VALIDATION OF COMPARATIVE ADVANTAGE IN BILATERAL WATER TRADE

Abstract

 Water shortages are becoming more serious due to population growth and climate change. To solve this problem, it is expected that water resources will be exported from water-rich countries to water-poor countries through food trade. However, previous studies that have examined this question by asking "whether comparative advantage can be established in virtual water trade" have conducted their analysis with incomplete predictions of the comparative advantage theory, and have not reached a clear conclusion. In this study, we focused on bilateral crop trade and analyzed the relationship between the volume of trade and the relative abundance of water resources to other ones. The results show that about 60-80% of bilateral crop trade is consistent with the theory. Some previous studies have shown that countries with absolute water abundance in comparison to the world average do not necessarily become crop exporters, i.e., they deny comparative advantage. In this analysis, too, when looking at trade among "net exporters" whose total exports exceeded their total imports, absolute water endowment was not a source of exports. However, when we focus on the "relative abundance of water resources compared to population or capital" in light of the original definition of comparative advantage, we find that comparative advantage is also established in trade among net exporters. In other words, trade in water resources through food is economically efficient.