Natural Disaster Equals Economic Turmoil - Trade Deficit

Natural Disaster equals Economic Turmoil - Trade Deficit

On March 11, 2011 Japan faced one of the greatest natural disasters ever seen. A largest earthquake that has ever been recorded which spawned a massive tsunami that damaged caused catastrophic damage to the country. This damage not only killed thousands of its citizens, caused displacement due to the homes and cars being swept away into the ocean, it also placed Japan in economic turmoil. Japanese government official initial estimated the damage caused by both events to be as much as "25 trillion yen (which is roughly $309 billion US dollars). To give this something to compare it to, this cost is roughly four times greater than the damage/loss caused by Hurricane Katrina. (Bloomberg)

One of the major events that were rooted from the catastrophic events has been the trade deficit Japan is facing. As of 01 February 2012, Japan has had a trade deficit for 10 consecutive months, which goes as you can see starts around the time of the natural disaster. This is the first time that Japan has been a trade deficit nation since the 1980's, which was caused by an oil crisis (see figure 1). Since the 1980's, Japan's transformed its trade practices by shifting to a horizontal model, which is characterized, by exporting and importing manufactured goods.

Figure 1

In order for one to understand the impact a trade deficit has on a country, we must first understand what trade is. Trade is "the act or process of buying, selling, or exchanging commodities, at either wholesale or retail, within a country or between countries (http://dictionary.reference.com/browse/trade). There are the ones who produce the goods, which will eventually be the exporters and the ones who consume the goods, who will eventually become the importers. Every country throughout the world relies on trade as a vital interaction. Without trade, each country would be forced to have to support itself with internal goods; not rely on other countries to provide a good or service to them. Some of the many items that are traded are technology, food and clothing.

Trade enhances the economy of a country. This allows for money to be exchange throughout the world which enhances the economy for everyone. If there is a deficit in either the import or export of goods the entire globe suffers in one way or another. The ability to trade creates million of jobs across the entire globe. Trade also allows some countries to buy goods cheaper than it would cost them to make the same goods. For trade to be beneficial there needs to be fair trade. What is fair trade? Fair trade is the idea where those involved in the so called network of trade forces suitable working conditions as well as fair wages. Why is this important? It forces less developed countries to treat their employee's right. Ensures that the work in safe conditions and get paid for their services fairly. This ensures that line is even throughout the world which allows for comparable competition.

So, if we know what trade is, what is a trade deficit? It is "An economic measure of a negative balance of trade in which a country's imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets." (Investopedia)

Why is this important? Japan is the world's third largest economy behind the United States and China. Not only this, but Japan is also the 5th largest import/export country in the world. Japan's main exports are electronic devices such as computers as well as cars. The major buyers of these goods are the United States and China as well as other countries such as Germany, Singapore, South Korea, Taiwan, Hong Kong and Thailand. If these countries go through economic struggle, it affects Japan directly by the amount of goods the countries are purchasing. (Rowley)

When it comes to the imports that Japan has coming in, the main most important imports involve raw materials. Some of these raw materials include wood, oil and food byproducts. Just as Japan relies on China and the United States to lead the way in buying products, Japan relies on them heavily for their import needs. Again, if these countries are struggling it affects Japan by limiting the supply of what they can purchase while also making it more costly to get these goods.

Prior to the earthquake Japan was able to produce its own power without having to rely on other countries. There was severe damage to the nuclear reactor power plant that placed Japan in and energy shortage and forced them to have to import energy. This need to have to import energy has greatly increased the level of imports which has resulted in the trade deficit. The increase has effect Japans dependence on imports such as natural gas and coal to replace its energy source since the Fukushima