Foreign Demand Elasticity


Countries like Turkey, which desperately need raw materials, intermediate goods and investment goods to run their import activities, have no choice but to export high added value products. However, this is not a goal that could be achieved without making the necessary efforts. The Marshall–Lerner condition tells us that a country with high elasticity of export demand and low elasticity of import demand cannot easily become competitive and that exchange rate rises can be of limited help.

To put it simply, it is not easy for a country that is dependent on imported goods while whose exports are heavily exposed to foreign competition, to run a trade surplus. Although the increase in exchange rates in such countries is helpful in the short run, in terms of generating export revenue, it creates serious problems in the medium term, considering the pass-through effect on inflation. Sadly, the competitive advantage of the goods supplied to the global markets by an export industry, which places its hopes in exchange rate rises, can only be in the form of offering cheaper prices compared to its rivals.

In the early 2000s, the determining factor in global trade was to rapidly supply goods that are cheaper and of appropriate quality, at the desired time and in the desired quantity from anywhere in the world. But things have changed after the pandemic: supplying from within the country or from close neighbouring countries, domestic production of essential goods, and gradually moving away from dependence on suppliers became the “new paradigm”.

“New Paradigm in International Trade”

Still, there is no consensus on how much of the habits we developed with the pandemic will be preserved, now the pandemic is over. However, we know that companies engaged in global trade no longer want to lose their supply chain security. The first indication of this was the stockpiling trend and swiftly rising commodity prices. However, the result was dissatisfying. Therefore, a supply chain restructuring is expected to happen in the near future. Accordingly, industries that need urgent restructuring are listed as follows in August 2020 report by McKinsey: pharmaceutical industry, ready-made garment, footwear, leather and communications equipment Industry. Industries that need rapid supply chain restructuring are healthcare equipment, furniture, textiles, and transportation equipment.

Obviously, the supply chains in other industries that contribute to global trade also need restructuring, but the above-mentioned ones need to review their situation and deal with their supply chains immediately. Because today, close proximity to the marketplaces, availability of distribution, ease of supply are vital factors in international trade.