Import substitution in illicit methamphetamine markets

The United States passed a series of precursor control laws between 2004 and 2006 which aimed to decrease illicit methamphetamine production by limiting access to key inputs. We provide evidence that this caused suppliers to substitute towards Mexican-produced methamphetamine. Using a difference-in-differences identification strategy, we show that the treatment effect of precursor controls on lab seizures was largest in the middle of the United States. This is consistent with substitution towards imports, where differences in each region's ability to substitute towards imports generates heterogeneous effects on domestic production. To quantify the effect of precursor controls on domestic costs and imports, we estimate a model of illicit methamphetamine production using data on lab seizures and methamphetamine prices. We find that precursor controls increased domestic costs by 114%–190%. Substitution towards Mexican-produced methamphetamine decreased the effect of precursor controls on methamphetamine prices by 62%–83%, relative to a counterfactual world without import substitution.