Australia’s Virtual Water Export problem and Free Trade

Australia's geography is characterised by expansive arid regions in the continent’s interior, which constrain habitable and economically viable land to the more temperate coastal regions. This led to the majority of its population huddling on the coast into large cities - in fact, 5 of Australia's major cities including Sydney, Melbourne, Adelaide, Brisbane and Perth already hosted half of the country’s population. Agricultural land comprises a substantial portion of Australia’s territory (approximately 55%), spanning multiple climatic and soil conditions. Although comprehensive figures vary by source, dryland farming predominates due to chronic water scarcity. Despite the presence of rivers around the east coast where most of the population live, namely the Murray-Darling Basin which makes up over half of water consumption, they are constantly at risk of drying up. Due to these facts, water security is undoubtedly one of the biggest challenges for the Australian economy in the long run. 

Due to Australia’s sparse population density, the supply of agricultural goods largely exceeds domestic demand, therefore most of the excess supply is exported to foreign nations such as China, Japan and Southeast Asia (SEA) nations. Although the value of food exports reached $70.1 billion - a record high figure in the last decade, a study by Victoria University on Australia’s water footprint shows that agriculture exports “cost more than they are worth”. With every unit of food exported to foreign countries, they are also exporting the water that was used to produce the food, which is referred to as “virtual water”. Especially, due to the substantial amount of government subsidies given to Australian farmers, Australia became the largest virtual water exporter on Earth - technically giving away the amount that is equal to their stored water reservoir every year (35,000 gigalitres, or 35 billion tons of water). Given the projected intensification of climatic aridity and reductions in river inflow, the sustainability of this virtual water trade poses even greater risks. 

Australian agriculture's share of national economic and environmental indicators (source: DAFF, 2025)

By definition, virtual water is the water used or contaminated to produce a good or a service. The heightened water extraction and contamination for exported goods from relatively dry areas such as Australia can have profound effects on the local ecosystems and communities. “Virtual water” is certainly not a new concept, since virtual water trade must have applied since international trade started to emerge in human history. However, the first ancient civilisations which exported food vibrantly such as the Roman Empire were self-sufficient - meaning that the virtual water largely moved within the empire’s different geographical areas, with local supply matching local demand. (Vos & Boelen, 2016). 

One of the main political implications of virtual water exports made by agriculture companies is the increasing control over water resources by private sector companies, which is equivalent to decreasing control by local communities and the government. Studies have shown that in most cases, Free Trade Agreements enable private companies to obtain control over the water supply (Solanes & Jouravlev, 2007). However, the Australian government has effectively prevented similar political consequences from unfolding in Australia due to highly developed regulation in the water markets, particularly in the Murray-Darling Basin. As a matter of fact, Australia’s water markets are often cited as a global reform success story. 

Despite the Australian legal and institutional framework having worked effectively to prevent “water grabbing”, virtual water export remains a problem since there is still a paradox in the country’s water governance. The successes mentioned above were achieved by clear entitlements of water, that is, property rights of companies are clearly separated from land. However, the virtual water export issue in Australia is rooted in the nature of its agricultural export industry. The production of high-value crops which occupy the majority of Australia’s agricultural exports is often water-intensive, namely almonds, citrus, and cotton (DAFF, 2025). Secondly, the water market of Australia is efficient and flexible, therefore water can be allocated to high-value crops rather than low-value crops. However, efficiency in an economic sense does not automatically mean that resource allocation is sustainable or socially optimal. The market mechanism ensures that water flows to the most profitable uses but it does not address the ecological limits of river systems or the long-term security of water supplies under climate change.

Although this highlights the need for balancing between economic growth and ecological limits, Australia is still a wealthy and highly diversified economy. Australia is a strong exporter of key player in raw materials to Asia and to the world, with one of the largest coal, iron ore, and natural gas reserves on Earth. Therefore, its prosperity is not solely dependent on agricultural exports, but rather, the resource wealth provides Australia with economic resilience and the fiscal capacity to overcome this water security problem in the future. Apart from developing more sustainable farming techniques, the accumulated wealth from other sectors may allow Australia to scale down the production and reduce export of the most water-intensive crops, and offset domestic demand by importing certain food products from neighbouring countries.