# Trade liberalization in Nile basin boosts economic growth and water security

## Dr. Roy Brouwer, Department of Economics

The Nile basin has one of the highest population growth rates in the world. This growth, combined with increased agricultural and industrial development, is putting mounting pressure on the basin’s water resources. Most of the countries within it are classified as water-scarce (Egypt, Kenya and Rwanda) or water-stressed (Eritrea, Burundi, Ethiopia and Sudan), and uncertainties related to future climate change pose additional challenges. There is consensus that, as water demand, evaporation rates and temperatures rise, so will the potential for water-related conflicts.

In the face of potential conflict and regional instability, the Nile basin countries have been seeking cooperative solutions through basin-wide dialogues. Recent decades have furthermore witnessed increased efforts of the basin countries to facilitate a move towards liberalized trade. In addition to tariffs, non-tariff barriers such as delays and related costs in customs clearance, sanitary and phytosanitary measures, poor infrastructure, high transportation and communication costs limit trade among the Nile basin economies.

An important policy and research question is how the interaction between trade liberalization and climate change would modify water endowments and water use in the Nile basin countries, and how they would impact agricultural production and overall economic conditions.

## Methodology

We used a multi-country, multi-sector computable general equilibrium model for the first time to evaluate the economic and water resource availability effects of trade liberalization under climate change in the Nile basin. Basin countries included Egypt, Sudan (including South Sudan), Ethiopia and the Equatorial Lakes (EQL) region (Rwanda, Kenya, Tanzania, Uganda). The analysis uses the Global Trade Analysis Project (GTAP) 9 Database and the GTAP-W model that implements water as a factor of production directly substitutable in the production process of irrigated agriculture. Another novelty is that the study considers both tariff and non-tariff barriers to intra-Nile basin trade.

We simulated five policy scenarios and compared them to a baseline scenario. The first scenario modelled trade liberalization and improved trade facilitation under current climate conditions. The second and third scenarios estimated the impacts of climate change on water resources endowment, irrigated and rainfed crop yields, and land endowment changes in irrigated and rainfed agriculture under Intergovernmental Panel on Climate Change (IPCC) global emissions scenarios A2 and B1. The fourth and fifth scenarios couple trade liberalization and facilitation with the impacts from the IPCC climate change scenarios.

## Outcomes

Climate change modifies the water and land endowments, as well as crop yields in the Nile basin countries. Climate change alone enhances production in most agricultural sectors in Sudan, Ethiopia and the EQL region. It has a negligible effect on agricultural production in Egypt, which relies heavily on irrigated agriculture. Results are similar for both the IPCC’s A2 and B1 scenarios.

Our simulations indicate that trade liberalization induces resource reallocation to sectors in each country where there is a comparative advantage. Production tends to improve in most agricultural sectors in Ethiopia and Sudan, while the manufacturing sector contracts in both countries. The opposite is true for Egypt where the manufacturing sector expands, while the agricultural sectors tend to decline or remain stable. The EQL region sees a substantial expansion in both the manufacturing sector and in agricultural production.

Climate change coupled with trade liberalization and facilitation improves agricultural production in Ethiopia and the EQL region. The expansion in agricultural production in these countries is mainly due to climate-change-induced improvements in water and land endowments. In downstream Egypt, where irrigated agriculture is already well developed, the predicted increase in water supply and the expected expansion in irrigated land due to climate change have little to no effect on agricultural production. In Sudan, climate change coupled with trade liberalization and facilitation results in mixed effects on agricultural production, enhancing output in most sectors (e.g. wheat, oil seeds) and reducing production in some others (e.g. fruits and vegetables, manufactures).

Irrigation water use tends to decline or remain stable in most of the agricultural sectors across the Nile basin countries due to trade liberalization and facilitation. In Sudan and Ethiopia, irrigation water use falls in some sectors and rises in others, while the simulation results show that irrigation water use remains more or less stable in most of the agricultural sectors in Egypt and the EQL region. Climate-change-induced improvements in irrigation water availability and hence productive land endowments allow the Nile basin countries to increase irrigation demand substantially and tend to improve water use in most agricultural sectors in the basin countries.

Overall, the basin-wide potential total welfare gain (net economic benefits) due to trade liberalization and facilitation are about $2.8 billion USD (Fig. 1). The total welfare gain rises to about$3 billion USD when trade liberalization and facilitation take place under climate change. The welfare effect due to trade liberalization alone (without trade liberalization) is limited to $319 to$416 million USD. On average, Egypt, Sudan, Ethiopia, and the EQL region are expected to face a welfare gain of $401,$448, $433 and$616 million USD, respectively.

Figure 1: Potential total welfare effects of trade liberalization and climate change across the Nile basin countries.

## Conclusions

The study indicates that the Nile basin countries would potentially gain from multilateral trade liberalization and trade facilitation as resources are reallocated to sectors in each country where there is a comparative advantage. As tariffs on trade between Nile countries have already been eliminated for several sectors, implementing free basin-wide trade is expected to have limited economic and water resource implications compared to instituting improved trade facilitation in the basin.

Climate change investigated in this study predicts a wetter Nile basin in the next decade and hence improves the water and land endowments of the Nile basin countries. Accordingly, climate change coupled with trade liberalization and facilitation further improves agricultural production and enhances economic growth. Climate change is, however, found to have little impact on the magnitude and pattern of intra-Nile trade.

While trade liberalization and facilitation may generate substantial basin-wide economic benefits, their impact on water savings in the basin is found to be limited, and are therefore not likely to be a panacea for the looming longer term water scarcity conditions. However, freer trade policy coupled with other relevant policy measures, like improved irrigation efficiency and other water-saving measures, as well as basin-wide infrastructure development, might help to alleviate future water scarcity.

Kahsay, T.N., Kuik, O., Brouwer, R. & van der Zaag, P. (2018). The Transboundary Impacts of Trade Liberalization and Climate Change on the Nile Basin Economies and Water Resource Availability. Water Resources Management, 32(3), 935-947.

Contact: Roy Brouwer, Economics