Have the Japanese turned investment lemons into investment project lemonade?
Last week, the governments of the United States and Japan completed a Memorandum of Understanding (MOU) to flesh out the details of a $550 billion pledge to invest in the United States made as part of the bargain to ‘buy down’ the tariffs imposed on Japanese traded products.
For months, we had heard government officials refer to the investment pledges, but there was not enough information to understand the process for these investments. In July, Japan’s chief negotiator, Ryosei Akazawa, confirmed in the Japan Times that the money would be in the form of loans and loan guarantees provided by financial institutions and backed by the Japanese government. Dismissing claims that Japan was handing over a cash payment to the United States, Akazawa said: ‘For the loans provided through the program, Japan will simply be collecting the interest payments, and for the loan guarantees, if nothing happens, Japan will also be just collecting fees. For that part, Japan’s just making money.’ But these statements left many questions unanswered.
Now published, in draft form at least, by Japan’s Cabinet Secretariat, the MOU is our first opportunity to better understand the architecture for foreign investments in strategic projects in the United States as part of ongoing bartering to lower U.S. tariffs. The MOU with Japan will likely serve as a model for agreements with other governments. It remains unclear whether this version of the MOU is the final text, but here are some preliminary questions arising from it.
Will Japanese officials have an equal say in selecting investment projects?
The draft MOU outlines the basic funding process as follows. In terms of the institutions, the President of the United States will ‘establish’ an Investment Committee (IC), chaired by the Secretary of Commerce (para 3). The MOU then provides that the IC will consult with a Consultation Committee (CC), comprising members from Japan and the United States. However, these members may only ‘provide input’ to the IC concerning each state’s ‘strategic and legal considerations.’ There is no obligation upon the United States to factor in the Japanese interests when establishing these development projects.
The ‘U.S. Investment Accelerator’ (U.S. IA) will manage and administer selected investment activities (para 6). The creation of the U.S. IA will facilitate selected investments (over $1 billion), offering various means to fast-track investment activities. For example, per the White House Executive Order, the U.S. IA will, in compliance with U.S. laws, aid investors with U.S. regulatory processes, reduce regulatory burdens, and increase access to appropriate national resources. Additionally, the Order confirms that the ‘Federal Government [will] dramatically expand its assistance to [foreign investor] companies.’ Within the MOU, there is an added commitment that the ‘United States intends to expedite any applicable regulatory processes in connection with any of the projects.’ By tying the MOU to the newly established U.S. IA, the MOU affords a significant advantage to large Japanese-funded investment projects. What is unclear is what this means for broader environmental and community concerns of those impacted. Nevertheless, coordinating with the US AI could offer these projects significant advantages over foreign and domestic projects lacking an accelerated track.
Will Japanese officials have any opportunity to assess their investment in all project phases?
The U.S. IA will manage and administer the investment, suggesting the Japanese have no role beyond the establishment of the investment, which is worrying if considering the multifaceted risks and illegality that could arise with later phases of the investment projects’ operation and management – all of which could impact Japan’s ability to receive returns on its investment.
Even having established these committees, the funding process remains fuzzy. The MOU provides that the ‘United States will from time to time present Investments to Japan for review and Japan will fund the related Investment’ (para 7). Who do they mean when they state the ‘United States’? The second clause of this sentence provides the answer, stating that the United States will convey to Japan that ‘the President has selected such Investment’ which triggers Japan’s responsibility to dispense ‘immediately available funds […] into the account or accounts specified by the U.S. Investment Accelerator.’ What is the legal basis for affording such power to the President to choose investments? What institutions will oversee this selection?
Will there be independent financial oversight of these investment projects?
Regarding the legal architecture of these investments, the United States will form special purpose vehicles (SPVs). Instead of subsidies to ‘build back better’ (a strategy under Biden), we see the Trump administration develop strategic industrialisation through these investment vehicles. This new approach raises challenging questions about state support and corporate governance. Each SPV will ‘be managed and governed by the United States or its designees in the capacity of a general partner’ (para 11). Will there be independent financial oversight? What are the legal bases for this framework? Corporate governance? What circumstances make such investments reasonable choices, and what are the limits to how the administration expands its support in these investments? Will there be independent oversight of each project’s constellation of legal instruments? How will the U.S. public hold its government accountable for the forms of investments made?
In terms of Japan’s returns on investment, here, Japan will initially receive fifty per cent of cash returns (though subject to U.S. taxes) up until what they put into the investment, and then ten per cent returns thereafter. If Japan were already looking to investments in the United States, there is the potential to see a decent bargain.
How will each respective government seek to mitigate the risks of corruption?
The MOU does not define corruption, which can be defined as the use of public office for private gain. A significant issue with blurring public and private funding for development is whether or not the government is undertaking these projects based on commercial considerations. Sometimes, development projects are necessary for societal welfare, but may not be profitable. But what happens when a project is determined based on private rather than societal gain? Some potential ways to tackle corruption risks are increased accountability and transparency of government actions, or designing these projects to limit opportunities for corruption. What is Congress’s role if Japanese officials have no oversight in these projects? These projects see investment management ‘until January 19, 2029’ (para 2), but what happens thereafter?
Will a neutral third party evaluate consistencies with each state’s respective laws?
The MOU does not anticipate judicial review – any questions of interpretation or dispute are subject to mutual consultations (para 19). Should this be a framework for sustained engagement between the two governments, it would make sense to establish a neutral third party to interpret the MOU terms to offer greater predictability. On the other hand, the absence of review enables the United States to pursue power-oriented diplomacy, relying on explicit or implicit threats to influence transactions or partnerships.
Will the constellation of agreements be consistent with each government’s existing international law commitments?
The commitment to Japanese vendors and suppliers (para 10) expands Japan’s role from being solely one of a financier. The MOU commits to ‘where feasible […] select Japanese vendors and suppliers in lieu of comparable foreign vendors and suppliers.’ The MOU may establish better treatment for Japanese investors in the United States, compared to all other foreign investors from home states that do not have similar deals with the United States. In effect, this commitment creates an unequal playing field for other foreign investors who must compete for economic opportunities.
Such commitments could expose the United States to investment protection claims. The United States has existing investment treaties and/or investment chapters in trade agreements. The MOU could raise issues for the United States (though they have never lost an investment case, at least not one that is publicly known), for it affords less favourable treatment to other protected foreign investors. In a way, the MOU framework is another element of the United States’ investment screening mechanism. However, in this case, the United States affords significant advantages to select investors, disincentivising others.
What are the legal consequences if the Japanese refuse an investment project?
Should Japan not ‘fully fund’ any investment, it forfeits its entitled returns pursuant to a Deemed Allocation Amount (DAA) and instead receives a Revised Allocation Amount (RRA) (para 8). Each is defined separately. The DAA equals the investment amount (plus interest and less prior distributions) divided by either the anticipated project life (determined in good faith) or by 20, plus any carryover amounts. It appears that the key difference is that the RAA cuts out interest. Japan will have to ‘catch up’ with its investments if this happens to go back to the DAA. Consider the operation of existing mining and extraction projects having an operation life of about thirty to fifty years. However, the most significant consequence for Japan is the revival of high tariff rates on Japanese imports.
Will there always be the threat of ever-increasing tariffs?
Should the Japanese not fund a project, it loses its distribution entitlements. Fine. More concerning is that the United States has clarified that in situations where Japan ‘elects not to fund, the United States may also impose tariff rate or rates on Japanese imports into the United States at the rate determined by the President’ (para 8). The legal basis for perpetuating this threat is unclear and not provided within the MOU.
The MOU cautions that so long as Japan ‘faithfully’ implements the MOU and ‘has not failed to fund any Investment Amount,’ there is no intention of raising tariffs. Hardly a guarantee! Who determines whether Japan is a faithful friend, and what guarantee does Japan have that the United States will consider the reasons for not funding a specific investment? Akazawa confirmed that ‘Japan cannot finance any project that contravenes its laws or is unrelated to Japan.’ But the MOU fails to identify a transparent process for Japan’s decision not to fund an investment, leaving any discussion to ‘mutual consultation.’ Japan has no guarantee that the United States will consider the reasoning underlying any decision not to fund, even if the investment breaks Japanese societal norms or is illegal under Japanese law. Behind closed doors, tariffs or other trade restrictions may remain as alive as ever.
When Secretary Yellen began to speak of friend-shoring, I half-jokingly observed that the rhetoric captured a desire to ‘unfriend’ China. Today, the MOU signals another pathway, but a path nevertheless built upon coercive foundations. What does it mean to foster a friendship with the United States? To finalise a friendship, commerce, and navigation treaty with Japan in 1953, both governments began with reciprocity, combining their respective model agreements and carefully negotiating the norms guiding development for the twentieth century. In contrast to today, the MOU captures a very short timeframe – intended to last until 2029. Moreover, the MOU is a pliable architecture that relies on the continued threat of tariffs and lost gains to steer Japanese investments towards U.S. interests.
As a final word
Three significant elements should raise caution for the Japanese and any other trading partner expecting a copycat version. First, the committee assembled to select projects may not include Japanese voices. Second, the threat of tariffs never disappears. Third, any trading partner accepting the MOU bargain must accept its legal characterisation as ‘not giv[ing] rise to any rights or obligations under Applicable Laws of either the United States and Japan or under international law’ (para 21). The MOU wording suggests it is quite far from an international agreement, particularly because the MOU confirms it will not establish enforceable obligations under international law (para 21).
Beyond these three elements, the MOU is developing alongside the United States’ contradictory objectives concerning coordination and self-reliance. Nor do any published legal or political instruments clarify how the United States will address any investment projects’ military and defence dimensions. As more sectors become matters of national security, how will this impact Japan’s commitments? For example, what could the United States demand of Japanese suppliers and vendors when operating on U.S. soil? Could the United States demand that U.S. authorities review Japanese facilities – at home and abroad?
Leo Lewis of the Financial Times summed up the MOU: ‘The point is that its one-sidedness, continued unpublished life in the shadows and the widely variable interpretations this allows represent a miserable charter of what it means to be friends with the US in 2025.’ The MOU could present some economic advantages to Japan to foster trust and collaborate with the United States. That said, the United States appears to be designing a dramatically different state-supported industrialisation plan, which significantly blurs questions of authority and agency. Until we see the implementation of the MOU, it is difficult to determine whether Japan is tying its funds to a shooting star or a sinking ship.