Do U.S. Trade Agreements Affect Corruption in Latin America? A Difference in Difference Analysis

Abstract

Free trade is important in the development of good economic institutions. One issue, in particular, is whether free trade agreements (FTA) can reduce corruption. Liberalizing trade while reducing corruption can reinforce moral behavior. We examine FTA between the United States and its Latin American trading partners. Free trade may provide incentives that could possibly result in countries becoming less corrupt over time. However, since 2004 the United States has included explicit anti-corruption clauses in its agreements. Using a difference-in-difference framework and a panel of 16 Latin American countries between 1991 and 2018, we test if trade agreements with the U.S. have any effect on corruption. We find that there is an increase in general corruption in countries after signing these trade agreements in comparison to countries that never signed one. These findings suggest that letting countries determine their own rules for reducing corruption might be better than dictating them through an agreement.