The globalization of virtual water flows: Explaining trade patterns of a scarce resource

Water availability is paramount for security and development, yet many countries suffer from water scarcity. Virtual water trade, or trade in water- embedded agricultural commodities, has been considered a means for countries to overcome water deficits provided they can import food rather than produce locally. Despite a rich literature, research on the subject has not reached a consensus on whether virtual water trade is actually driven by relative water endowment differentials (e.g. countries seeking to alleviate pressure on their own resources) or by comparative advantage in water utilization (e.g. countries using their most abundant and cheap factors of production). Understanding what drives virtual water trade would support water management policies in targeting the roots of water depletion: excessive use due to lack of other available inputs and bad water management due to absence of water use regulation. Using panel data of bilateral virtual water trade flows from 1994 to 2007 applied to a gravity model, we first demonstrate that arid countries do resort to trade as a means to alleviate water scarcity. Second, we demonstrate that there is much inefficiency in water use in some countries where other agricultural inputs (land, labor) are available and cheap. Given the increased urgency related to global water scarcity, our results suggest how agricultural production and trade could help countries preserve and better use precious water resources.