Theory of Comparative advantage

Foreign Trade Zones(FTZs) are areas in which domestic and imported merchandise can be stored, inspected, and manufactured free from formal customs procedures until the goods leave the zones (Daniels and Radebaugh, P.555). FTZs are important trading patterns in Brazil because increasing trade activities occurs under FTZ status. Brazilian government benefits substantially from using free zones more intensively, not only for the attraction of foreign investments but for inducing domestic firms to engage in export production. The role of free trade zones in Brazil is to provide a bureaucracy-free environment, free trade conditions such as duty free machinery, equipment and materials and stability for both local and foreign investors who want to process raw materials for export. 

Till now there are eight Free Trade Zones in Brazil. Manaus, which has been the most important free trade zone in Brazil, is extensively developed to create an industrial, commercial and agricultural center in Amazon (Trade Policy Review Body, 2000). The Free Trade Zone status implies that goods of foreign origin may enter into the Manaus free port without the payment of customs duties or other Federal, State or local import taxes. So domestic importing companies in Manaus greatly benefits form the lower cost of procurement from foreign countries. Together with other free trade zones in Brazil free ports for import and export of goods, free trade zones enable domestic importing companies to compete more readily with foreign producers or subsidiaries of multinational enterprises. 

Besides the major attractions of FTZs for national economic development, another factor may influence the FTZs of Brazil is that it is a country well known for frequent changes in economic and administrative regulations. Prevalent changes in trade legislation may impede the growth of FTZs and decrease trade activities. Recently Brazil government has made administrative regulations to restrict the applicability of informatics sector to Manaus Trade Zone. And the license and the authorization requirement for health and sanitary controls, national security interests, and environmental protection take effects (Trade Policy Review Body, 2000). So the Manaus Free Trade Zone was generally influenced by the new policy for in a short period of time. 

Developed countries like US spend billions subsidizing their agricultural sector. By encouraging over-production and export dumping, these subsidies for agriculture products are driving down world prices at their lowest levels. It is damaging to smallholder farmers in Brazil countries and poses the unfair trade. Brazil is one of the few countries that traditionally import more from the United States than it exports to it. One important reason is that the United States has particularly ferocious protection on the goods that Brazil has a comparative advantage such as citrus and sugar. This unfair trade practice cost Brazil as much as $5 billion in lost exports every year.

For example, in 1995 US violate WTO rules through subsidies and export credits for cotton and Soya production (Brazil Trade Policy, 2000). It artificially increase production and dumping exporting at price far below production cost. Brazil has been one of the largest competitive agricultural exporters in the world, whose production costs in several sectors are between 10 and 45 per cent lower than in the US and Europe. But the dumping of US surplus reduces the Brazil's export revenue. Brazil inflicts enormous damages in excess of $2bn to its cotton and Soya industries for depressed price by US (Brazil Export Statistics, 1999). 

In addition, EU as the representative of one of the world's richest and most powerful trading bloc, dumping sugar to Brazil not only reduce Brazilian export revenue. Despite the EU being one of the highest-cost sugar, its subsidies mean that it is the second largest sugar export in the world. The EU therefore has a strong influence on world price. The World Bank study estimates that EU sugar regime has caused world market fell by 17%. So the unfair trade practices still exist and substantially damage the Brazilian agricultural export. Now the Brazilian government is launching an unprecedented offensive to challenge US and European Union agricultural subsidies and trade incentives before the World Trade Organisation. 

One of the prominent trends in the contemporary world is claimed to be globalisation. The world is seen as increasingly connected as the result of economic, political, sociological and cultural forces (Hill, 1997). From the perspective of international business, globalisation refers to the implementation of free trade on a global scale, which is accomplished through international trade liberalization. A country liberalizes its trade with other countries by removing policies that serve as barriers to trade. The primary evidence for globalisation results in the rapid growth in the volume of cross-border of international trade and the increase in international capital flows.

The most recent data from the World Trade Organization and the United Nations indicate that in recent years the growth in cross-border trade and investment has accelerated, suggesting that the world is moving ever more rapidly toward a global economy and the world economy is becoming much more interdependent (Hill, 1997). As for Brazil, the growth of foreign trade as a percentage of GDP remained stable and foreign direct investment has increased substantially since 1997. It indicates Brazil's current import and export trade is becoming deeply intertwined with foreign countries. Increasingly, the level of trade activities in Brazil depends in large part on being able to utilize import from other countries and to export goods and services to other countries. 

On the one side, globalization creates new forms of global, regional and transnational communities which unite the trade of countries across territorial boundaries. For example, international trade union increasingly plays an important role in trade liberalization and settlement of trade disputes. On the other side, it also has the potential to divide and fragment communities.

One giant regional trading blocs in Latin American is Mersour that was established in 1990 to set up a full free trade area and a common market between Brazil, Argentina, Paraguay and Uruguay. Mersour has made a positive contribution to the increase trade growth of four core member. Trade between Mersour member-states grew from $4 billion in 1990 to 14.5 billion in 1995(Bilateral Trade Relations, 2001). So Brazil's trade will reap benefit from participating import and export most of goods with free tariff in the free trade area in the long term. 

The theory of absolute advantage holds that by specializing in the production of goods country can produce goods more efficiently than anyone else, nation can increase their economic well-being (Rugman and Hodgetts, 2000). For example, by virtue of their superior manufacturing processes, the English were the world's most efficient manufacturer of textile. It indicates that the English had an absolute advantage in the production of textile. 

As for the Brazil, due to its natural ample land, particularly favourable climate, the world's largest fresh water reserves which is an essential condition for modern irrigated agriculture and considerable skillful farmers, it had the most efficient coffee and sugar industries which means Brazil has an absolute advantage in the production of agricultural products such as coffee and sugar.

Therefore, Brazil should specialize in the production of coffee and sugar for which it has an absolute advantage and then trade sugar and coffee for textile in a cheap price produced by the English. That's the reason that Brazil remains the world's largest exporter of several agricultural products including coffee, orange juice and sugar. Similarly, the English can get all the coffee and sugar it needed at a lower cost by selling textile to Brazil and buying coffee and sugar in exchange. It indicates by specializing in the production of goods, Brazil can benefit by engaging in trade and global efficiency can increase through free trade. 

According to Ricardo's theory of comparative advantage, it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if it could produce them more efficiently itself(Rugman and Hodgetts, 2000). Few are the countries with as many absolute advantages in producing coffee, sugar, fruit and fiber as Brazil. But Brazil has a comparative advantage only in production of coffee and sugar. This is because its advantage in coffee production is comparatively greater than its advantage in fruit and fibers. It means by using the same amounts of resources, Brazil can produce more coffee and sugar per unit than fruit and fiber.

Then Brazil can import fruit and fiber from foreign countries that has comparative advantage in producing these goods. Comparative advantage indicates that if Brazil focuses on producing in goods that have a comparative advantage it has greater potential production and through unrestricted free trade and the consumer in other countries will consumer more in sugar and coffee. So in order to maintain the national competitiveness in international trade, Brazil may have to give up less efficient agricultural output to produce more efficient output. 

Brazil is a country of immense agricultural potential. With the autonomous trade liberalization and stable economic growth, both absolute advantage and comparative advantage of Brazil needs considerable resource inputs to and labour source particular skilled labour for goods production and packaging. Although Brazil has a huge population, some remote regions lack of skilled and semi-skilled workers to engage in agricultural and industry production. Therefore it is quite urgent for Brazil to improve educational system to train qualified workers to well prepare for future trade growth. 

In conclusions, with the economic liberalization initiated in 1990s Brazil's current trade policy is much more liberalized comparing with the situation decades ago. Manufactured exports become more important for Brazil than agricultural goods. With the opening up of European market and regional integration of MERCOSUR, EU and Argentina become the main trade partners besides US. The growth of import and export trade is stable but various trade barriers nature hampers its products' access to the world's principal markets.