Berlin Macro Seminar

Abstract
In this paper, we study the consequences of the NAFTA introduction on illicit drug trafficking from Mexico to the US. We argue that NAFTA's open border policy reduced average detection rates of illegal drug trafficking from Mexico into the US along their national common border, which increased potential rents for all drug-trafficking organizations, and ultimately led to increased competition over smuggling routes and violence. Using a difference-in-difference approach, we analyze changes in drug-trade-related homicides due to the introduction of NAFTA, across Mexican municipalities with and without predicted drug trafficking routes. We find that homicides increase by approximately 2.25 per 100,000 inhabitants in municipalities with a drug-trafficking route, which is equivalent to 27 % of the pre-NAFTA mean. Our results are robust to various checks, and document the response of drug trafficking organizations to trade quantity shocks.