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RESEARCH AND ANALYSIS: WORKING PAPERS

The Relation between International Trade and Freshwater Scarcity

It is becoming increasingly important to put freshwater issues in a global context. Local water depletion and pollution are often closely tied to the structure of the global economy. With increasing trade between nations and continents, water is more frequently used to produce exported goods. International trade in commodities implies long-distance transfers of water in virtual form, where virtual water is understood as the volume of water that has been used to produce a commodity and that is thus virtually embedded in it. Knowledge about the virtual-water flows entering and leaving a country can cast a completely new light on the actual water scarcity of a country. For example, Jordan imports about 5 to 7 billion m3 of virtual water per year, which is in sharp contrast with the 1 billion m3 of water withdrawn annually from domestic water sources. This means that people in Jordan apparently survive owing to the import of water-intensive commodities from elsewhere, for example the USA.

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This report reviews current knowledge with respect to four questions: What is the effect of international trade on domestic water resources? What is the effect of water availability on international trade? Can international trade increase global water-use efficiency? And finally, what type of international trade rules would promote a more wise use of water worldwide?

It is shown that import of water-intensive commodities reduces national water demand, which is attractive for water-scarce countries like in the Middle East and North Africa. Export of water-intensive commodities, on the contrary, raises national water demand and thus enhances national water scarcity. This happens for instance in the USA and Australia. Trade patterns thus influence patterns of water use and scarcity. Reversely, spatial differences in water scarcity do not seem to have a strong influence on trade patterns. The reason is that water is generally grossly underpriced. Water scarcity appears to affect trade patterns only in cases where absolute water shortage forces water-scarce countries to import water-intensive products, because they simply cannot be produced domestically. The report shows that currently international trade reduces global water use in agriculture by 5%, which is the result of the fact that water-intensive commodities are traded, on average, from countries with high to countries with low water productivity. Global water-use efficiency can be increased by including water scarcity as a factor into trade decisions. However, increased trade in water-intensive products possibly has a number of downsides, like for instance increased water dependencies.

Currently there is an imbalance between international trade agreements and international agreements on sustainable water use, because the former are strong and the latter weak. Most relevant is that internationally binding agreements on sustainable water use do actually not exist. There are no international agreements of the type that have the strength to restrict trade in cases where it negatively affects local water systems. It is argued that fair international trade rules should include a provision that enables consumers, through their government, to raise trade barriers against products that are kept responsible for harmful effects on water systems and indirectly on the ecosystems or communities that depend on those water systems. The report identifies several mechanisms to better ensure that trade and sustainable water use go hand in hand: product transparency, e.g. through a water label, an International Water Pricing Protocol and an International Water-Footprint Permit System.

International agreements on the liberalization of trade in agricultural products – as being negotiated in WTO’s ongoing Doha Development Round – should include provisions that promote sustainable water use in agriculture. As yet it is unclear how such provisions could look like, since the WTO explicitly refrains from making environmental agreements. An imbalance in global regulations of trade will be created as soon as free trade agreements are effective while sustainable-product and sustainable-water-use agreements to constrain international trade are not yet existent. This is a serious risk, since no international agreements on sustainable water use or sustainable products do exist or are being prepared.

  

No: ERSD-2010-05

Author:
Arjen Hoekstra — Professor in Multidisciplinary Water Management at the University of Twente and Scientific Director of the Water Footprint Network.
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Manuscript date:  January 2010

 
  

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This is a working paper, and hence it represents research in progress. This paper represents the opinions of the author, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, nor the official position of any staff members. Any errors are the fault of the author. Copies of working papers can be requested from the divisional secretariat by writing to: Economic Research and Statistics Division, World Trade Organization, Rue de Lausanne 154, CH 1211 Geneva 21, Switzerland. Please request papers by number and title.

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