Is irrigation driven by the economic value of internationally traded agricultural products?

A recent trend of literature investigates how international trade compensates or accentuates the differences in countries' endowments in water resources and whether trade regulation should be used to improve the use of water resources at the global level. Unlike previous works that focus on the cost of water resources, this paper emphasizes the price of traded goods as a key element of the shadow value of water used in agriculture. We use a simple production model to establish a positive link between the demand for irrigation water and the international price of irrigated crops. We test our model empirically using data on 243 irrigated crops exported by 185 countries, and find that higher-priced products are irrigated more intensively. This indicates that agricultural producers internalize the price of irrigation water. The effect is stronger when countries are net exporters of irrigated crops and weaker for crops essential for reaching food security, such as cereals. Our results imply that trade policy is a pertinent instrument to incite or deter the use of irrigation water across products, easier to implement than a differentiated water pricing policy, especially in water-scarce developing countries.