Changes in U.S. trade and tariff policy in 2025 led to a contraction in plastics trade and significantly higher import duties for the U.S. plastics industry. Based on preliminary trade data, combined U.S. exports of plastic materials and resins, plastic products, machinery, and molds declined 3.4% to $73.6 billion last year.
As expected under higher tariffs, imports fell 5.4% to $74.0 billion. As a result, the U.S. plastics industry’s trade deficit narrowed sharply by 78.5%. However, that improvement came at a cost: calculated duties on plastics imports surged 106.5% to $7.8 billion.
While the smaller trade deficit may appear positive on the surface, data suggests a more complex picture—one shaped by reduced trade flows, higher costs, and shifting sourcing decisions rather stronger underlying competitiveness. The United States, ranking second, in PLASICS Global Plastics Ranking® in 2024 has run a plastics trade deficit with Japan for many years, reflecting the long-standing integration of supply chains in machinery, molds, specialty plastics materials, and manufactured plastic goods. Japan continues to be an important force in global plastics markets, ranking 10th.
The U.S.-Japan relationship matters. Changes in the macroeconomic environment in both countries—including exchange rates, investment trends, industrial policy, and consumer demand—have direct implications for bilateral plastics trade. More importantly, the broader global trade environment has shifted, forcing countries to reassess commercial relationships as supply chains adapt to new tariffs, geopolitical risks, and slower global growth. For the plastics industry, that means the U.S.-Japan trade relationship is no longer just about bilateral flows—it is increasingly about resilience, competitiveness, and strategic alignment in a changing global economy. Here to discuss the future of U.S.-Japan trade relations, in this year’s annual trade blog,[1] is Prof. Urata.
Shujiro Urata is Professor Emeritus, Waseda University. He is also Chairman Emeritus of the Research Institute of Economy, Trade and Industry (RIETI), Specially Appointed Fellow at the Japanese Centre for Economic Research (JCER), Distinguished Senior Fellow at the Institute of Developing Economies (IDE-JETRO). and President of the East Asian Economic Association (EAEA). Professor Urata received his Ph.D. in Economics from Stanford University. He is a former Research Associate at the Brookings Institution, and an Economist at the World Bank. He specializes in international economics and has published a number of books and articles on international economic issues. His recent books include Sustainable Development Disciplines for Society, co-editor, Springer, 2022, Political Economy of East Asian Economic Integration: The Process of the RCEP Negotiations and Beyond, co-editor, Routledge, 2025.
Pineda: Prof. Urata, welcome, and more importantly thank you for agreeing to guest my annual trade blog. I am delighted to have this conversation with you on what I see is an evolving U.S.-Japan new trade reality.
Urata: Thank you very much for inviting me. I am delighted to join this conversation on such an important issue.
Pineda: Let’s start with U.S. trade with Japan.The U.S. continues to run a substantial merchandise trade deficit with Japan. In plastics specifically—including plastic materials and resin, plastic products, plastics equipment, and molds for plastics—U.S. exports to Japan rose to $1.8 billion last year, while imports from Japan reached $2.7 billion, resulting in a $0.9 billion trade deficit. That gap was as high as $1.2 billion in 2022. There was also a period, from 2004 through 2013, when the U.S. recorded a trade surplus with Japan in plastic materials and resin. Looking beyond plastics, the broader U.S. goods trade deficit with Japan remains significant. What specific policy adjustments—by either country or both sides—would be most effective in narrowing that gap without disrupting the strong security and technology alliance between the two countries?
Urata: First, from an economic perspective, an overall trade imbalance is not necessarily a problem as long as a deficit country can finance it through borrowing or by attracting capital inflows from abroad. It becomes problematic when such financing is no longer sustainable. Because a trade deficit is fundamentally a macroeconomic phenomenon reflecting excess spending—i.e., spending that exceeds income—its correction requires macroeconomic policy adjustment. Specifically, tightening fiscal and monetary policy can help reduce a trade deficit, while countries with trade surpluses may need to adopt more expansionary fiscal and monetary policies.
With regard to the U.S. trade deficit vis-à-vis Japan, the bilateral trade balance should not be a major concern from an economic standpoint. Bilateral trade balances are influenced not only by macroeconomic factors but also by structural factors such as resource endowments. For example, Japan has a persistent trade deficit with oil-exporting countries such as Saudi Arabia because it lacks domestic energy resources.
That said, bilateral trade imbalances can become politically sensitive. To address such concerns in the U.S.–Japan context, the primary approach should remain macroeconomic adjustment, as noted above. In addition, structural measures can play a complementary role: enhancing productivity and innovation in the United States would strengthen export competitiveness, while further market opening in Japan would increase imports. Importantly, the objective should not be to restrict trade, but rather to promote it in a way that contributes to a more balanced and sustainable outcome.
Pineda: You make an important point that the goal of trade policy should not be to restrict commerce, but to expand it in ways that support a more balanced and sustainable outcome. With that principle in mind, the world is now experiencing a major shift in the global trade regime. Have recent changes in U.S. tariff policy, particularly with the imposition of higher tariffs, begun to move the world away from a multilateral, rules-based trading system toward greater regionalism and bilateral deal-making? If so, does this risk undermine decades of progress toward a more open and predictable international trade architecture, and how is Japan responding?
Urata: Yes, recent changes in U.S. tariff policy, particularly during the second term of President Trump (“Trump 2.0”), have contributed to a shift away from a multilateral, rules-based trading system toward a more bilateral or unilateral, power-based system of trade relations. The introduction of higher and potentially reciprocal tariffs risks undermining the GATT/WTO framework, which the United States itself played a central role in establishing and which has supported the rapid expansion of the global economy. Such tariff measures are inconsistent with key GATT/WTO principles, including commitments not to raise tariffs above bound rates and the principle of non-discrimination.
A shift toward power-based trade relations, combined with frequent changes in tariff policy, increases uncertainty and instability in the global trading system. This, in turn, contributes to the fragmentation of global trade, disrupts supply chains, and ultimately slows both trade and economic growth.
In response, Japan has been actively seeking to uphold an open, rules-based trading system in cooperation with like-minded countries, particularly middle powers. One key strategy has been the promotion and expansion of regional trade agreements (RTAs). Japan played a leading role in the establishment of both the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP), and it continues to work toward expanding their membership.
In addition, Japan has been proactive in advancing plurilateral trade initiatives, which aim to develop rules in areas not fully covered by the WTO, such as digital trade. At the same time, Japan remains committed to WTO reform in order to address emerging challenges and ensure that the multilateral trading system remains relevant and effective in the evolving global trade environment.
Pineda: A follow-up question to what you just said, I have counted 16 bilateral trade agreements, including the most recent Japan-U.S. trade agreement, which focused on lowering tariffs for U.S. agricultural and industrial goods, with significant revisions in 2025 involving auto tariffs and investment. That agreement also emerged in the context of the U.S. reciprocal tariffs imposed in 2025 under IEEPA. Earlier this year, the U.S. Supreme Court ruled that the President did not have authority to impose tariffs under IEEPA. At the same time, the U.S. has 14 free trade agreements covering 20 countries. What are your thoughts on the Japan-U.S. trade agreement, and what does it suggest about the future direction of trade policy between the two countries?
Urata: A key issue is policy consistency. While the U.S.–Japan Trade Agreement remains formally in place, recent U.S. tariff measures have raised concerns about their compatibility with existing commitments. From Japan’s perspective, this creates uncertainty and may undermine the predictability that trade agreements are meant to ensure.
More broadly, it suggests a growing tension in U.S. trade policy between negotiated agreements and unilateral actions. Going forward, maintaining the credibility of existing agreements will be essential for stable U.S.–Japan economic relations and for the wider rules-based trading system.
Pineda: We have witnessed China’s rise from the pre-WTO era to becoming the world’s leading exporter of manufactured goods. Given China’s overwhelming lead in global manufacturing output, how does Japan view the U.S.-Japan economic partnership? Some regard it as a strategic counterbalance to China’s growing role in manufacturing and trade. Whether or not Japan shares that view, what concrete steps is it taking to deepen supply-chain integration with the United States in critical sectors?
Urata: Japan does not frame its economic partnership with the United States as a simple counterbalance to China, but rather as a strategy to enhance economic security, resilience, and technological competitiveness. Instead of pursuing full-scale decoupling, Japan emphasizes “de-risking,” aiming to reduce excessive dependence on China in critical sectors while maintaining broader economic ties.
Within this framework, the U.S.–Japan partnership plays two key roles. First, it supports risk diversification by strengthening “trusted” supply chains in strategic industries. Second, it enables co-development of advanced technologies, particularly in areas such as semiconductors, artificial intelligence, and next-generation communications.
Japan has taken several concrete steps to deepen supply-chain integration with the United States. In the semiconductor sector, the two countries have established cooperative frameworks for research and development, manufacturing, and export controls. Japan is also providing substantial subsidies to support domestic semiconductor production and to complement U.S. initiatives such as the CHIPS and Science Act. These efforts leverage the complementary strengths of Japanese firms in materials and equipment and U.S. firms in design and advanced manufacturing.
In addition, Japan and the United States are strengthening cooperation in critical minerals. Agreements have been reached to secure stable supplies of key inputs such as lithium and rare earths.
Institutionally, Japan has reinforced its economic security framework through the Economic Security Promotion Act and enhanced bilateral coordination via the U.S.–Japan Economic Policy Consultative Committee (“Economic 2+2”). These mechanisms facilitate alignment on supply-chain resilience, export controls, and investment screening.
Overall, Japan’s approach combines deeper bilateral integration with the United States in strategic sectors with continued engagement in regional and multilateral frameworks to achieve resilient and stable external economic relations and therefore does not serve as an exclusive counterweight to China.
Pineda: One of the long-standing realities facing United States manufacturing has been wage differentials between the United States and other countries, which contributed to decades of offshoring. A newer challenge now confronting many advanced economies, including the United States, is an aging workforce. Japan faces this issue as well. How critical is overseas investment to Japan’s long-term strategy of remaining a global manufacturing powerhouse? For example, Toyota Motor Corporation operates 11 plants in the United States.
Urata: Overseas investment is central—indeed indispensable—to Japan’s long-term strategy of remaining a global manufacturing powerhouse. Structural constraints at home, most notably a shrinking and aging workforce, limit the scope for expanding domestic production. As a result, Japanese firms have long relied on overseas investment not simply to reduce costs, but to sustain competitiveness, access markets, and optimize global supply chains.
Historically, wage differentials between Japan and other countries—especially in Asia —encouraged the offshoring of labor-intensive production. However, the role of overseas investment has evolved. Today, it is less about cost arbitrage and more about “localization” and “market-proximate production.” Producing within major markets allows firms to avoid trade barriers, respond quickly to local demand, and hedge against exchange rate volatility and geopolitical risks.
The United States occupies a particularly important place in this strategy. It is not only a large and affluent consumer market but also a key partner in advanced manufacturing and innovation. The example of Toyota Motor Corporation, which operates 11 manufacturing plants in the United States, illustrates this shift. These facilities produce vehicles and components close to end consumers, integrate local suppliers, and create employment, thereby embedding Japanese firms deeply into the U.S. industrial ecosystem. Similar patterns can be observed in other sectors, including machinery, electronics, and increasingly semiconductors and batteries.
From a strategic perspective, overseas investment serves several critical functions. First, it mitigates demographic constraints by allowing firms to tap into larger and younger labor markets abroad. Second, it enhances supply-chain resilience by diversifying production locations across multiple countries, reducing vulnerability to disruptions in any single location.
Third, it supports technological collaboration, particularly in advanced economies like the United States, where innovation ecosystems are strong. Fourth, it aligns with government-led economic security policies that encourage “friend-shoring” to trusted partners.
Importantly, overseas expansion does not imply the hollowing out of domestic industry. Instead, Japanese firms tend to retain high-value-added activities—such as research and development, advanced component manufacturing, and headquarters functions—within Japan, while dispersing assembly and market-oriented production globally. This functional division of labor enables Japan to remain at the technological frontier while leveraging global efficiencies.
In sum, overseas investment is not merely a response to short-term cost pressures but a core pillar of Japan’s long-term industrial strategy. It allows Japanese manufacturing to remain globally competitive despite domestic demographic challenges, while also reinforcing economic ties with key partners such as the United States. Rather than diminishing Japan’s manufacturing base, this outward-oriented approach has helped sustain its position as a leading manufacturing nation in an increasingly complex and fragmented global economy.
Pineda: You make a compelling case that overseas investment has become a structural pillar of Japan’s long-term manufacturing strategy—helping firms overcome demographic constraints, stay close to key markets, and strengthen supply-chain resilience while retaining high-value activities at home. If that outward-oriented model continues, and Japan’s domestic workforce keeps shrinking absent a meaningful rise in births or immigration, is it logical to expect that Japan’s share of imports would gradually increase over time—thereby reducing its trade surplus?
Urata: It is broadly logical to expect that a declining workforce and rising overseas investment would lead to an increase in Japan’s imports and a reduction in its trade surplus. As Japanese firms expand production abroad, goods that were previously manufactured domestically and exported may instead be produced overseas. In some cases, these goods are exported back to Japan as “reverse imports,” contributing to higher import levels while reducing exports. At the same time, demographic constraints—especially labor shortages due to an aging population—limit domestic production capacity, encouraging greater reliance on imports to meet domestic demand.
However, this relationship is not automatic or one-directional. Several countervailing factors complicate the picture. First, global value chains established through overseas investment allow Japan to maintain a strong export position in high-value-added sectors. Even when final goods production moves overseas, Japanese firms often continue to export key components, capital goods, and technology inputs. This means that while some categories of exports may decline, Japan’s role in global production networks remains significant.
Second, macroeconomic factors such as exchange rates and energy prices also play an important role in determining Japan’s trade balance. For example, a weaker yen can suppress imports and support exports, while fluctuations in energy prices—given Japan’s heavy dependence on imported energy—can significantly influence the trade balance, sometimes more than structural factors like demographics.
In sum, demographic decline and overseas investment create a structural tendency toward higher imports and a smaller trade surplus, but this is not automatic, as the trade balance is affected by various other factors such as exchange rates and oil prices.
That said, Japan has recently been running a trade deficit after a long period of trade surpluses. This is mainly due to increased imports, driven by higher oil prices, the depreciation of the yen, and other factors.
Pineda: Anyone reading your bio would not think twice about your expertise in international economics. Given that our industry trades with Japan, where do you think Japan’s economy is heading in the next five years against the backdrop of increased global economic policy uncertainty?
Urata: Over the next five years, Japan’s economy is likely to experience moderate but stable growth amid heightened global uncertainty, while undergoing gradual structural transformation. Rather than rapid expansion or decline, the trajectory will be characterized by adaptation to both domestic constraints—most notably demographic decline—and an increasingly volatile international environment.
In baseline terms, Japan’s economic growth is expected to remain modest, broadly in line with its low potential growth rate. A shrinking and aging population will continue to constrain labor supply and domestic demand, while productivity improvements are likely to be incremental rather than transformative. At the same time, inflation is expected to stabilize around the central bank’s target, allowing for a gradual normalization of monetary policy. This suggests a relatively stable macroeconomic environment, albeit without strong growth momentum.
However, rising global economic policy uncertainty will exert significant pressure on Japan’s outlook. First, as a highly trade-dependent economy, Japan is vulnerable to fluctuations in external demand. Trade tensions, protectionist policies, and geopolitical conflicts may dampen export growth and disrupt established supply chains. Second, Japan’s heavy reliance on imported energy makes it particularly sensitive to global commodity price shocks. Increases in oil and gas prices could raise production costs and inflation, creating difficult trade-offs for policymakers. Third, global financial conditions—especially rising interest rates—pose risks given Japan’s high public debt, potentially constraining fiscal flexibility.
At the same time, Japan is undergoing an important structural shift in its growth model. The economy is increasingly moving away from reliance on trade surpluses toward a model supported by overseas investment and income from foreign assets. Japanese firms continue to expand production and investment abroad, both to access growing markets and to mitigate domestic constraints. As a result, income generated from overseas operations is becoming a more important driver of the current account balance than traditional goods exports.
In parallel, Japan is strengthening its position in high-value-added sectors such as advanced manufacturing, digital technologies, and green innovation. It is also deepening economic ties with like-minded partners, particularly the United States, to enhance supply-chain resilience and technological cooperation in an era of geoeconomic competition.
In sum, Japan’s economy over the next five years is likely to be defined by low but stable growth, increased exposure to global uncertainty, and a gradual transition toward a more outward-oriented and investment-driven economic structure. While challenges remain significant, especially from demographics and external shocks, Japan’s adaptability and strong international economic linkages are likely to support continued stability.
A more optimistic scenario can be envisaged if Japan succeeds in generating and widely adopting new technologies, such as artificial intelligence, across its economy and society. Japan has been relatively slow in adopting some frontier technologies compared to other advanced economies, which implies that there remains considerable scope for improvement. If effectively harnessed, such technologies could enhance productivity, alleviate labor shortages, and support economic growth despite demographic constraints.
However, the realization of this scenario is not automatic. It depends critically on supportive government policies, including regulatory reform and the creation of an environment conducive to innovation. At the same time, the willingness and dynamism of private firms to invest in, develop, and adopt new technologies will be equally important. Without strong policy support and active private-sector engagement, the potential gains from technological advancement may not be fully realized.
Pineda: Prof. Urata, thank you for sharing your insights, particularly on the economic outlook of Japan over the next five years that sits at the intersection of structural constraints and structural transformation, where modest prospects are being reshaped by demographic pressures, global uncertainty, and ongoing reorientation of tis growth model toward investment, innovation, you mentioned AI, and deeper international integration. Anything else you would like to add to our discussion on U.S.-Japan trade relations?
Urata: I hope the United States will return to a rules-based system under the WTO and work with Japan and other like-minded countries to build an open, stable, and predictable trading system, while addressing key challenges such as digital trade, the environment, subsidies, industrial policy, and WTO reform.
Pineda: Once again, Prof. Urata, thank you for this insightful conversation on U.S.–Japan trade relations. From the perspective of the plastics industry, I am optimistic that trade between our two countries will continue to grow, benefiting not only the plastics industries in the United States and Japan, but also the broader macroeconomies of both nations. As I have noted on many occasions, for the plastics industry the world is our market, and the net impact of global trade is positive.
*The views expressed in this blog are those of the authors and do not necessarily reflect those of the Plastics Industry Association.
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