Trade and Water – an area increasing steadily in importance

Water and the sustainable use of it is an area that has clear trade implications. Here I will present a quick overview of the main issues and how they relate to the current trade framework. 

Whenever you hear about the trade implications of water use you are likely to brush up against the term ‘virtual water trade’. Simply put, ‘virtual water’ is a name for the amount of water that is used to produce goods that then go on export.

In other words, one makes a calculation of the amount of water that was used to produce an exported product, with its water use thus “virtually” integrated, though of course not all of it necessarily defacto included in the finished product itself (think irrigation of crops, runoff etc). Personally I prefer the more straightforward “embedded water”, but virtual water trade is what stuck in the trade vocabulary.

The core rationale for bothering with this concept is to hopefully achieve some efficiencies in the world’s increasingly scarce fresh water sources. As a rule, water in many countries is grossly underpriced. With such low cost inefficiencies often follow, leading to perverse situations where water-deficient countries engage in water-demanding economic activity.

Ideally, from an economic perspective of water usage, the countries with the largest fresh water reserve ought to produce the most water-demanding products, while the water constrained countries can improve their water balance by importing these products. With rapidly increasing populations around the globe, trade can thus be a tool to perform this global water balancing act with a greater degree of efficiency.

In theory.

In practice, perverse incentives with regards to water abound. It is not uncommon for industries in water-deficient countries and regions to engage in highly wasteful economic activity through massive subsidization of available fresh water resource. Though this may work for a while, particularly for the beneficiaries of such arrangements, it quickly becomes unsustainable. It’s important to understand that there are currently no international agreements on sustainable water use. Thus national sovereignty is very much absolute in these issues, even when national decisions are detrimental to national water resources. There have been voices raised to include sustainable water use in the WTO Doha round (under agricultural negotiations). However, this is currently considered by the WTO to be better negotiated in environmental agreements before any attempts are made at integrating it into the global trade regime itself. As per previous post, this area is thus another facet of what we have already been discussing with regionalism and bilateralism routinely proggressing more quickly with this than what is possible from within the confines of multilateralism.

This is of course where it gets exciting, because in Rio this year we might hopefully see some real progress on these issues. Water is one of the 7 critical issues for this years much hyped sustainable development summit. If you haven’t done so already, I highly recommend taking a look at the Rio+20 website, and particularly their briefings on the critical issues.

For a technical and compact run-through for how to implement virtual water trade issues into national and global trade policy (i.e. water labels, water footprint permits etc) I recommend “The relation between international trade and freshwater scarcity” which can be found here. Also, the Rio+20 “critical issue” special water report can be found here.



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