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Japan disaster likely to impact California economy

(Crossposted from CAIVN)

As Japan suffers from a horrendous death toll and substantial damage to several of its nuclear reactors, trade with California will unquestionably be impacted due to the catastrophic earthquake and tsunami.

Much of the trade both ways is in technology and electronics. If, say, major chip fabrication plants in Japan are down or destroyed, this will have a severe impact on California (and the world) especially given our era of just-in-time shipping. In the early 1990’s, a chip fab fire in Asia caused RAM prices to soar. It seems probable that a disruption like that could happen in the wake of the Japanese tragedy.

This type of disruption also applies to Japanese automakers. Toyota and Honda have already shut down several assembly plants, hopefully just temporarily. Some of the plants are in the earthquake area. If they are still operational, will they have power, water, no nuclear radiation, and a workforce that still has homes?

California accounts for 20% of all US exports to Japan. It exports food as well as tech. Given the port and rail disruption in Japan now, many of our exports may not be able to reach their destination. Or, if they can, it will take much longer as still-functioning ports, rail, and roads become hugely overburdened with extra traffic. The reverse applies too. Japanese products intended for California may be delayed, if they arrive at all.

California exported a record $11.75 billion in January, the highest amount ever. $1 billion of that was to Japan. (The vast bulk of this, sad to say, was goods made in other states and shipped out of California.) Clearly, that $1 billion is in peril, at least temporarily. Not many companies in Japan will want to be making any definitive plans until the full scale of the disaster is known and recovery is underway. Trade between Japan and California will probably plummet in the short-term.

Make no mistake, this was a black swan event, something no one could have predicted and which changes everything. Entire towns no longer exist. Massive parts of the infrastructure in the tsunami area are gone. Areas could become radioactive. Roads, rail lines, airports, power plants and the grid itself have to be rebuilt. Japan will undoubtedly be preoccupied with this for years to come. It’s said that in great calamity there can also be great opportunity, but it’s difficult to see that here. The devastation is too severe.

There will certainly be huge amounts of construction in the tsunami area soon. Maybe equipment built in California or shipped through it will be used. But Japan has companies that build similar heavy machinery and they can also import it from the much closer Korea or China. Also, most of Japan’s non-nuclear power is from natural gas. Those plants will now ramp up to full capacity and the price of natural gas will almost surely rise.

Given the scope of the destruction in Japan, it seems almost pointless (or heartless) to talk about trade. Yes, California will suffer as a result of the Japan quake. I was in Los Angeles during the Northridge quake, which was a 6.7. That will be an aftershock for Japan. And L.A. had no tsunami. Maybe the best thing we can do is help Japan however we can, and then the trade will probably take care of itself.

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