Vapor Pressure Deficit (VPD, atmospheric drought) and soil water potential (Ψsoil, soil drought) have both been reported to affect terrestrial plant water stress, plant functions (growth, stomatal conductance, transpiration) and vulnerability to ecosystem disturbances (mortality or vulnerability to wildfires). Which of atmospheric drought or soil drought has the greatest influence on these responses is yet an unresolved question. Using a state-of-the-art soil-plant-atmosphere hydraulic model, we conducted an in-silico experiment where VPD and Ψsoil were manipulated one at a time to quantify the relative importance of atmospheric vs soil drought on most critical plant functions. The model simulates the combined effects of soil drought and atmospheric drought on plant water potential (ΨPlant), a physiologically meaningful metric of plant water status driving plant turgor, stomatal conductance, hydraulic conductance or water content, and thus mortality and fire risks. Contrary to expectations, we showed that VPD had a weaker effect than Ψsoil on tree water stress and forest disturbances risk (i.e leaf moisture content). While physiological responses associated with low water stress such as stomatal closure or turgor loss could be driven by both VPD or soil drought, consequences of extreme water stress such as hydraulic failure, leaf desiccation and vulnerability to wildfires were almost exclusively driven by low Ψsoil. Our results therefore suggest that most plant functions are affected by VPD through its cumulative effect on Ψsoil via increased plant transpiration, rather than through a direct instantaneous effect on plant water potential. We argue that plant hydraulics provide a strong foundation for predicting tree and terrestrial ecosystem responses to climate changes and propose a list of explanations and testable hypotheses to reconcile plant hydraulic theory and observations of soil and atmospheric drought effects on plant functions.