Trade and Water

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Trade and Water: How Might Trade Policy Contribute to Sustainable Water Management? October 2016 | Environment Mike Muller Christophe Bellmann 

ICTSD Issue Paper

EXECUTIVE SUMMARY

Water is at the centre of economic and social development: it is vital in order to maintain health, grow food, generate energy and create jobs while sustaining the natural environment. A wide variety of economic, social and environmental services are derived from water resources, ranging from water supply and hydropower generation to navigation and recreation. Many of these services may be provided concurrently from the same resource. Water resources are also an integral part of the natural environment, supporting a wide range of biodiversity as well as underpinning the agriculture which provides the world’s food. Finally, natural water courses provide a range of “environmental services” such as water purification, flow regulation and flood mitigation as well as yielding food and building materials. Water security is therefore an integral part of the achievement of the United Nations 2030 Sustainable Development Agenda (UN 2015), including several Sustainable Development Goals (SDGs).

This paper identifies some of the key intersections between trade policy and water management, in areas such as agriculture, hydropower generation, water services and wastewater management. From a trade policy perspective, the main immediate concern is to ensure that international trade rules and disciplines do not unduly affect countries’ ability to manage their water resources sustainably and according to their respective social preferences. While the local nature of water systems and the diversity of water management objectives is not conducive to the application of trade instruments to enforce a prescriptive, one-size-fits-all approach to water management, there is also a range of areas in which trade policy could support the sustainable management of water and related SDG objectives.

The peculiarities of water as renewable natural resource

It is often believed that water is a scarce natural resource and that the world’s reserves are “shrinking fast”, “posing a serious threat to public health, political stability and the environment” (WTO 2010). A more nuanced perspective recognises that the world’s stock of water is effectively constant. Overall, there is no shortage of freshwater at the global level and water is not considered to be one of the natural resources whose overuse is exceeding “planetary boundaries” (Rockström et al. 2009). While at more local levels, water use has clearly reached the physical limits of the available resource, water availability is more often limited by its quality, variability, location, economic constraints and social preferences.

Water from diverse sources supports many different mixes of human activity. As a result, the objectives of water management vary substantially between jurisdictions. These specificities make it difficult to define global prescriptions for water management let alone to determine whether water is being sustainably managed at any particular point in time and space. Given this reality, other approaches have focused on the notion of “water security” defined as “the availability of an acceptable quantity and quality of water for health, livelihoods, ecosystems and production, coupled with an acceptable level of water-related risks to people, environments and economies” (Grey and Sadoff 2007) as the overarching objective of sustainable management.

In a similar vein, the simple specification of water challenges as one of scarcity with the response prescribed as correct pricing only deals with part of the problem. While “getting the price of water right” has resonance for economic policy makers, it is only one of a range of interventions that can be used to achieve sustainable water management. Water cannot simply be treated as an economic good and this has implications for the way in which water and trade policy interact. ix Environment

Water and trade policy considerations

Besides bottled water, trade in bulk water remains limited and the resource is not generally transferable beyond local scales. Water is however a critical factor of production in most traded goods and its supply is enabled by a wide range of services. Agriculture in particular is the largest consumptive use of water on a global scale and in most countries, as well as being an important source of water pollution. Often, however, the impact of other uses of water resources, including for the disposal of industrial and urban waste, may be higher than that of agriculture.

Early research on trade and water focused on the movement of what was conceptualised as virtual water, defined as “the volume of water required to produce a commodity or service.” This work also gave rise to metrics such as water footprints, proposed as an instrument to assess and influence the impact of corporate activities and trade generally on the sustainability of water use and management (Hoekstra 2011). The underlying assumption was that trade can help ensure a better allocation of resources and that water-scarce economies would tend to import goods whose production is water-intensive and export goods that require limited water. Existing empirical evidence suggests, however, that water endowment is only one among several factors of production that play a role in determining trade flows. Academic commentators have noted that virtual water and water footprint analyses generally do not consider opportunity costs (Wichelns 2010) while a recent United Nations Environment Programme (UNEP) review concluded that, although the concept helped to understand how water-stressed countries and regions cope with rising water demands, it has “limited application from a policy perspective….” (UNEP 2015).

Liberalisation of water services has produced at best mixed results in terms of increasing access of the poor to water supplies and continues to be controversial, although the pressure to privatise these services has lessened. Restrictions on reversing liberalisation in the water services sector, together with the constraints imposed by externally adjudicated investment agreements on the policy space of developing countries, will remain a sensitive issue. This could inhibit efforts to experiment with new models of service provision, including liberalisation, for fear of “lock-in.” Private sector involvement in the more limited business of operating specialised treatment plants for both supply and waste, however, has been less controversial. While the World Trade Organization (WTO) has correctly pointed out that countries are not compelled to include water services in their General Agreement on Trade in Services (GATS) offers, bilateral negotiations often present difficult decisions. Aid for trade could support the development of regulatory mechanisms that could allow for small-scale (and therefore potentially less costly) experimentation with liberalisation and draw lessons from these.

A water sector-specific review of approaches to market access liberalisation and regulation adopted by governments within the context of the GATS and Reciprocal Trade Agreements (RTAs) and of the rules around post-establishment investor protection in international investment-agreement frameworks would be helpful. The way in which investment agreements balance investor protection with the regulatory flexibility needed to facilitate adaptation to change, notably in climate but also in other environmental and social dimensions, could also usefully be reviewed since this is a specific concern in water reform.

Industrial pollution and wastewater treatment generally offer significant opportunities for trade because of the growing need to address them effectively, the specialist nature of the services involved as well as the broad desire to promote a green economy. Several wastewater treatment-related goods have been identified in current negotiations about environmental goods. There is however a risk that core development principles of local (human and industrial) capacity development may be undermined if liberalisation leads to an over-reliance on foreign skilled labour and results in x hollowing out of domestic technical capacity. As the diffusion of (green) innovation depends on local capacities to adopt and adapt innovative solutions (see in particular OECD 2011), Aid for Trade could usefully support the development of local capabilities in industrial pollution and treatment.

With hydropower, there is a case for engagement to assist in the removal, or rationalisation, of barriers to investment in large-scale hydropower in comparison with other renewables, particularly insofar as they involve development financing, to support trade in renewable energy. Aid for Trade could also be targeted to support cooperation to promote intra-regional energy trade.

In agriculture, trade has helped maintain food security in countries where water availability limits domestic production. Trade and investment in agriculture can help countries to buffer the impact of climate variability and shocks, such as floods and droughts. It can also provide an important mechanism to offset climate change-induced production decreases and improve access to food. In practice, however, many countries with limited water resource endowments are likely to continue producing certain water-intensive goods, particularly food, which many countries regard as essential to their national security. While this may conflict with the objectives of trade liberalisation, it reflects concerns about the ability of global food markets and the trade system to meet national needs should exceptional circumstances arise. This applies particularly to large countries that cannot rely exclusively on international markets to feed their growing population and will constrain the contribution that trade can make to addressing water shortages. On the other hand, increasing the purchasing power of people in poor countries by helping (and not inhibiting) their products and services to gain access to global markets could make an important contribution to overall welfare. More specifically, trade policy makers could usefully consider ways of improving the transparency of irrigation subsidies, and designing agricultural support mechanisms that help to achieve social, economic and environmental goals. Measures to facilitate access to technology and finance to adapt to climate change-induced water stress would also contribute to both trade and development goals.

The acquisition of large-scale productive agricultural land by foreign investors—sometimes referred to as “land grabbing”—has prompted concerns about the use of local freshwater resources. In addition to social consequences, some commentators fear that this may place additional stress on local water resources. However, the broader picture is more complex and less clear-cut than the headlines suggest. The recent wave of foreign investments in agricultural land in Africa, for example, are also part of long-term efforts by African governments to attract foreign investment capital to increase the productivity of domestic agriculture, including greater water use efficiencies. In many cases, external investment is encouraged because it can enable under-utilised resources to be productively mobilised.

Finally, at a general level, the challenges of developing effective interfaces between trade and water policy are mirrored in other sectors. There is a general desire to understand better how water and its management contributes to the growth and development of economies and societies and what interventions are needed to ensure that this happens. For the trade policy community as for many others, a joint review of the role of water in development could assist it to identify where further interactions and partnerships may be productive.