The impact of natural disasters on international business
International business is defined as the economic system of exchanging goods and services in multiple countries, but it also refers to the practice of engaging in business transactions outside the national borders. Typically, these business transactions are carried out by multinational corporations (MNCs) and international business companies (IBCs), which prefer to outsource some of their business operations overseas. Offshore outsourcing has become increasingly popular in the context of international trade due to numerous advantages that include, but are not limited to, cost effectiveness, specialization, risk management and operational control.
The mechanisms of free trade
Free trade allows specialization in the manufacture and export of products that are produced most efficiently in a specific country and import of products that are most efficiently produced in other countries. When free trade among nations occurs, there is no governmental intervention in the form of quotas or duties to influence what consumers can buy from another country or what suppliers can produce and sell to another country.
The impact of natural disasters on international trade
China, India, South Korea, Japan, Philippines, Mexico and South Africa are major suppliers of raw materials for the manufacture and production of particular products mainly in the United States and the European Union (EU). A natural disaster that occurs in any host country can destroy a plant or the entire area where the raw materials are manufactured. This will lead to the inefficiency of the country to export raw materials to foreign countries. The foreign countries may be unable to manufacture the product for local consumption or export it. Consequently, supply will be less than demand. Excess demand for particular products will cause prices to increase, making suppliers willing to supply more in order to bring the price closer to its equilibrium. However, in the case of a natural disaster this may be impossible.
A natural disaster can cause a domino effect to the host countries that supply the raw materials but also to the countries that import the raw materials or the end-products for local consumption or to export them to other countries. The lack of raw materials due to natural disasters causes product deficiency. In many cases, factories in the host countries need to shut down operations, thus reducing the revenues of the countries that import the products.
Japan's natural disaster
On March 11, 2011, large areas of northern Japan were thoroughly destroyed by an 8.9 magnitude earthquake and its resultant 23-foot tsunami. Thousands of residents were killed, while towns were destroyed and the infrastructure of the world's second-largest auto producer was wrecked.
Given that Japan is the leading producer and distributor of electronic components, machinery and automobiles, the earthquake and tsunami had a devastating effect on international trade. Toyota, Honda and Nissan suspended production, causing supply problems for the United States, where all three Japanese automakers are top sellers. Although the demand for Japanese models was increasing due to the rise in U.S gasoline prices, the supply of vehicles to the United States was not enough to cover consumer demand.
In addition, the damages caused to significant Japanese ports all along that country's eastern coast have had a major impact on the global shipping industry. According to Zepol, nearly 3.5 percent of the total ocean borne shipments entering the United States in 2010 came from roughly 325,300 Japanese shipments — especially from the port of Sendai, where roughly 2 percent of Japanese shipments were sent to the United States. However, Sendai was severely destroyed by the earthquake and tsunami. Consequently all import and export activities had to be suspended until March 18, 2011, when Sendai accepted only relief supplies.
Although it is too early to fully assess the long-term economic impact of Japan's natural disaster and nuclear crisis on international trade, it has certainly caused global turbulence. Global commodity prices fluctuated sharply after March 11, with crude oil, of which Japan is a large importer, experiencing sharp decline, while the prices of agricultural products declined sharply as well. Beyond any doubt, the earthquake and tsunami in Japan has caused severe disruption in the global supply chain. The same had happened with Hurricane Katrina in New Orleans in 2005, the Indian Ocean tsunami in 2004 and the Haiti earthquake in 2010.
