Introduction

The United States and Japan are the world’s two largest market economies, bound together by a decadesold alliance that has become the lynchpin of stability and security in the Asia-Pacific region. But differences over economic and commercial issues have been a recurring source of strain in the relationship for over half a century and still cast a shadow over bilateral ties today. Despite this, U.S. and Japanese strategic interests in the Indo-Pacific region are substantially—and increasingly—aligned, and economic cooperation between the two countries has the potential to advance those shared interests in the region and beyond.

Trade tensions were a consistent feature of the U.S.–Japan relationship for three decades after Japan ran its first bilateral trade surplus in 1965. In the 1970s, Washington and Tokyo sparred over everything from surging exports of Japanese color televisions to Japanese purchases of Iranian oil during the 1979 hostage crisis. Tensions grew worse in the 1980s, with conflict over Japan’s currency policy and growing anger over its protected domestic market. The low point came in the summer of 1987, when a scandal broke out over a Japanese company’s covert sale of advanced machinery to the Soviet Union; in response, angry members of Congress took sledgehammers to a Toshiba radio on the steps of the Capitol building at a televised press conference. The bursting of the economic bubble at the end of 1989 did little to immediately resolve trade tensions, but these gradually eased in the second half of the 1990s as Japan descended into its first “lost decade” of economic stagnation.

Even during these periods of strain in their economic relationship, Washington and Tokyo still found ways to work together constructively to advance shared economic interests around the world. They helped shape global rules and norms in international financial institutions such as the World Bank, the Asian Development Bank (ADB), and the Organization for Economic Cooperation and Development (OECD). As founding members of the Group of Seven (G7) industrialized democracies in the mid-1970s, they were leaders of the informal body that effectively served as the steering group for the global economy. As the Cold War wound down in the late 1980s, even with bilateral trade frictions at their peak, the two countries invested significant effort in trans-Pacific economic integration when Japan asked Australia to take the lead in establishing the Asia-Pacific Economic Cooperation (APEC) forum, an initiative that Washington soon endorsed.

Regional economic cooperation has been a centerpiece of U.S.–Japan relations in the three decades since APEC was founded, and it has deepened since Prime Minister Shinzo Abe returned to office in December 2012. Most notably, the two countries successfully negotiated a de facto U.S.–Japan free trade agreement under the rubric of the Trans-Pacific Partnership (TPP). Signing TPP in February 2016 brought the United States and Japan closer than ever to realizing the ambition of Article II of the U.S.–Japan Mutual Defense Treaty of 1960, an often-forgotten provision that should be resurrected: it calls for the two partners to strengthen their free institutions, to eliminate conflict in their international economic policies, and to encourage economic collaboration.

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Key findings from the project included the following:

• The underlying strategic interests and goals of the United States and Japan in the Indo-Pacific region are highly aligned, transcending today’s bilateral trade tensions.
• China’s growing influence and assertive behavior in the region pose a substantial challenge for the United States and Japan.
• There remains a strong demand in the region for U.S. and Japanese economic engagement and leadership in rule-making and norm-setting.
• Washington and Tokyo have complementary skills in economic statecraft and should work to better coordinate their economic policies in the region.

The report offers 10 crosscutting recommendations for individual and joint action by the United States and Japan in the Indo-Pacific:

1. Resolve bilateral trade tensions to clear the way for third-country cooperation.
   The increase of trade tensions between the two countries has been an unfortunate distraction. The United States should work with Japan to address impediments to trade and investment; in doing so, both sides should act within established rules, seek to resolve differences through negotiation, and focus on enhancing cooperation in third countries.
2. Develop a joint strategic approach that plays to each country’s strengths.
   The United States and Japan should work together to strengthen and operationalize the economic pillar of their respective free and open Indo-Pacific strategies and coordinate to maximize each country’s unique advantages, including by establishing a new, bilateral Indo-Pacific Economic Cooperation Dialogue.
3. Work toward a free and open digital economy.
   The United States and Japan should foster cooperation on emerging technologies and digital governance to ensure that both play a leading role in shaping the rules, standards, and norms of the future global economy. The two countries should cooperate in forums such as APEC to develop guidelines and principles for the digital economy.
4. Cooperate on trade liberalization and rule-making.
   The true power of the U.S.–Japan economic relationship lies in the two countries’ ability to shape global economic rules, standards, and norms, especially in the Indo-Pacific region. Rule-making efforts should focus on extending the disciplines agreed on in TPP in two key areas: the digital economy and state-owned enterprises.
5. Promote trilateral cooperation with European partners.
   Europe has shown an intention to play a more active role in Indo-Pacific regional affairs. Trilateral economic cooperation among the United States, Japan, and the European Union should be expanded. Washington and Tokyo should also work within the G7 to gain European support for their endeavors in the Indo-Pacific.
6. Increase financing and other support for high-quality infrastructure investments to meet regional needs and enhance connectivity.
   Both Japan and the United States have critical roles to play in the historic global infrastructure buildout. The two countries can improve operations and financing from their respective government agencies, facilitate information sharing between agencies with similar mandates, and jointly promote high standards for infrastructure investment.
7. Respond to the risk of geo-economic coercion through trade and debt.
   There is growing concern around the world about China’s economic coercion. The United States and Japan should offer more support to countries that are part of the Belt and Road Initiative, through building the capacity of government staff, offering coordinated alternative financing, and improving intelligence sharing about China’s economic activities.
8. Seek an affirmative agenda with China where possible.
   Although China has diverging interests and policies, it shares a desire for a peaceful and stable IndoPacific region. The development needs of the region cannot be fulfilled by one country or organization alone. Cooperation and positive market competition where possible will be in the interest of all three major powers as well as regional economies.
9. Utilize U.S. and Japanese strength in technical assistance and human capacity building to nurture small and medium-sized enterprises.
   Know-how, human capacity development, and a healthy climate for small and medium-sized enterprises (SMEs) are key forces for market-based growth and development. The United States and Japan should step up their efforts to develop capacity and skills in third countries and enhance SME access to global financing and trade.
10. Collaborate on anti-corruption efforts.
    Countries with high levels of corruption are unlikely to generate stable or equitable economic growth and are at risk of becoming reliant upon non-democratic countries for trade and investment. Washington and Tokyo should enhance intelligence sharing on corruption and deepen joint work on anti-corruption in international forums.

Centre for Strategic and International Studies, All content © 2018. All rights reserved.
To see the original report, click here.