a business with sales rivaling those of General Motors - is countering shrinking profit margins by stepping up production and improving distribution.

Insiders on both sides of the front in the drug war say profits are being eroded by arrests, seizures and steeply rising overheads. But demand remains high, and Latin America's drug lords are meeting it according to the rules of the free market economy.One way of reducing transport costs, according to sources familiar with the trade, is to smuggle bigger loads into the United States. Seizures point to a growing trend toward concealing shipments of several tons in sea-freight containers.

"Getting, say, five tons through in one single shipment is obviously more cost-efficient than moving 10 separate consignments of 1,000 pounds each," said a Latin American familiar with the trade. "These people are the ultimate capitalists, and they play by capitalist rules."

That helps explain why the multibillion-dollar business has weathered a series of major blows without apparent long-term damage. As one expert put it, cocaine trafficking is "almost as crisis-proof as the funeral industry. People will always be buried, and they always take drugs."

The latest major setback for the drug trade came April 8 in Mexico with the arrest of Miguel Angel Felix Gallardo, reputed to be one of the architects of a supply network that routed huge quantities of Colombian cocaine through Mexico to the United States.

Mexican authorities portrayed Felix Gallardo as one of the world's top drug traffickers, and an official of the U.S. Drug Enforcement Administration in Mexico said his arrest would have a significant impact on the U.S. drug market.

Other experts consider such predictions too optimistic, despite the fact that senior police and judicial officials who protected Felix Gallardo were also arrested.

In the past, the loss of leading figures in the drug trade has failed to affect the availability and price of cocaine.

"Would Chrysler stop operating if Lee Iacocca were removed," asked a Latin familiar with the cocaine trade. "Of course not. Same in drugs. One goes, another takes his place."

Those who went recently included Juan Ramon Matta, an associate of Felix Gallardo in the Mexican connection. He was arrested in Honduras last year and bundled off to the United States.

A few months later, police in Bolivia captured Roberto Suarez, a billionaire said to be the world's biggest grower of coca, the raw material for cocaine.

Carlos Lehder, one of the founders of the so-called Medellin cartel, which handles much of the cocaine consumed in the United States, was sentenced by a Florida court last year to life in prison.

Despite the arrest of such key figures, DEA agents say, the street price of cocaine remained the same, a sure indicator that the volume of supplies had not been affected.

To compensate for losses through seizures in the United States and Europe, the criminal conglomerates that control the drug traffic have been producing ever greater quantities.

The raw material is in abundant supply in Bolivia and Peru, where tens of thousands of farmers depend on the coca bush as the only crop that guarantees them a living. Most of the paste produced from coca leaves is refined into cocaine in Colombia for export to the United States.

Insiders report that the traffickers' profits have been whittled down by a variety of higher costs, including pilots' salaries and advanced telecommunications equipment to keep track of shipments.

Bribes paid to police and government officials have risen in direct proportion to more effective law enforcement and therefore greater risk of detection.

In the drug underworld of Colombia, there is nostalgic talk of corrupt U.S. law enforcement officers who only a few years ago cooperated for as little as $30,000 a year.

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(Additional Story)

Big business

Annual sales of major U.S. industries, in billons:

General Motors121

Illicit drugs$110*

Ford$92.4

IBM $59.7