Virtual water trade: Does bilateral tariff matter?

Virtual water trade (VWT) is the trade of water 'embodied' in a product. This paper explores the extent to which bilateral tariffs, World Trade Organization (WTO), and Regional Trade Agreements (RTA) reshape the trade of water across nations and alleviate water scarcity issues. To achieve this goal, we built a panel database on blue (irrigation water) and green (rainwater) VWT among paired trading countries from 1998 to 2002. Using a standard gravity model, we study how the bilateral tariff and WTO/ RTA affect the intensity of blue and green VWT. The results indicate that, on average, a 1% tariff reduction increases the green virtual water trade by 0.219%. In most waterstressed countries, a 1% reduction in tariffs increased blue VWT by 0.416% and green VWT by 0.424%. By crops, we find that tariffs had a negative effect on VWT for the less water-intensive crops, but a positive effect or no effect on the more water-intensive crops. We further find in the most water-stressed countries, RTA facilitated VWT. As a climate mitigation strategy, water-scarce countries can increase VWT, thus reducing the production of water-intensive crops, by lowering tariff rates independently or through trade agreements.