Necessary evil: water treaties and international trade

Water is a limited resource but it lies at the heart of economies and life on Earth. As it ignores borders, its exploitation can affect water resource availability and quality even in geographically distant areas. As a solution, there is a growing interest in international agreements to protect water resources. However, these agreements can influence other aspects of the economy. This article focuses on the effect of water treaties (WTs) with environmental provisions on international trade. We argue that, as a key input in all production activities, protecting water resources can generate additional costs that can be detrimental to international trade. Empirical investigations are conducted using a structural gravity equation with exporter-year, importer-year and bilateral fixed effects. We find that WTs with environmental provisions decrease bilateral trade. Sectoral analyses show that these WTs reduce particularly mining trade and countries’ income levels and climatic conditions are important characteristics to consider when setting up these agreements. We also find that regional trade agreements (RTAs) with environmental provisions reduce mining and agricultural trade. So, while beneficial for sustainable development, policymakers should consider, when signing treaties with environmental provisions, that they constrain international trade in order to propose mitigation provisions.