H13G-1617
A Theoretical Model of Water and Trade

Monday, 14 December 2015
Poster Hall (Moscone South)
Qian Dang1, Megan Konar2, Jeff Reimer3, Giuliano Di Baldassarre4, Xiaowen Lin2 and Ruijie Zeng1, (1)University of Illinois at Urbana Champaign, Urbana, IL, United States, (2)University of Illinois at Urbana Champaign, Civil and Environmental Engineering, Urbana, IL, United States, (3)Oregon State University, Applied Economics, Corvallis, OR, United States, (4)Uppsala University, Department of Earth Sciences, Uppsala, Sweden
Abstract:
Water is an essential factor of agricultural production. Agriculture, in turn, is globalized through the trade of food commodities. In this paper, we develop a theoretical model of a small open economy that explicitly incorporates water resources. The model emphasizes three tradeoffs involving water decision-making that are important yet not always considered within the existing literature. One tradeoff focuses on competition for water among different sectors when there is a shock to one of the sectors only, such as trade liberalization and consequent higher demand for the product. A second tradeoff concerns the possibility that there may or may not be substitutes for water, such as increased use of sophisticated irrigation technology as a means to increase crop output in the absence of higher water availability. A third tradeoff explores the possibility that the rest of the world can be a source of supply or demand for a country's water-using products. A number of propositions are proven. For example, while trade liberalization tends to increase water use, increased pressure on water supplies can be moderated by way of a tax that is derivable with observable economic phenomena. Another example is that increased riskiness of water availability tends to cause water users to use less water than would be the case under profit maximization. These theoretical model results generate hypotheses that can be tested empirically in future work.