Stock markets shrug off talk of U.S.-China trade war

All of the talk of rising trade tensions between the U.S. and China has not scared stock market investors. The Dow Jones industrial average is up 1.9 percent since Friday, when President Barack Obama slapped new duties on Chinese tires. In the same period, the S&P 500 and Nasdaq Composite Index both gained 2.5 percent. The picture in the red-hot stock markets in China is similar where indexes in Hong Kong and Shanghai both posted gains Wednesday. Whether this calm will last remains to be seen.

"Although investors are not yet facing World War III between the two economic superpowers, it's enough to make the markets very nervous," writes Jim Trippon, editor of the China Stock Digest, in a statement released to the press. "Alarmists are worried that China, which holds about a trillion dollars worth of U.S. financial instruments could declare a real economic war. "

After Obama's move last week, Beijing responded by complaining to the World Trade Organization about U.S. exports of poultry products -- mostly chicken feet -- and car parts. U.S.-based experts such as Scott Paul of the Alliance for American Manufacturing, a think tank funded by labor and management interests, reject the argument that American goods are being dumped in China.

"I don't think it's fair to say that this is the first shot in any trade war," he said. "They actually have a lot more to lose than we do. You may see some more cases filed but I don't think you will see a flood of cases."

Nonetheless, investors are concerned about whether trade tensions will ratchet up significantly. China could, if it wanted to, really put the screws on the U.S. economy.

Among the potential weapons that Beijing could use are selling dollars they hold faster than they do already and not participating in the treasury auctions for government, according to Trippon. He thinks it's premature to talk about the trade war going "nuclear." Todd Lee, managing director of IHS Global Insight's Greater China Division, argues that a full-scale trade war is unlikely.

"It would be almost suicidal on both sides," said Lee.

Chest beating about China' s trade practices is in not new. Before China joined the World Trade Organization in 2001, there were annual discussions before Congress about whether to renew China's Most Favored Nation trade status. The talks often were heated, particularly as union officials argued that the world's most populous nation unfairly subsidizes its industries.

Like the U.S., China has many people grumbling about trade.

"They have their domestic political forces that are against free trade," Lee said. "There's a lot of nationalistic fervor in China."

However, Lee cautions that this rhetoric will not necessarily translate into action because the Chinese also need a strong U.S. economy to buy their goods and services. The U.S. exported about $71.5 billion in goods to China in 2008. During that same time, the U.S. imported more than $337 billion worth of goods. Many economists have noted that the $585-billion Chinese economic stimulus seems to be working better than the $787-billion U.S. plan, but Lee argued that China's economy may not be as strong as people suspect..

According to Lee, Chinese "exports and consumer demand are not very strong. China is one-dimensional rebound."

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