Thursday, February 01, 2007

Water exports vs. food exports

What are the chances that Canada will export water to the U.S. in the foreseeable future? Slim, says the Canadian government. But maybe there's a better alternative to the US's water woes: the exportation of water-intensive commodities.

Neil Reynolds explored this issue back in the Jan. 26 issue of The Globe and Mail. I've been meaning to comment ever since. First, here's an excerpt from a paper he quotes from, The Water Footprints of Morocco and the Netherlands by A.Y. Hoekstra and A.K. Chapagain:

Although bulk water itself is not a tradable commodity, agricultural commodities – that generally consume a lot of water during production – are increasingly being traded. As a result, water use within a nation is no longer an appropriate indicator of national water demand, at least not if one takes the consumer’s perspective. ...The water footprint of a country is defined as the volume of water needed for the production of the goods and services consumed by the inhabitants of the country. The internal water footprint is the volume of water used from domestic water resources; the external water footprint is the volume of water used in other countries to produce goods and services imported and consumed by the inhabitants of the country.
Canada's dependence on U.S. produce, and the water it contains, raises ethical as well as economic considerations. As the Council of Canadians often asserts, the United States is beginning to run out of water. ("We live next to a superpower," says Maude Barlow, who is the council. "And the superpower is getting mighty thirsty.") But the United States uses the bulk of its fresh water in the production of food — more than 80 per cent of water it consumes. And Canadians are principal beneficiaries. We get 60 per cent of the fruits and vegetables that we eat from the United States. Canadians, so to speak, are drinking the United States dry. Is it not in our national interest to replace this precious water — if only to keep the food coming?
…In one academic study published last year by UNESCO, two economists (A.Y. Hoekstra and A.K. Chapagain) looked at this issue from the perspective of the Netherlands… The academic conclusion: "International trade can result in water savings provided water-intensive commodities are traded from countries with high water productivity to countries with lower productivity."

All factors considered, Canada helps save the world's water supply by buying California lettuce and Florida oranges.
If I understand Mr. Reynolds right, he's saying that it's more efficient for Canada to purchase oranges and lettuce from the U.S. rather than from other countries with lower water productivity. Of course, we also have the incentive to purchase these goods from the U.S. because of lower transportation costs and shelf life reasons, so I'm not sure why Mr. Reynolds chooses to spin it this way. I see it differently.
If we're taking a lesson from Hoekstra and Chapagain, Canada (with its greater water supply) should have a comparative advantage in water-intensive commodities that actually grow in our climate and soil. Increased efficiency would result from Canada selling the U.S. certain water-intensive commodities because it would save the U.S. from having to import (or desalinate, or whatever) its water. Therefore, following Hoekstra and Chapagain's theory, the U.S. would help save the world's water supply by buying Canadian water-intensive commodities.
If Canada has a comparative advantage in water-intensive commodities over the U.S., it hasn't been realized. First, the U.S. might enjoy a degree of independence in food production. Second, the market is distorted. If subsidies to farmers were killed, comparative advantage within and across both countries would surely become a little clearer, thus allowing resources to be reallocated to their most efficient means. In other words, as long as farmers in arid lands are being subsidized to water their low-quality soil, regions will not achieve their comparative advantage, resources will not be efficiently allocated, and a vicious circle will ensue (eg. farmers might continue to be dependent on government initiatives such as the Canadian Wheat Board, or perhaps they too will rely on subsidies, if the CWB closes).
Of course, Canada may never have a great comparative advantage over the U.S. in water-intensive commodities. The Financial Times, Jan. 31:
Unlike other big WTO members such as the European Union and Japan, the US cannot sign a Doha deal where it loses benefits for farmers but gains export markets for its manufacturers and service companies. The power of the farm lobby means the US needs new export markets for agriculture to make up for any cuts in subsidies. This puts it on collision course with the "Group of 33" developing countries that want to protect their small-scale farmers.
So much for that. Load up the water.


happyjuggler0 said...

Food for thought. :)

It is far too easy to overlook input components like water when thinking about international trade. Another such thing that is sometimes overlooked, although much less overlooked nowadays, is GHG emissions that are transferred to countries like China, India and Viet Nam when they take up industry that otherwise would have been located in rich countries. A country can beat its Kyoto targets this way and still be responsible for a net increase relative to 1990 GHG emissions instead of a decrease.

Nor Any Drop to Drink, a BSF post on innovative water solutions for Africa.

A doomsday type of article on water shortages. Of course whenever I hear the word shortage I think price rule, or in articles like this, faulty pricing mechanisms.

I hate to go into yet another "natural monopoly" issue again so soon after the last thread, but it looks like I "have no choice". :x

Governments simply ought to require that one way or another that water is priced according to market cost if consumers competed with trucked in bottled water or water from desalinization plants. In other words, charge what the market will bear. The profit can be used instead of taxes somewhere else, a smart tradeoff in my opinion.

In the wake of the 1988 US presidential election where Massachusetts (MA) governor Dukakis lost to George H W Bush, MA seriously revamped its water pricing.

Basically the impetus for it was Dukakis' embarassment (by Bush press conference on location) over the dirty water of Boston Harbor, which is where human waste was essentially dumped instead of being properly treated. (I lived in MA at the time by the way, which is why I know this).

So what the MA government wound up doing was gradually, yet substantially, increasing the price of water and using the proceeds to pay for proper waste treatment facilities. While most people undoubtedly noticed their water bills going up, they likely just chalked it up to inflation if they hadn't been paying attention the way some of us were.

Now granted not everywhere will be able to raise their water prices to near market levels, but they indeed ought to price it as dearly as they can. Higher price=lower demand. People start doing willingly what they begrudgingly do during "drought"* induced civic pleas for people to conserve water. Appealing to civic mindedness will of course neeedlessly produce much hated free riders as well....

Maybe they even close up the local farm, sell it to a land developer, and start up a new farm somewhere with more abundant water supplies. Or get out of the farming industry entirely and do something more productive when inputs and outputs are properly priced.

It is a well known phenomenon that people don't value as highly what they get for "free" as when they have to pay for it instead. Even charging very poor people pennies for water in dirt poor countries will in the long run be much more humanitarian than future water shortage induced deaths. Indeed, once again the "profit" raised from the pennies for water can be used to improve these lives instead of some other more destructive tax.

*What is the actual definition of drought? If it means anything like: "Less replacement of water than is used due to weather conditions", then perhaps there are actually a lot fewer real droughts than people realize, and more quasi-droughts due to a governmental failure to understand the relation of prices to supply and demand. Certainly the bar will be raised for what qualifies as a drought when less water needs replacing.

dachisb said...

I foretell a visit by Samuelson's angel. You heard it here first.

true dough said...

Raising prices to reflect the true value of water seems like a good solution.

I don’t know much about MA’s economy, but it’s impressive if there was upward movement in water prices and farmers (farmers in MA?) didn’t complain. Perhaps lobbies didn’t have a good hold on the government at that time, or the increase was slight?

With the farm lobbies in the US (and perhaps here, I don’t know), it almost seems like increased water prices might increase water consumption by farmers, if they had their way. The Financial Times article I linked to:

“The power of the farm lobby means the US needs new export markets for agriculture to make up for any cuts in subsidies.”

If it’s also the case that increased costs of operation (ie higher water prices due to the government “allowing it”) will mean that farmers expect more markets to be available (bringing about more intensive farming), higher prices could actually lead to greater water consumption (within their means). That’s backwards, if I have it right.

But then again, this would probably encourage tech breakthroughs and lower costs in desalinization methods, etc. So, I guess your bottom line on prices stands regardless.

true dough said...

Too bad perfect competition doesn't exist; Samuelson’s angel might take his sweet time.