Trade deficits and trade conflict: The United States and Japan

The US trade relationship with Japan was characterised by periods of intense conflict over 1969−95. The paper identifies five such periods, beginning with two bitter conflicts in 1971 and ending with an equally difficult conflict over autos in 1994−95. It presents econometric evidence suggesting rising Japanese penetration of the American market and growth in the bilateral merchandise trade deficit with Japan were important causes of these crises. Over 1996–2016, US-Japan relations were handled in a much less confrontational manner, as import penetration declined. The difficulties Japan’s economy faced; heightened security concerns in Northeast Asia; a broader US shift away from unilateral measures; greater acceptance of the trade deficit; and perceptions that Japan was moving to open its economy were also important in lessening tensions in the bilateral relationship. Strong concerns with the US trade deficit re-emerged under the Trump Administration, but the two economies were, during this period, able to address trade differences without a major confrontation.