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Water provides a source of comparative advantage

The problem of water shortages around the world is not due to the fact that the total volume of water available is inadequate. The problem is that the world’s water supplies are distributed very unevenly. Moreover it is difficult to directly trade water internationally because it is bulky and heavy.  Products which are relatively water intensive can, however, be traded.  This helps to indirectly allocate water resources to where they are most needed and improves the global efficiency of water use.

This paper by Peter Debare shows that water is a source of comparative advantage in the sense that relatively water abundant countries do tend to export water-intensive goods.  Thus water is indirectly traded internationally through trade in goods which are more=or-less water intensive. Comparative advantage in water therefore undoes some of the effects of an uneven distribution of water globally. But water contributes much less to the pattern of international trade than other productive factors such as labour and capital.  Hence changing water supplies due to climate change should cause only moderate disruptions to international trade.  For example,  if Australia experienced a 10% drop in precipitation due to climate change, Debare calculates that overall Australian exports would fall by 5.2%. Not negligible from Australia’s perspective but not catastrophic either.

It is a fine paper. I’d suggest that the failure generally to price water at its scarcity value limits the comparative advantage role that water plays in world trade and also limits the ameliorative role that such comparative advantage might play in mitigating the effects of climate change. Of course we also want water priced efficiently to achieve sound patterns of water use and prompt adaptations to climate change even in the absence of international trade.

http://pubs.aeaweb.org/doi/pdfplus/10.1257/app.6.2.32

1 comment to Water provides a source of comparative advantage

  • Crocodile

    Also, if true value prevailed, the marginal cost of reclamation may look a bit more competitive.