Trade, Agriculture and Illegal Markets: Coca in the Colombia-US Free Trade Agreement

Trade liberalization has the potential to generate gains in an economy. Nevertheless, sensitive sectors like agriculture present difficulties because of the need to adapt to the new competition. Consequently, trade policy may affect economic conditions and lead to incentives for illegal activities. Using municipal level data for Colombia, I examine the effect of trade liberalization in the agricultural sector on coca crops. Using a difference-in-differences strategy in the Colombia-US Free Trade Agreement framework, I find that municipalities that depend highly on the cultivation of the most important crops present a differential decrease in the area covered with coca after the agreement implementation. The effect is consistent with incentives from more market access and more imports of lower-price inputs. I find that credit access drives the decrease in coca. Nonetheless, small farming decreases the impact. The results highlight the importance of trade, complemented with other policies, as a tool for development.