Thirsty for Trade: How Globalization Shapes Virtual Water Trade

We investigate the distributional implications of trade policy (import tariffs) for virtual water embodied in traded agricultural products. To do this, we undertake an econometric analysis and counterfactual simulation exercise using a structural gravity framework to quantify the impacts of (i) preferential tariff schemes and (ii) hypothetical global tariff liberalization for virtual water trade in 15 major primary agricultural commodities. We find that tariff preferences have been responsible for increased virtual water exports from developing water-scarce countries predominantly located in Africa and Asia. Conversely, tariff preferences are responsible for higher levels of virtual water imports by countries in the Americas, Europe, and the Middle East. However, we estimate that further trade liberalization would reverse this pattern and benefit many water-scarce countries in the Global South in securing their domestic water resources.