U.S. - Japan trade relation is not only important for both the countries but, being a relation between two highly developed industrial nations, is equally important for global trade. In a conservative estimate it has been observed that, trade between these two countries account for 40% of world gross domestic product (GDP). Japan is the fourth largest import destination of U.S. and third largest export market for the U.S. exporters. Japan is the second largest foreign direct investor in U.S., and also the largest foreign holder of U.S. treasuries. U.S. trade deficit with Japan, which was $81.3 billion in 2000, had become $82.8 billion in 2007. This minimum change over the said period may be attributed to the fact that Japanese economy experienced stagnation during this period. For the period 1970 to early 1990s, the magical growth of Japan’s economy and its growing trade deficit with U. S. was a matter of concern for America in doing business with Japan. Japan was perceived as a potential threat to the U.S. economy and business. The perception stemmed from the fact that Japan had made huge investments in several U.S. companies and capital market raising concerns of economic security of the later. However the scenario changed considerably with a slowdown in Japan and emergence of China as a leading partner of U.S. in international trade. A new initiative called Economic Partnership for Growth (EPG) was started in 2001 by both the governments. Economic Partnership for Growth (EPG) primarily works as a general framework for U.S. - Japan economic and trade relations. It aims to promote trade and investment between the two countries that would generate employment and wealth for American exporters and Japanese exporters, as well as the American manufacturers and Japanese manufacturers. The average gross domestic product (GDP) of Japan slumped at less than 2 percent during the period 1992-2002, which was lowest among major developed nations. Banking system in Japan was burdened with bad debt and the bad debt of the Japanese government had grown in excess of Japan’s total GDP. Economic Partnership for Growth (EPG) came at this juncture to help Japan follow a vigorous economic reform programme and discipline its economic and financial system in doing business with U.S.
Japanese Exports to U.S.
Major items of exports by Japanese manufacturers to U.S. includes passenger cars, car parts and accessories, industrial machinery, computer accessories, video equipment, engine parts, semiconductors, excavating and paving machinery, motorcycles and parts, meat products, spacecraft, zinc and precious metals. Export of passenger cars tops the list with about 30 percent of the total exports to U.S. After the Second World War the focus of export shifted to highly sophisticated and technologically advanced products. Textiles and steel, which topped the list in 1960s, were overtaken by motor vehicles, semiconductors, scientific and optical equipment and sophisticated electronic equipments.
Japanese Imports from U.S.
Main imports of Japan from U.S includes Civilian aircraft, medicinal equipments, telecommunication equipments, corn, pharmaceutical preparation, organic chemicals, military apparel and footwear, copper, fuel oil and aluminum. Japan has limited natural resources. In order to maintain economic development of the country and help Japanese manufacturers, Japan depends on other nations like U.S. for most of the raw materials. As such its import list is wide and varied. Japan is heavily dependent on imports to meet its energy requirements, and imports all of its petroleum requirements and 90% of its requirements of coal. As the economy of Japan flourished, real income of the Japanese people also increased fuelling demand. The demand came primarily due to growth in industrialization. This, coupled with appreciating “yen” (Japanese currency), surplus trade and liberalized economy, resulted in steady growth in imports. A slowdown in economy in 1980s resulted in stagnation of this growth. However, in the recent times there has been sign of improvement.
Highlights of Japanese industry
Japan is the home for some of the largest and technologically advanced producer of motor vehicles (Honda, Toyota), electronic equipment (Sony, Cannon), ships, chemicals and processed foods, and steel (Nippon steel). Other major industries are banking and insurance (Mitsubishi UFJ Financial Group), retailing and telecommunication, real estate and construction. The country has one of the lowest tax burdens among developed countries (only a quarter of GDP). Value added tax rate is about 5 percent.
In doing business with U.S., slowdown in the Japanese economy resulted in its slipping down and being edged out by other countries. Once it was the largest foreign direct investor in U.S., the position was lost to United Kingdom in 2006. In 2007 it lost the number three position as the source of U.S. imports. In order to identify and overcome the problem areas, in July 2008, in a Report-to-Leaders, U.S.-Japan Regulatory Reform Initiative detailed and proposed various measures. The report reflected the problematic areas such as medical devices and pharmaceuticals, distribution, financial and insurance services, intellectual rights and competition policy and the measures taken by Japan government to open its business and investment sectors.
Areas of dispute
In December 2003 Japan imposed a ban on import of beef from U.S.exporters due to a reported case of “mad-cow-disease. The ban was lifted for a very short period from December 2005 to January 2006, and again re-imposed after bone materials were found in imported beef. In December 2007 Japanese government proposed a conditional lift of the ban, which was rejected by U.S. who demanded total lift of the ban.
A Japanese government advisory panel, in May 2007, recommended that the government should try to form an Economic Partnership Agreement (EPA) with U.S. to foster economic growth and bilateral trade. With the conclusion of Free Trade Agreement (FTA) of U.S. with South Korea, EPA is seen as a desperate attempt by Japan to cover up the sentiment of being losing its importance to U.S. Japanese exporters conveyed their feeling to government for being ‘left out’ in comparison to their Korean counterpart. China has already emerged as the largest source of U.S. imports; it has enjoyed the status of most favored nation by U.S. With the implementation of FTA the importance and focus of U.S. trade may further drift to South Korea. However it is argued that Japan’s restrictions on agricultural imports may prove to be a roadblock in implementing EPA.
Banks, suppliers, manufacturers and distributors of Japan are known for co-operation in closely-knit groups called “keiretsu”, making it difficult for entry of U.S. insurance companies to do business in Japan. In addition it is being complained that very little public information is available on insurance regulations for doing business in Japan. However, in successive agreements in 1994 and 1996, Japan agreed to give access to life and non-life insurance providers of U.S. in specialty insurance markets such as cancer insurance, nursing care, personal accident and hospitalization.
U.S. and Japan had contradictory views in Doha round of WTO (World Trade Organization) negotiation. While U.S. advocated for removal of barriers on agricultural imports and subsidy to agricultural production, Japan strongly objected to it. U.S opposed Japan’s proposal that national antidumping laws and actions thereof by the member countries should be examined.
A stagnant Japanese economy is a matter of concern for U.S. Japan is a strategic and leading trade partner of U.S. As such U.S. has always come out with a helping hand for Japan in its time of crisis in international trade as well as domestic crisis. The late 1980s saw the bust of “bubble economy” in Japan. This was followed by a long period (1992-2002) of economic stagnation. At this juncture U.S. came forward with various proposals and suggestions to help Japan recover the crisis. U.S. emphasized the need to liberalize the labor market of Japan, eliminate obstacle to foreign investment and overhaul the inefficient and protected agricultural sector. Some of these suggestions were taken into consideration by Japan. The Japanese government took some bold steps to privatize some of the inefficient government corporations, slowed the public works which were not much needed, to save government money. In a landmark decision the government of Japan privatized ‘Japan Post’ whose financial entities hold assets equivalent to China’s current Gross Domestic Product.
Recent statistical data shows that imports and exports of nuclear reactors, boilers and machinery parts have gained importance between the two countries. U. S. exports to Japan have increased by 5 percent. This was 13.3 percent of the total exports by U.S. to Japan. At the same time U. S. imports of nuclear reactors, boilers and machinery comprised 20 percent of the total imports from Japan. U.S. exports to Japan witnessed a growth in cereals, inorganic chemicals, raw hides and skins. However U.S. importers from Japan witnessed very little growth. This may be attributed to the fact that Japan is increasing its trade with Asian countries. International Monetary Firm (IMF) recently reported that trade among East Asian Countries saw a phenomenal growth of about 850 percent for the period 1990-2006. Japan is a leading supplier of the intermediate raw materials required by fast developing Asian countries like China. However, it cannot be concluded that Asia has replaced U.S. as Japan’s major export market. Japan’s trade surplus with all of Asia was just below the trade surplus it maintained with U.S. Trade between U.S. and Japan should explore new areas of interests with changing environment in global trade.