The United States and Japan, among the world’s largest economies, are close economic partners. As a top U.S. trade partner, Japan has been a priority for U.S. trade negotiations and regional economic cooperation. The U.S. and Japan do not have a comprehensive bilateral free trade agreement (FTA); the partners have two limited trade deals. The U.S.Japan Trade Agreement (USJTA) involves tariff reductions and quota expansions to improve market access.
The U.S.Japan Digital Trade Agreement covers rules on the digital aspects of global commerce. The trade deals, which took effect in 2020 without formal action by Congress, constituted what the U.S. and Japanese governments then described as “stage one” of a broader U.S.-Japan trade deal, but further talks did not materialize.
The Biden Administration has prioritized the U.S.-Japan trade relationship through several other initiatives such as the regional Indo-Pacific Economic Framework for Prosperity (IPEF), an initiative that covers selected trade issues but not tariffs or other market access provisions. In 2023, the United States and Japan signed a critical minerals agreement (CMA), which qualified Japan for certain benefits under the U.S. Inflation Reduction Act of 2022 (IRA, P.L. 117-169). The partners also continue to engage on trade issues through initiatives like the U.S.-Japan Partnership on Trade.
Key issues for Congress include oversight of implementation and impacts of U.S.-Japan trade agreements, the role of Congress in authorizing such agreements, and prospects for further cooperation.
U.S.-Japan Economic Ties
Japan is the sixth-largest U.S. trade partner (ranked based on total goods and services trade), largest source of foreign direct investment (FDI) in the United States, and largest holder of U.S. Treasury securities. In 2023, U.S. exports to Japan totaled $121 billion ($77 billion in goods, $44 billion in services). U.S. imports totaled $184 billion, with goods accounting for the majority ($149 billion). The stock of U.S. FDI in Japan was valued at $77 billion in 2022, concentrated in finance and insurance. Japanese FDI stock in the United States in 2022 totaled $712 billion, with the largest share in manufacturing. Majority-owned U.S.-based affiliates of Japanese multinational firms employed nearly one million U.S. workers in 2021 (latest data).
The size of the U.S. goods trade deficit with Japan has at times been a source of tension, with some observers arguing that historically the imbalance stems in part from various nontariff barriers in the Japanese market and the weak yen. Such concerns arguably peaked in the 1980s and 1990s, dissipating in recent decades in the face of Japan’s domestic economic challenges, Japanese investment in the United States, and a shift in U.S. focus to concerns over trade with the People’s Republic of China (PRC or China).
Source: US Congressional Research Service