We examine how the strategic aspect of Japanese research and development expenditures and industrial policies affected U.S.-Japanese bilateral trade during the late 1970s, and investigate which component of R&D--expenditures on process innovation, product quality improvements, new products or new technology, and technology transfer--proved to be most effective. We find that while Japanese R&D expenditures have generally promoted Japan's trade advantage, certain components of R&D have proved more effective than others. The depreciation subsidy and special status with the MITI is positively related to the Japanese trade performance, while legal cartelization status has not had any apparent effect.