Failure of the Virtual Water Argument: Possible Explanations Using the Case Study of Mexico and NAFTA

Abstract

The virtual water concept and argument have been used to analyze the linkage between trade, food security, and water resources. The concept comes from the idea that water should be treated as a production factor and virtual water is the volume of water needed to produce a commodity or service. The virtual water argument then states that the importation of agricultural products that need important amounts of water represents the importation of water into a water-scarce country. The objective of this paper is to test the virtual water argument and to present some possible explanations why the theorem does not hold true. The paper suggests that the main reason for the failure of the argument resides in the strong assumption of price equalization, as well as other factors that distort trading patterns such as government programs and subsidies. Using Mexico as a case study, the paper shows that the water price equalization hypothesis does not hold true, and that various factors, such as the level of agricultural trade liberalization, influence virtual water flows rather than water endowments. Trade liberalization via the North American Free Trade Agreement (NAFTA) significantly influenced the level of virtual water flows between Mexico and the United States.