagan Administration introduced the first multi-sector negotiating framework—the MarketOriented Sector-Specific (MOSS) talks—with Japan in March 1985. The process resulted fromdiscussions between President Reagan and Prime Minister Nakasone to find a way to deal withtrade issues that had been clouding the relationship for some time. The initial set of negotiations
covered four sectors: telecommunications; medical equipment and pharmaceuticals; forestry
products; and electronics. The two countries added auto parts later. The sectors were selected
because of the potential for U.S. companies to increase exports to the Japanese market if thebarriers were removed. They were also sectors in which multiple Japanese government barriers toimports existed. The United States and Japan reached agreement in all of the MOSS sectors. A
1988 General Accounting Office (GAO) study concluded that U.S. exports in each of the selected
sectors except auto parts increased, but that improved market access does not necessarily
guarantee huge increases in exports.19 Macroeconomic trends and other factors also play a rolethat could trump market access.
In March 1989, President George H. W. Bush with Prime Minister Uno launched the Structural
Impediments Initiative (SII) that targeted a broad range of Japanese macroeconomic policies andpractices and structural factors that served as nontariff trade barriers and that prevented U.S.
exporters and investors from penetrating or increasing their presence in the Japanese market. The
SII was a pioneering effort in that U.S. negotiators targeted Japanese barriers that were cited by
not only American exporters and investors, but also by Japanese academics, business leaders, and
19

U.S. General Accounting Office, U.S.-Japan Trade: Evaluation of the Market-Oriented Sector-Selective Talks,
GAO/NSIAD-880205, July 1988. p. 57.

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politicians. In so doing, the U.S. side sought to increase the possibility of a successful outcome if
it had a domestic constituency in Japan that would be working to achieve the same goal. In
addition, the targeted policies and practices were ones that were fundamental to Japanese
economic life and had not been subject to bilateral negotiation. These targets were Japan’s highsavings-low investment imbalance, to which many economists attribute its perennial current
account surpluses; the Japanese retail distribution system, particularly its Large-Retail Store Law
that favored small “mom and pop” enterprises at the expense of larger operations, such as Toys R
Us; land use policies that inhibited the market entry of new firms and kept land prices high; thekeiretsu business conglomerates that both Japanese and U.S. experts blamed as a barrier to theentry of new Japanese and foreign firms to the Japanese market; exclusionary business practices,such as the formation of cartels to limit competition; and business pricing practices under which
Japanese companies would sell products at a premium in Japan so that they could undersell theircompetitors in the U.S. market.
The SII also included U.S. policies and practices, such as the low U.S. savings rate, which
Japanese negotiators asserted was a cause of U.S. trade deficits. This element was an attempt tomake the format more balanced. However, it was generally understood that the real focus of the
SII was Japanese barriers. The SII process operated throughout the four years of the George H. W.
Bush Administration. U.S. and Japanese negotiators met periodically and reported annually on
progress made in resolving the offensive policies and practices. The results of the SII process are
mixed. On the one hand, it focused attention of policymakers of both sides on fundamental causesof problems that cut across many sectors and economic activities. The SII is also credited withplacing enough pressure on Japan to change its Large-Retail Store Law. Some observers also
argued that by selecting policies and practices that many Japanese themselves wanted changed,
the United States lessened the unilateral thrust of previous negotiations. On the other hand, manyof the problems that had plagued the U.S.-Japan relationship before the SII remain, such as thetrade imbalances.
The Clinton Administration negotiated its own bilateral framework with Japan. The “UnitedStates-Japan Framework for a New Economic Partnership” borrowed elements from the MOSS
and the SII processes by including some sector-specific goals along with overall structural andmacroeconomic issues. These goals were included in five “baskets.” This framework departed
from the others in several important ways. It obligated the President and the Prime Minister tomeet at least twice a year to review progress under the framework. At the insistence of the Clinton
Administration, “objective criteria” were to use to determine whether Japan was fulfilling its
obligations under the framework. This element proved highly controversial, and the two countries
never agreed on the role the “objective criteria” would play or, for that matter, what they would
be. The United States argued the criteria were to be targets Japan was to meet while Japan did notwant to be bound by such criteria and argued that the criteria were to be guidelines. The
differences over “objective criteria” reached the summit level and strained U.S.-Japan relations.
The United States and Japan reached agreements in most of the areas, including medical
equipment procurement, intellectual property rights protection, financial services, insurance, andflat glass, among others, but not without some acrimony. For example, the United States was on
the brink of imposing tariff-sanctions on Japan, and both countries were poised to take one
another to the WTO before they reached agreement on Japanese imports of autos and auto parts.
U.S.-Japanese trade friction reached its peak during the period of that framework that roughly
corresponds to the first Clinton Administration. The friction was due in part to the long-running
frustration that U.S. exporters and investors were experiencing with the same obstacles that
previous agreements were supposed to have addressed. The “results-oriented” strategy wasCongressional Research Service

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U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options

intended to provide a clear indicator of whether Japan had removed the barriers. But Japan
resisted such objective indicators, because, it argued, the problems in U.S.-Japan trade stemmed
from private sector practices and not government policies. The framework raised the issues to thesummit level to ensure that both sides took the issues seriously. By doing so, however, theframework increased the risk that failure to achieve results would sour the entire relationship.
With the completion of the auto and auto parts agreement in 1995, most trade issues in theframework had been completed. The Clinton Administration closed the books on the framework.
In its place, it got Japan to agree in June 1997 to another, more loosely shaped format, theEnhanced Initiative on Deregulation and Competition Policy (the Enhanced Initiative). This
format did not have the results-oriented elements of the previous framework. It was a mechanism
for exchanging views on some of the fundamental aspects of the Japanese economy that limitedcompetition and were likely preventing Japan from emerging from the economic malaise that had
set in. These issues had not received as much attention in previous negotiations. The UnitedStates focused on getting Japan to change regulations and competition policies affecting
telecommunications, medical devices and pharmaceuticals, and financial services, as well as moregeneric issues such as competition policy and regulation transparency.20
On June 30, 2001, President Bush and then-Prime Minister Koizumi announced the formation of
the “U.S.-Japan Economic Partnership for Growth” (The Economic Partnership). In so doing, theBush Administration continued a tradition of creating special frameworks as mechanisms fordiscussing bilateral economic issues with Japan, a unique approach in U.S. trade policy.
The Enhanced Initiative marked a turning point in the overall U.S.-Japan relationship as
economic relations became less prominent. While negotiators continued to meet to exchange
views and monitor progress under the initiative and previous agreements, the issues did not havethe importance at the summit level they once had. National security issues had become more
dominant in the bilateral relationship.
The Economic Partnership consisted of several initiatives or dialogues to include participationfrom subcabinet-level leaders from both governments and participation from members of thebusiness communities and other nongovernment sectors from both countries. The U.S.-Japan
Subcabinet Economic Dialogue provided overall direction for the Economic Partnership. Other
elements of the Economic Partnership included the Regulatory Reform and Competition Policy
Initiative (with working groups on telecommunications, information technologies, energy, andmedical devices and pharmaceuticals, plus a cross-sectoral working group); the Financial
Dialogue, which examined such issues as banking reform; the Investment Initiative, which
discussed requirements to improve the investment climate in Japan; and the Trade Forum, which
operated to resolve sector-specific trade issues, to catch potential problems before they got worse,and to monitor sector-specific agreements already in effect. Each one of these elements
contributed to an annual report to the President and the Prime Minister in which participants
record progress and make recommendations for the coming year.
In November 2010, President Obama and then-Prime Minister Kan established the United StatesJapan Economic Harmonization Initiative (EHI), a framework similar to its predecessors, todiscuss these complex issues. In 2011 under the EHI, the two sides held several working-level
20

Edward J. Lincoln, Troubled Times: U.S.-Japan Trade Relations in the 1990s (Washington, D.C., Brookings
Institution Press, 1999), pp. 158-166.

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U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options

and ad hoc meetings and a high-level meeting at the Deputy USTR/Deputy Minister for Foreign
Affairs level. No meetings under the EHI have taken place since 2011as the TPP has become thede facto framework for addressing bilateral trade issues.

The WTO Dispute Settlement Mechanism
In addition, the United States and Japan are using the dispute settlement mechanism in the World
Trade Organization (WTO) more frequently to resolve bilateral issues. In so doing, the UnitedStates and Japan have helped to depoliticize their trade disagreements, leaving it to panel
members selected from trading partner nations to adjudicate the disputes. Furthermore, the WTO
has provided a forum in which Japan has felt comfortable challenging U.S. trade practices.
Increased reliance on the WTO has reflected a major shift in Japan’s strategy in dealing with theUnited States in trade. In 1995, Japan filed a dispute with the WTO as a counter-complaint
against a U.S. complaint against Japan on the sale of autos and auto parts (discussed above). The
two countries reached a resolution outside the WTO, but it was the first time that Japan had
challenged the United States rather than acceding to U.S. demands. Japan was emboldened toshift its strategy in 1997 when the WTO ruled against the United States on its complaint against
Japan regarding the marketing of Kodak and Fuji film in Japan.21

Author Contact Information
William H. Cooper
Specialist in International Trade and Financewcooper@crs.loc.gov, 7-7749

21

Saaida M. Pekkanen, “The Politics of Japan’s WTO Strategies,” Orbis, Winter 2004, pp. 135-147.

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