THE RISING U.S. TRADE DEFICIT WITH JAPAN: OVERVIEW AND POLICY OPTIONS

CRS Report for Congress
The Rising U.S. Trade Deficit With Japan:
Overview and Policy Options
Dick K. Nanto
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

Figure 1. U.S.-Japan Merchandise Exports, Imports,U.S. economy is
and Trade Balances, 1978-99growing faster than
^131.4¹⁵⁰^$Billion¹⁵⁰Japan’s, the bilateraldeficit tends to grow,
^107.268^119.1^123.6^115.2^121.7¹²²
^81.911003^84.574997^89.802002^93.585999^90.432999^92.333^97.181^{U.S. Imports}and vice versa. In
^68.782997^{from Japan}recent years, Japan’s
^48.584999^48.146999^47.949001^64.3^67.5^65.5^37.654999^37.743999^41.182999^57.134998¹⁰⁰¹⁰⁰
^47.764^53.5^57.9^57.5^24.933001^26.396999^30.867001economy has been in
^17.490999^21.641001^20.667999^23.173^22.190001^26.618999^27.808001^37.43^44.584recession, while the
^20.684^21.6⁵⁰⁵⁰U.S. economy has been
^12.85^{U.S. Exports}
^{to Japan}growing.
⁰⁰
As shown in
^-50^-50Figure 2, virtually allthe trade deficit with
^{U.S. Deficit}^{With Japan}Japan can be accounted
^-100^-100for by trade in
⁷⁸⁷⁹⁸⁰⁸¹⁸²⁸³⁸⁴⁸⁵⁸⁶⁸⁷⁸⁸⁸⁹⁹⁰⁹¹⁹²⁹³⁹⁴⁹⁵⁹⁶⁹⁷⁹⁸⁹⁹machinery and
^Yeartransportation
^{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 $14.8 billion surplus in trade with Japan in food, live animals,
beverages, tobacco, and
Figure 2. U.S. Trade With Japan by Majorinedible crude materials.
Commodity Classification, 1999
^8.6^0.3^{Food & Live Animals}The U.S. trade imbalance
^8.3with Japan arises primarily
^2.2^0.1^{Beverages & Tobacco}from trade in a handful of
^2.1
^3.6^0.2^{Crude Materials}products in which imports are
^3.4
^0.8^0.3^{Mineral Fuels, Lubricants}exceptionally large. As shown
^0.5in Table 1, the list of major
^5.8^6.5^Chemicals
^-0.7U.S. imports from Japan is
^2.9^7.8^{Mnf. Goods Class. by Materials}headed by motor vehicles,
^-4.9
^24.1^99.4^{Machinery & Transp. Equipment}office machines, electronic
^-75.3
⁸^12.8^{Misc. Manufactured Articles}components, and
^-4.8communications equipment.
^1.4^3.9^Other
^-2.5These four categories account
⁰⁵⁰¹⁰⁰¹⁵⁰^-50^-100for approximately half of all
^$billionU.S. imports from that
^Exports^Imports^Balancecountry. Imports of motor
^{Source: U.S. Department of Commerce}vehicles and parts, in
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

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
SICDescription19971998 1999
^Total^1st^2nd^3rd^4th^Total^1st^2nd^3rd^4th^Total
³⁷¹^MOTOR^VEHICLES^AND^MOTOR^{VEHICLE EQUIPMENT, AND PARTS}^33,484^8,688^8,336^8,477^9,246^34,747^9,906^8,961^9,639^10,964^39,470

357 ^{OFFICE, COMPUTING, AND}^ACCOUNTING^MACHINES,^AND^15,351^3,411^3,438^3,348^3,476^13,672^3,275^3,342^3,727^3,813^14,157

^{PARTS AND ACCESSORIES}
³⁶⁷^ELECTRONIC^COMPONENTS^AN^D^ACCESSORIES^11,502^2,602^2,291^2,286^2,466^9,645^2,355^2,470^2,687^2,983^10,495
³⁶⁶^{COMMUNICATION EQUIPMENT AND}^APPARATUS^3,938^1,106^1,101^1,193^1,203^4,604^1,195^1,418^1,705^1,847^6,165
³⁸⁶^PHOTOGRAPHIC^EQUIPMENT^AND^SUPPLIES^4,831^1,140⁹⁹⁸^1,029⁹⁸³^4,150^1,008⁸⁸⁶⁹⁶³⁹⁹²^3,849
³⁵⁴^METALWORKING^MACHINES^AND^{EQUIPMENT, AND PARTS,}^4,059⁹⁷⁰⁹⁹¹^1,013⁹⁸⁸^3,962⁹⁰⁷⁸⁸²⁸³⁵⁸⁰⁶^3,429
^ACCESSORIES^AND^ATTACHMENTS
^RADIO^AND^TV^RECEIVING^SETS;^{PHONO-GRAPHS; RECORDERS;}
³⁶⁵^MICROPHONES;^{LOUDSPEAKERS;}^2,614⁶⁴¹⁷⁰⁰⁷⁵⁹⁷²⁶^2,826⁶⁸⁶⁷⁶¹⁸⁴¹⁷⁸⁸^3,075
^{AUDIO AMPLIFIERS; & OTHER}^AUDIO^EQU^{IPMENT & ACCESSORIES}
³⁶⁹^{ELECTRICAL MACHINERY,}^{APPARATUS, AND PARTS}^3,006⁷²⁸⁷²³⁷⁴²⁷⁵⁷^2,948⁷⁴⁶⁷⁵⁸⁸⁴⁶⁹⁰⁷^3,257
³⁸²^INSTRUMENTS^FOR^MEASURING,^DETECTI^{NG, TESTING, AND/OR}⁶⁸⁴⁷⁰⁶⁷⁶⁷⁸⁵⁷
^{CONTROLLING NONELECTRIC}^{QUANTITIES, AND PARTS &}^2,546⁷¹³⁶⁵⁰⁶³⁰⁶²¹^2,613^3,014
^ACCESSORIES
³⁵⁶^GENERAL^INDUSTRIAL^MACHINES^AND^{EQUIPMENT, AND PARTS AND}^2,359⁶³⁶⁵⁸⁷⁵⁴⁰⁶⁰⁶^2,369⁶⁶¹⁶⁷⁴⁷⁵²⁸⁷²^2,959
^ATTACHMENTS
³⁵³^CON^{STRUCTION, MINING, AND}^{MATERIALS HANDLIN}^G^1,705⁵³⁸⁵⁷³⁴⁴⁰⁴³⁸^1,988⁶²⁰⁶¹⁸⁴²⁰³⁷⁷^2,036
^MACHINERY
³⁹⁴^TOYS^AND^SPORTING,^ATHLETIC,^{AND GYMNASTIC GOODS,}^2,592³⁷¹⁵³⁸⁵²⁵^1,141^2,575³⁸⁰⁴⁹⁹⁷²²⁹¹⁷^2,517
^{APPLIANCES, APPARATUS OR}^ACCESSORIES
³⁵¹^ENGINES^AND^TURBINE^S^,^AND^{PARTS AND ACCESSORIES}^1,265³⁴²³⁵⁰³⁵²⁴⁰⁰^1,444⁴⁵⁷⁴⁷³⁵⁰²⁵⁸⁶^2,018
²⁸⁶^INDUSTRIAL^{ORGANIC CHEMICALS}^1,933⁵¹⁴⁴⁸⁷⁴⁴⁹⁴⁸⁴^1,934⁴⁵¹⁴⁶⁷⁴⁴⁸⁵³⁹^1,905
²⁸³^DRUGS^1,203³⁵⁹³⁹⁶³⁶⁹³³⁷^1,461³⁶⁶⁴⁴⁷⁵²⁴⁵⁰⁰^1,837
³⁶²^{ELECTRICAL INDUSTRIA}^L^APPARATUS^1,586³⁸²³⁶⁷³⁴⁷³⁴²^1,438³⁷²⁴⁴⁸⁵²²⁴⁶⁴^1,806
³⁷²^{AIRCRAFT AND PARTS}^1,646⁴¹²⁴⁹⁴⁴⁸⁵⁴⁹²^1,882⁴²⁷⁴³¹⁴⁴⁹³⁹⁰^1,697
³⁵⁵^{SPECIAL INDUSTRY MACHINES}^{AND EQUIPMENT, AND PARTS,}^2,370⁵⁹¹⁵⁶¹⁴⁴⁷⁴²⁴^2,023⁴⁴⁸⁴²¹⁴²⁶⁴⁹¹^1,786
^ACCESSORIES^AND^ATTACHMENTS
³³¹^BLA^S^T^FURNACE,^STEEL^WORKS,^ROLL^{ING MILL, AND FINISHING}^1,807⁶⁰²⁷⁸³⁹⁰⁶⁸⁹⁸^3,189⁵¹¹⁴¹²⁴¹¹³⁶⁸^1,702
^{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.

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. ExportsU.S. ImportsBalanceBalanceBal. onBalance
ononInvest-on
YearGoodsServicesmentCurrentGoods ServicesGoods Services
IncomeAccount
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.
Figure 3. U.S. Balances with Japan in Goods, Services,The balance on
Investment Income, and Current Account,current account is
1994-1998 in billion dollarsconsidered to be a
⁴⁰broader measure of the
^Servicestrading relationship
^15.6^19.3^20.1^19.5^16.5²⁰between two countries.
It includes trade in
⁰goods and services as
well as unilateral
^-11^-15.7^-16.2^-20transfers (e.g.,
^-25.2^-26.4remittances from
^-40immigrants) and the
^-49.2^-45.5balance on incomefrom U.S. assets
^-60.3^-57.1^-65.3^-62.8^-56.9^-62.9^-60abroad and foreign-
^-67.3^Investment
^-75.4^-80^Income^Current^Accountowned assets in the
^GoodsUnited States. As
^-100shown in Figure 3, the
¹⁹⁹⁴¹⁹⁹⁵¹⁹⁹⁶¹⁹⁹⁷¹⁹⁹⁸current 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

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 flows³
(resulting from differences in saving rates), exchange rates, and relative growth rates.
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 Gail E. Makinen and CRS Report 98-693 E,
The U.S. Trade Deficit: Trends, Theory, Policy, and Sustainability, by Dick K. Nanto.

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 William H. Cooper.