Trade Openness and Domestic Water Use

Abstract

We contribute to the debate over globalization and the environment by asking, what is the impact of trade on national water use? To address this question, we employ econometric methods to quantify the causal relationship between trade openness and water use. Specifically, we use the instrumental variables methodology to evaluate the impact of trade openness on domestic water withdrawals in agriculture and industry. We find that trade openness does not have a significant impact on total or industrial water withdrawals. However, we show that one percentage point increase in trade openness leads to a 5.21% decrease in agricultural water withdrawals. We find that trade openness reduces water use in agriculture primarily through the intensive margin effect, by leading farmers to produce more with less water, such as through the adoption of technology. We do not find evidence for extensive margin or crop mix impacts on agricultural water withdrawals. Significantly, these results demonstrate that trade openness leads to less water use in agriculture. This finding has broad scientific and policy relevance as we endeavor to untangle causal relationships in the complex global food system and develop policies to achieve water and food security.