The Effects of International Trade on Water Use

The growing scarcity of water resources worldwide is conditioned not only by precipitation changes but also by changes to water use patterns; the latter is driven by social contexts such as capital intensity, trade openness, and income. This study explores the determinants of water use by focusing on the effect of trade openness on the degree to which water is withdrawn and consumed. Previous studies have conducted analyses on the determinants of water use but have ignored the endogeneity of trade openness. To deal with this endogeneity problem, we adopt instrumental variable estimation and clarify the determinants of water use. The determinants of water use are divided into scale, technique, and composition effects. Calculating each trade-induced effect, we examine how trade openness affects the degree of water use. Our results show that while trade has a positive effect on water withdrawal/consumption through trade-induced scale effects and direct composition effects, the trade-induced technique and the indirect composition effect, both of which exhibit a negative sign, counteract the scale effect and the direct composition effect, resulting in reduced water withdrawal/consumption. The overall effect induced by trade is calculated as being in the range of –1.00 to –1.52; this means that the overall effect of a 1% increase in the intensity of trade openness reduces the degree of water withdrawal/consumption by roughly 1.0–1.5%, on average. This result indicates that international bilateral trade would promote efficient water use through the diffusion of water-saving technologies and the reformation of industry composition.