Water plays a vital but largely unrecognized role in the global economy. Today’s supply chains often rely on – and exacerbate – unsustainable water use. Reforming how water is used at every stage along supply chains is vital for enhancing environmental and community resilience, and for ensuring reliable flows of critical goods.
‘Virtual’ water – that is, the water used in supply chains to produce and deliver goods and services – is of huge but often unrecognized importance to the global economy, environmental sustainability, and social and community resilience. Take China, for example. Before it joined the World Trade Organization (WTO) in 2001, China imported 2 million tonnes of soybeans a year from Brazil. Today, Brazil exports over 50 million tonnes of soybeans a year to China. The expansion of this activity has massively increased water stress in the Amazon basin, the largest freshwater system on Earth. China is now the world’s largest importer of virtual water; external water resources account for one-third of the total water required to produce the goods and services that the country consumes each year. This in turn increases water use in supplier countries and has sustainability impacts on their communities and environments.
China’s strategy of, in effect, ‘outsourcing’ its water needs to other countries exemplifies how international trade can redistribute environmental benefits and harms globally. Growth in Chinese imports of soybeans (especially from the US and Brazil) and palm oil (especially from Indonesia and Malaysia) since the start of the century has conserved water in China but resulted in deforestation in locations such as Indonesia and the Brazilian Amazon. Soybean cultivation has historically contributed to significant deforestation in the Amazon, in turn affecting rainfall by reducing moisture released into the atmosphere – this has led to less rain, longer dry spells and increased drought risk. Although the pattern of China’s bilateral trade with Brazil has evolved in the past decade – Chinese demand for beef imports is now a more significant factor in Amazonian deforestation – cultivation of Brazilian soybeans to meet Chinese demand has continued. The industry has simply shifted location, predominantly to the Cerrado region of central Brazil, and continues to contribute to deforestation risk and environmental/social pressures associated with land-use change.
These trends pose significant risks to Brazil’s domestic water users, who are reliant on the same resources for household use, industry and energy generation. The health and resilience of Brazil’s water resources are also critical to ecosystem integrity. At the same time, depletion and degradation of these resources are of concern to Brazil’s trading partners, for whom heavy dependence on any one supplier creates strategic supply-chain vulnerabilities. Risks in Brazil mean risks for its customers in importing countries, as Brazil is a significant player in the global production of water-reliant commodities. Brazil holds 12 per cent of the world’s freshwater reserves. In short, Brazil’s systemic importance to global agricultural trade means that a water crisis in the country could rapidly affect commodity supplies and prices worldwide.
Water risks in key production regions are now entangled with broader geo-economic shifts as politicians and policymakers increasingly scrutinize supply-chain dependencies in relation to security, national resilience and geopolitical competition.
While water use in the production of goods has noticeable localized impacts, unsustainable virtual water trade – aggravated by ineffective water stewardship – also has systemic impacts. The example of Brazil’s soybean sector illustrates how trade relies on strategic pockets of water reserves that are unevenly distributed around the world. Those reserves are being damaged and depleted, to the detriment of local populations and ecosystems in producer countries. Any type of disruption – such as the threat that deforestation poses to Brazil’s water system – could create enormous cascading consequences for global markets. The Brazil–China example described above also illustrates how water risks in key production regions are now entangled with broader geo-economic shifts (such as the use of economic tools to advance geopolitical objectives), as politicians and policymakers increasingly scrutinize supply-chain dependencies in relation to security, national resilience and geopolitical competition.
Historically, consideration of the sustainability (or lack thereof) of water use has rarely factored into policy thinking and commercial strategy on trade. Rising water scarcity and pollution in supplier countries have had little impact on trade patterns, nor have such concerns prompted buyers in destination markets to change their sourcing strategies. Global value chains have instead been shaped largely by input availability, labour costs and other macroeconomic factors. However, as geopolitical competition sharpens and as climate-related water stress intensifies – by 2030, the world could face a 40 per cent shortfall in freshwater supply – long-standing assumptions about trade-related water risks, and about the criticality of virtual water to supply chains, are beginning to shift.
While concern is growing over the vulnerability of globalized supply chains to water risk, less evident are discussions of how these supply chains are adding to water stress in locations already severely affected by climate change. Production regions in the Global South are particularly at risk. Prevailing trade relationships continue to enable importer markets – not only China, but rich countries in the Global North – to avoid environmental degradation at home. This de facto outsourcing of water stress is an increasing concern for governments and business: among Global North-headquartered companies that disclosed water use data to CDP – a non-profit organization that focuses on environmental footprint reporting – in 2025, almost 80 per cent of supply-chain facilities with substantive water-related challenges were in the Global South.
With geopolitical relationships fracturing, and new alliances potentially set to form as countries attempt to advance their national interests, supply-chain resilience is increasingly a geostrategic concern. In the UK, recent reports have suggested that Britain’s food supply, underpinned by international trade networks, is ‘almost certain’ to be ‘on a decline and collapse trajectory’. It is becoming increasingly vital to recognize the vulnerability of globalized supply chains to water risk.
These pressures are part of a wider transformation affecting how water-related risks emerge and are addressed. Fragmentation in the international system, the weakening of multilateral institutions, and the growing use of trade and technology policy as instruments of strategic rivalry are reshaping the conditions under which supply-chain vulnerabilities can be addressed. Such dynamics increasingly influence not just how water risks are experienced, but whether they are visible, manageable and shared across borders.
About this paper
This research paper aims to drive a rethinking of ‘virtual water’ trade and its role in supply chains, examining the topic in the context of today’s increasingly challenging conditions for global cooperation. As businesses and governments continue to reorganize supplier relationships, in part to reduce costs and boost longer-term supply-chain security, we argue that physical water scarcity and water degradation challenges must not be overlooked. This matters, more than ever, because the world is entering an era of ‘water bankruptcy’, in which global freshwater resources are being depleted beyond renewal. Unsustainable water use, linked to and amplified by trade, is behind the emergence of production chokepoints where drought, floods and other water-related challenges threaten supply chains, globally connected communities and the environment with increasing regularity and severity.
Unsustainable water use, linked to and amplified by trade, is behind the emergence of production chokepoints where drought, floods and other water-related challenges threaten supply chains, globally connected communities and the environment with increasing regularity and severity.
Addressing these intertwined factors requires attention to risk assessment and due diligence at all points along the supply chain, both in producer and consumer countries. It requires system-wide collaboration among actors facing similar challenges. It also requires governmental, institutional and corporate commitment to the principles of fair and sustainable water footprints. Reforms can be supported by improving general understanding of the ‘cascading’, compounding and often unintended impacts of unsustainable water use on interlinked socio-ecological and trade systems.
Previous research by Chatham House has demonstrated the challenges of developing coherent responses to water stress in supply chains for key commodities – specifically food and agricultural products, textiles and minerals. This research has illustrated the extensive dependencies of selected Global North countries on water-intensive imported goods, and how these dependencies are driving water insecurity in different regions of the world (including, but not only, in less developed countries). As these pressures intensify, the vulnerabilities associated with embedded water use in global value chains cannot be understood purely in environmental or hydrological terms. They also reflect and reinforce a wider geopolitical shift, in which cooperation is harder to sustain and supply chains are increasingly securitized.
This Chatham House research paper has been developed in connection with the Fair Water Footprints partnership, an initiative funded by the UK government’s Foreign, Commonwealth and Development Office (FCDO). Chatham House is a member of the Fair Water Footprints partnership alongside CDP, the International Institute for Environment and Development (IIED), Water Witness International and the FCDO. The initiative builds on the Glasgow Declaration for Fair Water Footprints, launched at COP26 in 2021. Signatories to the declaration include consumer and producer governments, industry and civil society actors. The declaration affirms a commitment to transforming how the world’s water resources are managed. It defines a ‘fair water footprint’ as having five characteristics. In any given sector, a water footprint should:
- Result in zero water pollution;
- Rely on sustainable and equitable water withdrawals and use;
- Be consistent with protecting nature;
- Ensure workers have full access to safe water, sanitation and hygiene; and
- Support planning for droughts and floods.
