Under large East African Acacia trees, which were known to show hydraulic lift, we experimentally tested whether tree roots facilitate grass production or compete with grasses for below-ground resources. Prevention of tree–grass interactions through root trenching led to increased soil water content indicating that trees took up more water from the topsoil than they exuded via hydraulic lift. Biomass was higher in trenched plots compared to controls probably because of reduced competition for water. Stable isotope analyses of plant and source water showed that grasses which competed with trees used a greater proportion of deep water compared with grasses in trenched plots. Grasses therefore used hydraulically lifted water provided by trees, or took up deep soil water directly by growing deeper roots when competition with trees occurred. We conclude that any facilitative effect of hydraulic lift for neighbouring species may easily be overwhelmed by water competition in (semi-) arid regions.