Virtual water flows and trade liberalization

Abstract

The linkages between agricultural trade and water resources need to be identified and analyzed to better understand the potential impacts that a full liberalization, or lack thereof, will have on water resources. This paper examines trade of virtual water embodied in agricultural products for most countries of the world. The main purpose of the paper, however, is to examine the impact of trade liberalization on virtual-water trade in the future. Based on a simulation of global agricultural trade, a scenario of full liberalization of agriculture was used to assess the net effect of virtual water flows from the relocation of meat and cereals' trade. The paper also identifies the main reasons behind the changes in the magnitude and direction of the net virtual water trade over time, and shows that virtual water trade flows are independent of water resource endowments, contrary to what the Heckscher-Ohlin Theorem states. Finally, based on a formal model, some input demand functions at the country level are estimated. The estimates of the income and agricultural support elasticities of demand for import of virtual water have the expected sign, and are statistically significant. Variables found to have some explanatory power of the variance of virtual water imports are average income; population; agriculture as value added; irrigated area, and exports of goods and services.