How trade policy can change where water flows

Every morning, millions of people start the day with a cup of coffee. Few realize that producing that single cup—from growing the plant to processing the beans—requires around 150 liters of water, most used far from where the coffee is consumed. Add the water required to make a teaspoon of sugar (about 10 liters), a splash of milk (10 liters), and a small cookie (30 liters), and breakfast exceeds what many people use at home in a day. 

This hidden water embedded in the goods we consume is known as “virtual water”. Through trade, enormous volumes of it move across borders. In fact, international trade moves roughly 500 billion tons of water every year—50 times the weight of all the goods shipped by sea, or a quarter of total global water use. These flows have grown rapidly. Over the past two decades, virtual water trade has increased by half, reflecting rising incomes, shifts toward more water-intensive diets, and longer value chains.
 

Trade helps save water globally

Water is unevenly distributed across the world and persistent freshwater loss disrupts jobs, incomes, and ecosystems. North America holds over half of global renewable freshwater, but only 5% of the population, while many densely populated regions, such as South Asia or the Middle East—face severe water stress. 

Trade helps balance these differences. The World Bank’s flagship report Continental Drying: A Threat to Our Common Future shows that crop trade saves around 500 billion cubic meters of water every year, because many crops are grown where water is used more efficiently than in importing countries. This is especially crucial as water-dependent sectors, such as agriculture, energy, and industry, support around 1.7 billion jobs worldwide.
 

But some virtual water trade is sub-optimal

The picture is not uniformly positive. About one-fifth of the irrigation water embedded in traded goods comes from places where water is scarcer and used less efficiently than in the importing markets.

In these cases, water-stressed countries are effectively exporting scarce water resources through agricultural products. Map 1 illustrates this pattern: several major exporters of irrigated crops also face significant water stress. This mismatch suggests that trade flows do not always align with where water can be used most sustainably.
 

Trade policy can influence where water-intensive production happens

Trade policy does more than move goods—it can actively influence where and how water-intensive production takes place. By shifting production to water-abundant regions, supporting diversification in stressed basins, and enabling the flow of water-efficient technologies, trade policy can help align economic competitiveness with water security. In practice, this can happen through a combination of price signals, regulatory measures, and international cooperation—tools that already exist but are not yet fully used for water.

1. Price signals

Price signals shape production incentives across borders, but in many water-stressed regions water often is underpriced, and energy subsidies can make groundwater pumping artificially cheap. Correcting these distortions is the most effective solution. But when they persist, tariff structures can amplify or dampen their effects.

Import tariffs affect competitiveness of water-intensive industries—such as in agri-food, textiles, leather, pulp and paper, and chemicals.  At the same time, tariffs on water-saving technologies—for example, drip irrigation systems, smart meters, and wastewater-treatment equipment—can slow their adoption. While these tariffs tend to be less than overall average tariffs (figure 2), reducing them could make water-saving technologies more accessible to farmers and industries.

2. Non-tariff measures

Policies other than tariffs, or non-tariff measures, also influence water use through trade. These include product standards, technical regulations, and restrictions on exports. Some countries already use such tools to promote water efficiency.

Australia’s Water Efficiency Labelling and Standards scheme sets performance and labeling requirements for water-using products such as taps, toilets, and washing machines, which apply equally to domestic and imported goods. Another example is the EU’s Corporate Sustainability Due Diligence Directive, which requires firms to assess environmental risks—including water use—across supply chains.

Trade measures can also emerge when water scarcity becomes acute, as governments impose export restrictions or other controls to protect domestic water and food security.

Beyond governments, private companies also shape global water use. For example, Unilever sources raw materials from more than 90 countries. The company has set targets to reduce water use in its factories and work with suppliers on more efficient irrigation and processing. 

3. International cooperation

Trade agreements can facilitate more efficient water usage by including environmental provisions that encourage sustainable resource use.

The EU–Chile Advanced Framework Agreement includes commitments to sustainable water use and creates mechanisms for joint monitoring and dialogue. The Japan–Australia Economic Partnership Agreement supports collaborative research on efficient irrigation and water management. These agreements do not have water-specific rules but water-related commitments could be included as environmental chapters expand.
 

Aligning trade with water sustainability

Reorienting trade toward more water-efficient outcomes will take time and effort. Virtual water trade is deeply embedded in global value chains, and sudden policy shifts can disrupt producers, traders, and consumers, particularly in developing countries. 

This makes sequencing and design critical. Gradual, transparent approaches—such as phased disclosure of water footprints, basin-level sustainability indicators, and clear transition timelines—can help steer trade toward sustainable water use while minimizing disruption. Such approaches work best when paired with private-sector engagement and technical assistance, helping producers adapt and adopt better technologies to and remain competitive.

The World Bank Group can help governments align trade and water policy by identifying exposure to water risks through trade and supporting reforms promoting water efficiency—including supply-chain traceability, water-efficiency standards, and modern testing and certification systems.