In the Journal of World Trade (and free on SSRN), Dukgeun Ahn and William J. Moon argue for a new approach to the causation standard in trade remedy investigations, which they call the "Cost of Production" test. Here's an excerpt:
We argue that correlation, in a strict temporal sense, is neither a sufficient nor a necessary condition to prove causation. ... correlation will not be observed in many instances, even when there is genuine harm caused by increase in imports. Correlation, for example, will not be observed when rational firms show symptoms of decline five years after the increase in imports, because they take into account the ubiquity of sunk cost. Correlation may also simply be a temporal coincidence to industry decline, rather than a cause. To ameliorate this problem, we propose an additional tool that can be used as complement to Elasticity/ Partial Equilibrium Model. We propose the following hypotheses:
HYPOTHESIS 1 (H1)
If the price of imports is less than the domestic marginal cost of production, we should see an immediate decline in production that is attributable to import surge.HYPOTHESIS 2 (H2)
If the price of imports is greater than the domestic marginal cost of production but lower than the domestic average cost of production, we should not observe immediate decline in production that is attributable to import surge; instead, we should expect decline sometime in the future.HYPOTHESIS 3 (H3)
If the import price is greater than the domestic average cost of production, we should not see an immediate nor future decline that is attributable to import increase.
