The Economist: Disaster in Japan
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M. Ray PerrymanMarch 16, 2011 | 1,982 views | 1 comment
Horrific images of the earthquake of historic proportions and associated tsunami which devastated Japan continue to fill media outlets. The loss of life and tragic scenes are difficult to comprehend, and returning to normalcy seems an almost insurmountable task. As we go to press, the nuclear plant continues to present a potential crisis. While the human toll is beyond measure, the economic cost of the disaster is already being assessed.
Many of Japan’s largest factories remain shuttered. Power problems are widespread, and transportation is exceedingly difficult. Business losses mount each day and will continue to do so until production resumes. A huge outlay of funds will be required to rebuild commercial buildings, houses, and infrastructure.
The incident is also affecting economies around the globe, including those of the US and Texas. Japan is an important trading partner, and the events there are shaping indicators ranging from the US stock market to the nuclear power industry.
Trade is an important sector of the Japanese economy. The nation is ranked 5th in the world for total dollar amount of imports and exports according to the CIA World Fact Book. The US is Japan’s second largest import and export partner, after China. For the US, Japan is the fourth biggest export destination.
As the US leader in exports, Texas is a hub for world trade, exporting over $206 billion worth of goods in 2010. While Mexico is Texas’ largest trading partner by far, Texas exporters also have growing ties with East Asia. In fact, Japan ranked 10th as a partner for exports from Texas, which represented a dollar amount of almost $4.0 billion last year.
Texas merchandise exported to Japan in 2010 included chemicals (41.8% of all exports to Japan), computer and electronic products (17.6%), machinery, except electrical (10.6%), and transportation equipment (5.7%).
Texas also receives billions worth of imports from Japan. In 2010, 30.1% of imports from Japan were computer and electronic products. This was followed by machinery, except electrical (20.6%), transportation equipment (10.9%), and primary metal manufacturing (10.7%).
Japan has also been known to invest heavily in Texas. From 2005-2010, Japan represented 9% of all foreign direct investment (FDI) projects in Texas and was the fourth source country for FDI projects in Texas. These tens of billions of dollars in investment inflows continue to support jobs and other economic activity in the Lone Star State.
Stifling this activity will affect companies across the state and nation. Exporters will temporarily lose an important market for their products. Importers may face shortages of needed parts for manufacturing as well as end-use electronics, cars, trucks, and other items.
Another aspect of the fallout from the Japanese situation is a potential slowdown in the US nuclear industry. It has been decades since a new nuclear generation facility has come online in the US. Recently, however, proponents had gained some traction in adding new nuclear generation capacity, with projects well down the road in the southeastern US and in Texas. Support for these initiatives included federal loan guarantee programs instituted by former President Bush and slated for expansion by President Obama.
In Texas, nuclear generation represents an important source of diversification in the mix of input fuels used in power plants, thus contributing to price stability and predictability. In addition, nuclear fuels are completely clean burning, helping to ameliorate greenhouse gas issues.
The frightening prospect of a meltdown and release of radiation in Japan has sparked calls for stopping new construction. In fact, a major project in Texas has already been suspended for now. However, it is important to note that the plant in Japan is decades old, and newer facilities would be built with significantly advanced safety features.
With global economies only recently gaining momentum after the financial crisis, the timing of this setback may increase its effects. The Bank of Japan is pumping in funds at a rapid rate, but has little room to drop interest rates and is dealing with relatively high debt loads thanks to past efforts to stimulate the economy.
The magnitude of the economic damage will not be known for some time. The costs in terms of human suffering and loss of life are already immeasurable.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group ( http://www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.