Economic aspects of virtual water trade: Lessons from the Spanish case
ABSTRACT: Virtual water is the volume of water that is used in the production process of a commodity (Allan, 2003). Agricultural trade is by far the largest vehicle to move water virtually around theworld.The effects ofwater scarcity inmany countries and regions can be reduced through open farm trade and specialization. Many world countries are now suffering water shortages and expect worsening conditions in the future due to climate change, economic development and food demand increases. We first review a number of key facts about world water scarcity and reflect on the role of virtual water trade. Observing that most countries import and export water embedded in the exchanged products, we review the example of our evaluation of water trade in Spain for the period 1997-2006. We differentiate between the green (soil water) and blue (surface water and/or groundwater) components of virtual water from a hydrological and economic perspective. The combination of spatial and time dimensions offers a unique empirical setting to determine whether virtual water trade can contribute to reduce water scarcity. The study reveals that Spain is a net and increasing importer of virtual water. By far the largest virtual water imports are linked to cereals and animal feed products whilst the virtual water exports are linked to exports of animal products, fruits and vegetables. Virtual water trade is one way to reduce the vulnerability of the agri-food sector to climate instability. It reinforces the competitive advantages of its natural endowments and capital investments in agriculture. The econometric analysis using provincial water exports for 10-years shows that water exports are invariable to cyclical water scarcity, and largely explained by fixed factors. Virtual water trade does not exacerbate water scarcity, though it is certainly a source of pressure for resource management. Adequate water pricing would make virtual water trade more efficient.