How natural disasters ‘cascade through supply chains’

The Fukushima earthquake in Japan sent shock waves both upstream and downstream through supply chains, an academic paper published on the 10th anniversary of the disaster has found.

Supply Chain Disruptions: Evidence from the Great East Japan Earthquake by the University of Cambridge’s professor Vasco Carvalho and others showed how the effects of the disaster cascaded through supply chains.

The paper found that the quake resulted in a 3.6 percentage point decline in the growth rate of firms with affected suppliers.
Research also showed a 2.9 percentage point decline in the growth rate of firms with disaster-hit customers.
The 2011 Fukushima Daiichi nuclear leak – the  worst nuclear accident since the Chernobyl disaster in 1986 – was caused by the 2011 Tôhoku earthquake and tsunami.

“Our results also indicate that the disruption caused by the earthquake led to significant indirect propagation, not only affecting the disrupted firms’ immediate transaction partners, but also their customers’ customers, their suppliers’ suppliers, and so on,” it said.
Disaster-stricken firms’ customers’ customers saw a 2.7 percentage point reduction in sales growth, while suppliers’ suppliers experienced a 2.1 percentage point decline.

And there were also noticeable, though smaller, effects for indirect suppliers and customers who were further from the source of the shock.
Carvalho said perceptions at the time were that while the quake had caused a slowdown of the economy, this was only modest.
This view was strengthened by the fact that the area immediately affected did not account for much GDP, with economic activity there consisting mainly of fishing, some manufacturing and the nuclear plant itself.

But the research showed the incident also disrupted economic activity elsewhere in areas of Japan that were not hit by the earthquake.
“As it turns out, supply chains acted as a conduit for generalised economic disruption, with large aggregate effects,” said Carvalho.
He believes the research adds to our overall understanding of how deeply supply chains can be affected by natural events.
“While natural disasters can send powerful shocks rippling through the global economy, economists had previously struggled to determine just how far they can travel,” the report said.

Carvalho said: “Now, we had a lot of live data to illustrate this. We could see all the connections, and we could trace the supply chains, and we could start seeing just what an impact it had, and quantify them.”
He described how the earthquake “shaved off bits of activity throughout the Japanese economy, making every supply chain in Japan less efficient”.

“It affected suppliers and customers of disaster-stricken firms, and then continued cascading through the economy, disrupting firms that had no direct business link to the affected area,” he added.

Source: cips.org – 17/03/2021 – Andrew Allen
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