Introduction
On August 15, 1945, Emperor Hirohito proclaimed that Japan had surrendered after immense bombardment by the United States (U.S.) in his speech at the United Nations. The proclamation effectively marked the end of World War II (WWII), characterized by a fierce war between the U.S. and Japan. The nations fought the war on the battlefield and in the residents’ minds across both nations. People were fed with racial hatred that further fuelled the desire to fight. However, in a turn of events, both nations proved their human spirit, productiveness, and bigheartedness, particularly in helping Japan rise out of the ramifications of the war. As a result, the country rose to the highest level of being the second-largest economy globally1. The two nations also reestablished their relations to become the closest partners across the pacific. Today, over ninety percent of American leaders and more than three-quarters of the general public consider Japan, a dependable partner. The outcome points to the close partnership that the countries have established despite the destruction they caused to each other throughout WWII.
Foundation for Partnership
To further show their power globally, both the U.S. and Japan are the first and second-largest financial contributors to the main global leading institutions, especially developing economies. The International Bank for Reconstruction and Development (IBRD), also called the World Bank, and the International Monetary Fund (I.M.F.) was established after the war, in 1944 and 1945, respectively. The World Bank was formed to provide loans to nations to reconstruct their countries, while the I.M.F. was established to help in stabilizing the international monetary system. Together the two Bretton Woods Institutions seek to promote economic growth and stability.
Japan and the U.S. also play a major role in supporting the United Nations (U.N.) that they helped establish in 1945 to support international peace and security, promote social development and friendliness among nations, advocate for human rights and better living conditions. Table 1 below shows the countries’ contributions to the World Bank, I.M.F., and U.N., respectively. U.S. and Japan continued their cooperation by committing their armed forces and financial power to defeat the expanding Soviet Union in East Asia and stop the Cold War. Their partnership was also evident in the December 2004 Asian tsunami, where armed forces from both nations worked together to deliver relief supplies to survivors2. They also collaborated to refuel ships taking part in the war to defeat the Al Qaeda and Taliban in Afghanistan.
Table 1; Top Financial Contributors to the World Bank, I.M.F., and U.N.
In economic terms, Japan greatly preferred growing its economy in isolation. However, with the invasion from the western world, the country had to adjust its strategic policies in line with the emerging global networks. At the start of the 20th century, Japan established an axis pact with Nazi Germany and Britain, the dominant powers, which also guaranteed its desire to expand and dominate over Asia. The relations with the U.S. came after WWII since the country had proved to be the new superpower. Japan could not overcome the effects of the war minus the help from the U.S., who also reigned supreme over the country’s new constitution enacted on May 3, 1947. The central cooperation between the two countries is security marked by the 60th anniversary celebrated in 2020 of the signing of the U.S. and Japan Security Treaty3. In 2015, the nations enhanced their security cooperation following the reviewed U.S. and Japan Defense Guidelines. These guidelines provide a fresh and prolonged form of security-oriented partnership.
U.S. – Japan Trade Relations
Japan and the U.S. have expanded their collaboration to economic matters through which they have grown together to become the leading economic powers in the world. Cumulatively, the two nations account for close to 30 percent of global Gross Domestic Product (G.D.P.). The prevailing economic environment in the U.S. and Japan has a big impact on the economy across the other parts of the world. What’s more, the U.S. and Japan bilateral trade relations can sway economic circumstances in other countries. The economies of the two countries share some similarities and differences. Both are big developed economies whose residents enjoy high standards of living. However, the U.S. economy is over double the size of the Japanese economy. Japan has had a slower economic growth rate in the past two decades and fewer recessions. Even though the U.S. has had stronger economic growth, the economy was affected by the 2008-2009 Global Financial Crisis (G.F.C.). The U.S. also has had an almost double rate of annual G.D.P. growth rate to that of Japan. Still, both economies’ recovery is largely fragile, especially Japan.
Trade Relations in Goods and Services
Japan and the U.S. maintain close bilateral trade in goods and services, although the growth has been relatively stagnant over the past two decades, mainly due to the weak state of the Japanese economy. The trade relations were greatly affected by the 2008 – 2009 G.F.C. Despite signs of recovery in 2010 and 2011 leading up to the pre-crisis level in 2012. However, in 2013 the bilateral trade in goods and services slumped. In 2020, the total trade in goods and services between the two countries amounted to $252.2 billion. The U.S. imports totaled close to 60 percent of the total trade, valued at $150.1 billion, while 40 percent were exports valued at $102.1 billion. The trade-in goods and services show a trade surplus in Japan, amounting to $48.0 billion in 2020. Japan was the 4th largest trading partner to the U.S. in goods in 2020, with imports valued at $119.5 billion and exports valued at $64.1 billion, with a U.S. trade deficit of $55.4 billion. The total trade in goods was $183.6 billion, while the total trade in services amounted to close to $68.6 billion. Services exports from the U.S. totaled $38.0 billion, while the imports totaled $30.6 billion4. In services, the U.S. had a trade surplus of $7.4 billion.
The main goods and services imported by the U.S. from Japan predominantly involve four main categories. Japan is a world leader in car manufacturing with leading companies, such as Toyota, Honda, Nissan, Mazda, Mitsubishi, and Subaru. Therefore, around 75 percent of the imports involve passenger cars and parts5. Other categories include; office machinery parts, computers and components, and electrical machinery (mainly video cameras associated with Kodak). U.S. exports to Japan are:
- Computers and components lead to a larger variety of goods.
- Optical and medical equipment.
- Gas turbines (turbo-propellers, turbojets).
- Electrical machinery (integrated circuits).
- Office machinery parts.
- Agricultural products, such as meat and wheat.
The key services exported by the U.S. consist of royalties and licensing fees; passenger fares, travel services, and “other transportation”; and other reserved services. The U.S. main imports from Japan comprise the same category of items, with the balance of trade in favor of the U.S. Despite the preeminent trade ties between Japan and the U.S., the level of trade has gone down in recent times as other trading partners emerge. In 1989, Japan was the second-largest U.S. export market and the top source of U.S. imports. However, two decades later, in 2009, Japan had slid to the U.S.’s fourth-largest commodity export market, overtaking Canada, Mexico, and China. It also maintained the same position in commodity imports, behind Canada, Mexico, and China.
Still, the trade between Japan and the U.S. cannot be underestimated, especially in connection with the trade with China for inputs used in manufacturing items that find their way to the U.S. market. There are a lot of Japanese-invested firms in China that export inputs from Japan. Data from the Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (W.T.O.) supports this claim. The OECD and W.T.O. have a database indicating the value-added of bilateral exports and imports (actual value added by country), including services consumed in producing the exports and imports instead of the final value of the exports and imports6. According to the database, the U.S. contributed to about 20 percent of Japanese exports in value-added terms, making it the top market. Conversely, China accounted for 15 percent of the Japanese exports on a value-added basis, making it the second-largest export market.
The rise of China and other East Asia caused a decline in the importance of U.S. – Japan trade relations. The situation is made worse by the rapid growth of the East Asian economies, shifting global production patterns, and the expansion of regional supply chains. The East Asian economies now form a major market for Japanese commodities compared to the U.S., with China being the fastest-growing Japanese trade ally. In the same way, the geographical shape of U.S. trade has shifted in favor of Mexico and China.
Trade Relations in Business Investment
The other major area of business collaboration between the U.S. and Japan involves bilateral investment in the form of Foreign Direct Investment (FDI) and portfolio investments. The main areas of FDI involve real estate, business, and manufacturing, while portfolio investments involve corporate bonds and stocks, government securities, and bank deposits. The bilateral investments predominantly take in the residents of both countries, who also define the economic partnership. The trade value under this category exceeds the trade value under the exchange of goods and services. FDI also tends to epitomize a long-lasting financial pledge on the part of the investor.
For decades the U.S. has been the leading and reliable source of FDI in Japan. The period 1998 to 2011 saw the U.S. FDI double due to a hike in investments driven by U.S. firms’ acquisitions of Japanese businesses about to be declared bankrupt as opposed to the usual nature of investments. Japan has also been protective of its local entities; hence, the level of FDI inflow has been low compared to other developed economies7. Japanese investors are also venturing into the U.S. market, particularly in the automotive sector, where their industrialists have a reputable profitmaking footprint. The Japanese car manufacturers have succeeded in gaining a sizeable share of the U.S. local market.
Japanese investors mainly invaded the U.S. market in the 1980s to the 1990s, where they made major acquisitions involving the Rockefeller Center, Columbia Pictures, and Pebble Beach Golf Course. The trend saw Japanese investors in the U.S. venture into car manufacturing and consumer electronics. They invaded the U.S. market to the extent of raising concern among the U.S. authorities. By the start of the 21st century, the Japanese FDI in the U.S. had risen to $159.7 billion but went down to $147.4 billion by 2002 before picking up and hitting $308.3 billion in 2012. Even though in the 1980s Japan was the leading source of FDI in the U.S., beating the previous leader, the United Kingdom, by 2002, Japan had fallen to number four before again rising to number two in 2004 behind the United Kingdom. In 2012 Japanese investors held $319.8 billion in U.S. stocks and $337.3 billion in U.S. bonds while U.S. investors held $429.4 billion in Japanese stocks and $45.7 billion in Japanese bonds. As of 2019, the Japanese investments in stocks in the U.S. were $619.3 billion, climbing by 25.4 percent from 20188. Japanese investors mainly invested in wholesale trade, manufacturing, and finance, and insurance. Also, Japanese investors are among the top private foreign holders of U.S. Treasury securities that provide finances to the U.S. government underlining their importance in the U.S. economy.
On the other hand, the U.S. investment in stocks in Japan was $131.8 billion, climbing by 16.4 percent from 2018. U.S. investors mainly invested in wholesale trade, manufacturing, and finance, and insurance. In 2018, most Japan-owned firms’ sales of services in the U.S. were $173.2 billion, whereas sales of services in Japan by most of the U.S.-owned firms were $77.4 billion9. The data reveals the appetite for Japanese investors in the U.S. market.
Conclusion
The U.S. and Japan were the two main protagonists in WWII. After a heavy bombardment of major cities in Japan, causing the Japanese Emperor Hirohito announce their surrender in the 1945 U.N. assembly meeting. Shortly after, the two nations embarked on nation-building supported by the financial institutions founded to help reconstruct the World Bank and the I.M.F. With Japan desiring to maintain its influence in Asia, they partnered with the U.S. to collaborate in security matters mainly involving the armed forces. The two nations also launched collaborations in trade with major trade activities between them taking place in the 1980s to the 1990s. The U.S. and Japan established trade ties on two major fronts; in goods and services and business investments (FDI and portfolio investments). Japan has been at the forefront in goods, having a surplus, while the U.S. has led in the trade-in services. Also, Japanese investors have been a key source of FDI to the U.S., leading in business acquisitions and the stock market. The U.S. has also invested in Japan, albeit at a lower rate. However, other emerging economies, especially China, Mexico, and Canada, have interrupted the trade between the two nations due to geographical advantages. The developments have reduced the trade ties between the U.S. and Japan.
Bibliography
Brock, Williams, Cathleen Cimino-Isaacs and Anita Regmi. “Stage One” U.S.-Japan trade Agreements. 2020.
Byung-il, Choi, and Jennifer Oh. Politics of East Asian Free Trade Agreements: Unveiling the Asymmetry between Korea and Japan. Routledge, 2021.
Makoto Iokibe and Tosh Minohara. The History of US-Japan Relations: From Perry to the Present. Palgrave Macmillan, 2017.
Mireya Solís. Dilemmas of a Trading Nation: Japan and the United States in the Evolving Asia-Pacific Order. Brookings Institution Press, 2017.
Footnotes
- Mireya Solís. Dilemmas of a Trading Nation, 55.
- Mireya Solís. Dilemmas of a Trading Nation, 87.
- Byung-il, and Oh. Politics of East Asian Free Trade Agreements, 100.
- Byung-il, and Oh. Politics of East Asian Free Trade Agreements, 135.
- Iokibe and Minohara. The History of US-Japan Relations, 300.
- Iokibe and Minohara. The History of US-Japan Relations, 99.
- Byung-il, and Oh. Politics of East Asian Free Trade Agreements, 130.
- Williams, Cimino-Isaacs and Regmi. “Stage One” U.S.-Japan trade Agreements, 63.
- Brock, Cathleen and Regmi. “Stage One” U.S.-Japan trade Agreements, 65.