Consequences of water supplies for international trade

Roger Williams brings his knowledge to bear on the biggest economic  issue facing the planet, the paucity of fresh water, and asks what the consequences will be for international trade

Major water sources, like the Mekong, can cause economic conflicts between nations
(©Getty Images)

Punch and Judy introduced me to conflict. Rugby, football and squash honed my abilities. The floors of the London Stock Exchange sharpened my elbows.

All this before I reached 21. Now, I am familiar with conflict. A good thing too considering that conflicts are defining our world like an economic carpet bomb. It moves people and people move markets.

Ex-Secretary General of the UN, Kofi Annan once stated that “fierce competition for fresh water may well become a source of conflict and wars in the future.” 70% of the world is covered in water.

If you were here in the South West of England on 3 October, you might think a material percentage of the world’s water fell on you that day. But in fact, most water is in the oceans and this is saline.

Only 2.5% is ‘fresh’ and 1.5% is trapped in glaciers and snowfields, leaving less than 1% to argue about and argue we do. Rivers, the water highways, become the battle ground as they are polluted, diverted or dammed. 

Rivers follow the course of least resistance and have no respect for national or regional boundaries. They arise in hills and mountains. The source of a river is seldom the most productive land.

By comparison, a river’s estuary helps provide the most fertile soil and a place of economic power and strategic value. A big river often arises in one region or country, flows through at least another on its way to the ocean. Anything done upstream will impact the river downstream, its waters drinking quality or its volume but generally both. 

The United Nations estimate today that 36 countries are experiencing high water stress, meaning that water demanded by cities, farms and industries eats up almost the entire available supply every year.

It estimates by 2025, 1.8 billion people will live in areas where water is scarce and two-thirds of the world will be in water-stressed areas, as water use per capita is growing at twice the rate of population growth.

Therefore, as any country’s population grows, its water resources are depleted even quicker. As this happens, self-interest becomes the region’s trumpet and conflict its rallying call. People fight for water. This fight damages economic output and the damage can be on an epic scale.

Dust bowl

Climate change and shortage of water brings conflict and drought. Drought causes migration and migration brings conflict. Using data about climate change, water resources and drought has allowed the World Resources Institute to produce a map showing what they consider the risks of conflict.

As you can see, there are a number of existing and potential conflicts on the Chinese border. There are obvious candidates for stirring this particular pot of excrement but the proliferation of new dams on the Yangtze and Lancang (Mekong) are without doubt creating conflict.

Internally in China such conflict can be repressed. Externally in Cambodia, Thailand, Laos and Vietnam, the damage done is apparent and the conflict is clear.

Dams on the headwaters of the Mekong in China are estimated to be damaging the lives of 60 million people who live downstream in the river’s delta.

A study by Eyes on Earth over a 28-year period determined that dams in China on the Upper Mekong River have disrupted the river’s natural systems for years. 2019 saw a particularly damaging situation, as downstream countries faced a severe drought while the Upper Mekong in China received above-average rainfall.

The report concluded that it is China’s water management practices that threaten the livelihoods of people in neighbouring countries.

Thailand, Cambodia, Laos and southern Vietnam experienced a devastating drought last year as China held back abundant water on the Upper Mekong River from downstream communities.

This wiped out crops and fishing stock. At this time, the river was roughly 5 metres (16ft) lower than it should have been under natural conditions, while from April to November, China’s upstream areas received above-average levels of rainfall.

Rest of world

Conflict over water is not restricted to Asia. The US and Mexico are embroiled in a dispute as Mexican farmers protest that Mexico should not fulfil its commitments to send water north. Under the 1944 treaty, Mexico should use only 62% of the water flowing north in the Conchos River, which becomes the Rio Grande in the US.

The increasing growth of fast-growing, water-hungry crops popular in Mexico have resulted in takes of 71% of the treaty water. In the past, Mexico has been able to make late payments as seasonal storms have made up the difference but in recent years these storms have not materialised.

At the last count, Mexico owes the US 426 million cubic metres, equivalent to 345,000 acres covered in foot deep water. To pay this will result in substantial crop failure in Mexico. Non-payment could result in sanctions perhaps, even closure of the border.

Developing countries are suffering. Population growth is causing demand for water that cannot be met. Rich developed countries often export not just their products but also their pollution.

As China continues its industrial march, it takes what was once water that belonged to smaller countries on their border. Its demand for electricity means it is planning to build new coal-fired power generators in 12 months equal to the current installed base of India. Little wonder it needs dams.

California, the sixth largest economy in the world, is suffering from drought. Import-water shortages and uncontrollable wildfires that have burnt forest equal to the area of the UK. In some places there was no water to be pumped to fight the fires.

Some of this is reflected in the commodity markets, some of it feeds through to currencies but when you consider how little drinkable water exists in the world; how fast we are consuming it, it is no wonder conflict is arising. Market opportunities will continue to arise for those who follow the flow of water or lack of it.


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