Intra-Industry Trade and the “Smooth-Adjustment Hypothesis”

The “smooth-adjustment hypothesis” (SAH) for intra-industry trade (IIT) is one of the most frequently invoked tenets of applied trade analysis. However, this proposition has been subjected to comparatively little rigorous scrutiny. This project offers a first theoretical analysis of the link between IIT and intra-industry labour turnover.

This should now be possible thanks to the model proposed by Bernard, Redding and Schott (2007), which, depending on chosen parameter combinations, allows for trade expansion paths featuring different intensities of IIT. The model at the same time allows for changes in firm-level compositions of individual industries, which in turn can be mapped into measures of labour reallocation. In addition to offering a general-equilibrium setting within which to rigorously embed the SAH for the first time, the model might also generate new insights into the channels between the composition of trade flows and nature of labour-market reallocation.


In the second part of our research, we propose to explore the SAH using a panel of trade and labour-market data for Switzerland. Individual worker histories can be constructed for a large random sample of Swiss residents using publicly available labour-market surveys. In order to obtain plausibly causal estimates of the impact of trade patterns on job reallocations, we propose to instrument the trade variables with exchange-rate variations. The value of the Swiss franc is largely determined by factors other than Switzerland’s own merchandise trade, yet it significantly impacts on Swiss trade performance. Exchange-rate variations therefore offer the prospect of both a valid and a strong instrument for Swiss trade patterns.

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