Trade liberalization generates benefits in various aspects of an economy. Nevertheless, sectors like agriculture present difficulties in liberalization because of the need to adapt to the new competition. Consequently, trade policy may affect economic conditions and derive in incentives for illegal activities. Using municipal level data for Colombia, this research study the effect of trade liberalization in the agricultural sector on the dynamic of 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 sensitive crops present a differential decrease in the area covered with coca after the agreement implementation. The effect is consistent with incentives for agriculture from more market access and more imports of lower-price inputs. Exploring potential heterogeneities, I find that credit access drives the decrease in coca crops. Nonetheless, municipalities with more exposure to small farming have a lower impact. The results highlight the importance of trade, complemented with other policies, as a tool for development.
