Japanese trade with the United States - Business in United States of America

Significance: The United States forcefully entered into a trade treaty with Japan in 1853 to bolster its profitable trade with China. From that time until World War II, Japan was an important U.S. trading partner, and after the war, American exports helped rebuild Japan. Beginning in 1965, Japan began to export more to the United States than it imported, raising American trade fears during the 1970’s and 1980’s. By 2008, Japan had become America’s fourth-largest trading partner.
During the mid-nineteenth century, Japanese ports were closed to all but some Dutch and Chinese traders. However, American business interests had begun expanding across the Pacific Ocean into China, so the United States wanted to establish trade relations with Japan to gain bases for its China trade. On July 14, 1853, U.S. Navy commodore Matthew C. Perry led a squadron of ships to land at a harbor near present-day Tokyo. Perry conveyed American demands for a trade agreement to a reluctant Japanese government. He was subsequently credited for opening Japan to Western trade. Significant Japanese trade with the United States began with the Tariff Treaty of 1866, which set import and export duties, allowing only a 5 percent duty to be placed on goods imported to Japan, and permitted American merchants to deal directly with their Japanese counterparts.

Early Trade

From 1866 until 1932, American businesses imported more from Japan than they exported. The first top imports from Japan were raw silk, which American factories turned into consumer products, and tea for U.S. consumption. America exported primarily cotton yarn to Japan. As natural-resource poor Japan embarked on industrialization, American manufacturers, like their Western European counterparts, began to export machinery, iron, and steel to Japan.
Initially, Japanese trade was a welcome but small by-product of America’s trade with China. In 1866, American exports to Japan were worth $1 million, and imports from Japan $2 million. Trade with Japan accounted for only 0.4 percent of U.S. trade. By 1914, exports to Japan had reached $51 million, and imports from Japan $107 million, raising Japan’s share of America’s foreign trade to 3.6 percent.
Japanese trading companies soon sought to control the trade with American businesses that was supporting Japan’s rapid industrialization, so they opened branches in the United States The first to arrive was Mitsui Company, which established an office in New York City in 1879 and was soon followed by others.
Trade between America and Japan led to collaboration on economic policy. In 1899, Japan supported America’s Open Door Policy to keep China accessible to international trade. In 1904, American banks sold $350 million of Japanese war bonds to help finance Japan’s successful 1904-1905 war with Russia. In 1911, the United States accepted Japan’s tariff autonomy when that country modestly raised import duties.

Trade from 1914 to 1941

When World War I broke out in 1914, Japan joined the Allies and increased trade with the United States. The American and the Japanese economies were booming, but as of 1917, a huge difference remained in the importance of their trade for each partner. Japanese trade accounted for 4.7 percent of U.S. trade, with American exports to Japan valued at $186 million and imports from Japan worth $254 million. In contrast, the United States was Japan’s largest trading partner with a share of 29 percent of all Japanese foreign trade.
As Japan’s industry expanded, U.S. companies formed joint ventures there to manufacture goods under U.S. licenses. Western Electric (1899) and General Electric (1905, 1908) were pioneers, followed in 1917 by the rubber company Goodrich. Ford (1925) and General Motors (1927) set up factories in Japan. Other U.S. firms, such as Columbia (1927), United Steel and Signal (1928), RCA (1929), and Otis Elevator (1932), followed suit.
Japanese firms continued to form branches and subsidiaries in the United States to support Japan’s trade with America. By the early 1930’s, Yokohama Specie Bank alone financed more than 50 percent of Japan’s purchases in the United States. Japanese ships transported 73 percent of its imports from and 63 percent of its imports to the United States.
After the Depression hit, global trade shrunk. Due to demand caused by its military aggression in China beginning in 1931, Japan continued to buy U.S. exports. From 1932 until 1940, for the first time, U.S. exports to Japan exceeded imports from Japan, and American businesses earned some much needed revenues. However, Japan was an ally of Germany, which entered into World War II in Europe in 1939. The U.S. government froze all Japanese assets in America and launched an oil embargo after July, 1941, to protest Japan’s aggression in China and Indochina. Trade was terminated with Japan’s attack on Pearl Harbor on December 7, 1941.

Postwar Trade Helps Japan Recover

After the Japanese surrender on September 2, 1945, the United States conducted all Japanese trade until August, 1947. American businesses began exporting their goods to Japan again, and Japanese imports to the United States generated strongly needed revenues for the island nation. Until 1965, Japan imported more U.S. goods than it exported to America.
American exports shored up the Japanese economic recovery. In 1949, Japan enacted the Foreign Exchange and Foreign Trade Control Law to protect its industries, and set up the Ministry of International Trade and Industry (MITI) to promote its exports. Japan welcomed the 1949 U.S. decision to fix the exchange rate at 360 yen to 1 dollar, making dollars earned abroad very valuable. To safeguard weakened Japanese companies from takeover by foreign, primarily American, companies, the Foreign Investment Law was enacted in 1950. Japanese banks and trading companies reopened their American branches after 1951.
When Japan regained sovereignty on April 28, 1952, the United States accepted Japan’s export oriented trade strategy. This was done from a position of strength and with the goal of helping a Cold War ally. The United States supported Japan’s joining the General Agreement on Tariffs and Trade (GATT) and extended most-favored-nation status to Japan in 1955. In 1961, the United States accepted Japanese tariff policies that set low rates on desirable American imports, such as raw materials and essential goods, but imposed barriers on goods that were being produced by Japan’s rebuilding industry. The United States championed Japan’s becoming a member of the Organization of Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) in 1964. All of this was done in the spirit of free trade with Japan, even though American companies setting up branch offices in Japan, such as International Business Machines (IBM), could not transfer their earnings from Japan to the United States.
Trade with Japan was brisk and growing by 1964. American companies exported goods valued at $2 billion to Japan and imported goods worth $1.8 billion from Japan. Trade with Japan accounted for 8.3 percent of America’s foreign trade.

The Trade Balance Shifts

Since 1965, Japan has had a trade surplus with the United States. That year Japanese exports to the United States, worth $2.4 billion, first exceeded American exports to Japan, worth $2.1 billion. In the United States, the best-selling Japanese imports were radios and television sets, liked for their high quality and low prices. By 1971, Japanese exports to the United States had almost tripled, to $7.3 billion, while U.S. exports to Japan merely doubled, to $4.1 billion. At this peak, imports from Japan accounted for 16 percent of all imports in the United States.
The steady growth of Japanese imports in the United States led to a series of U.S. countermeasures. American businesses demanded Japanese reciprocity in free trade and objected to the many legal and administrative barriers that protected Japanese manufacturers and markets. Beginning with Sony Corporation in 1970 and continuing until 1974, U.S. courts charged some Japanese companies with dumping products, or selling them below cost, in the United States. Japan received its biggest shock when President Richard Nixon slapped a 10 percent tariff surcharge on all Japanese imports to the United States in 1971.

United States Trade with Japan, 1985-2005, in Millions of Dollars

Trade Friction

The 1973 oil crisis made fuel vastly more expensive and exacerbated U.S.-Japanese trade friction. Fuel-thrifty Japanese cars became a hit in the United States, taking market share from U.S. automakers. To earn money to pay for the rising cost of oil, all of which it must import, Japan pursued the American market with tenacity. Even as U.S. exports to Japan jumped from $5 billion in 1972 to $10.5 billion by 1977, Japanese imports to the United States doubled from $9 billion to $18.6 billion. This trade was generally conducted by Japanese companies that handled 86 percent of Japanese exports to the United States and 94 percent of U.S. exports to Japan in 1974.
Japanese businessmen and politicians were not oblivious to the changing mood in the United States. One alternative was for Japanese companies to manufacture directly in the United States. Sony was the first to open a color television plant in America in 1972. By 1979, five other Japanese companies had begun manufacturing products in the United States. Japanese foreign direct investment in the United States rose from$0.3 billion in 1973, or 1.4 percent of foreign investment in the United States, to $4.3 billion in 1980, a 6.2 percent share.
The United States confronted Japan over the barriers to its domestic market during the GATT Tokyo Rounds from 1973 to 1979. Although progress was made in eliminating Japanese legal protectionist measures and Japan opened its market to U.S. bulk film, pharmaceuticals, computers, and semiconductors, Japanese agriculture remained protected and many administrative barriers remained. In 1977, Japan agreed to voluntary limits on the export of color television sets, and later of steel and automobiles, to the United States.
The abolition of Japan’s Foreign Investment Law and the liberalization of its Foreign Exchange and Foreign Trade Control Law in 1979 freed more Japanese capital to invest abroad. New Japanese-owned factories in the United States such as those of Honda (1982) and Toyota (1988) created jobs for Americans. However, American apprehension over losing vital national security technology canceled the Fujitsu purchase of U.S. manufacturer Fairchild Semiconductor in 1987.
As the Japanese trade gap with the United States widened from $10 billion in 1980 to $46 billion in 1985 and Japanese trade accounted for 15.6 percent of U.S. foreign trade, the United States sought to balance the situation through a variety of economic policy initiatives. From 1984 to 1985, the Market Oriented Sector Selective (MOSS) talks covered the contentious issue of U.S. access to Japanese markets in four key fields. Two currency agreements strengthened the yen versus the dollar in 1985 and 1987.
U.S.-Japanese trade frictions reached their climax during the 1988 U.S. presidential primaries, when Democrat Richard Gephardt charged that unfair Japanese barriers made Chrysler’s K-car too expensive in Japan. Congress passed the Trade Act of 1988, under which Japan was charged with unfair trading in three business fields. The 1989 Structural Impediments Initiative led to a series of agreements in 1990 to remove Japanese domestic barriers for U.S. exports and ended in 1993.

A Calmer Relationship

In 1990, American business feared that Japanese competition would challenge America’s global economic position. Strong American consumer demand for Japanese goods and a still tightly guarded Japanese domestic market maintained the trade imbalance, as trade with Japan accounted for 15.6 percent of all American trade. Japan had become the second-largest foreign investor behind Great Britain in the United States, owning U.S. assets worth $83 billion. Sony’s acquisition of CBS Records and Columbia Pictures in 1988 and 1989, as well as Matsushita Corporation’s purchase of MCA/ Universal for $6.6 billion in 1990 raised some U.S. cultural anxieties. However, just as American concern over Japanese economic strength peaked during the early 1990’s, the Japanese bubble economy burst. This plunged Japan into a recession from which even its strong exports to the United States could not save it immediately.
Intense economic negotiations preceding the foundation of the World Trade Organization (WTO) on January 1, 1995, led to significant opening of Japanese markets for U.S. products. As Japanese consumers had to economize, demand for cheap American goods rose. In a highly symbolic move, after Japan ended its post-World War II ban on rice imports in 1994, Emperor Akihito dined on American rice.
As Japanese trade with the United States matured and the Japanese economy remained troubled, growth of Japanese exports to the United States slowed significantly. Exports rose only from$123 billion in 1995 to $145 billion in 2007. At the same time, weak Japanese domestic demand kept U.S. exports to Japan in the $50 billion to $60 billion range from 1995 to 2007. Even though Japan was America’s fourth-largest trading partner, Japan’s share of U.S. trade fell to just 6.7 percent in 2007, less than half of what it had been in 1995.
During the early twenty-first century, Japanese trade with the United States was more harmonious than in the two preceding decades. American business enjoyed greater access to Japanese markets, and Japanese companies continued to do brisk business with their American trading partners.