Water as a Comparative Advantage in International Trade

Even though experts refer to water supply issues in terms of a world crisis, there is more than enough water across the globe for domestic and agricultural demands.  The world’s supply of usable water, however, is unevenly distributed so that certain countries and regions suffer more acutely from water scarcity than do others.  Some regions have ample water sources to satisfy their needs (even if water is distributed inequitably among residents).  Yet in certain arid regions, water availability has long been an ecological problem: shrinking lakes or dry rivers indicate overuse.

Furthermore, producing agricultural and industrial goods require lots of water – often much more water than we realize. The water that is necessary to produce a good is often referred to as its water footprint or its virtual water content. For instance, one kilogram of apples has a water footprint of 700 liters because of the water needed to grow an apple tree, as well as harvest and transport the apples.

In Peter Debaere’s most recent discussion paper for the Centre for Economic Policy Research (CEPR), he finds that water is a source of comparative advantage in international trade.  Debaere, a CEPR Research Affiliate, concludes:

In particular, I find that countries that are relatively water abundant tend to export more water-intensive products. This evidence supports the hypothesis that water is a source of comparative advantage. My findings also indicate that water contributes significantly less to the pattern of exports than the traditional production factors such as labor and physical capital.

Debaere suggests that countries should take advantage of the global economy to fight water scarcity, i.e. they should specialize more in producing goods depending on water availability in their regions.  Water-scarce countries should buy water-intensive goods from water-abundant countries instead of producing and exporting those types of goods themselves.  While he suggests that open markets would be useful to make efficient use of global water resources, he acknowledges that more research is needed about the influence of trade policy on water use.

Debaere’s recent case on Australia’s water market, UVA-GEM-0109, as well as his technical note on water economics, UVA-GEM-0110, are available from Darden Business Publishing.

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