Stock markets waver on fears of a US-Chinese trade war over tyres

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Stock markets around the world faltered yesterday amid nervousness that a spat between the US and China could escalate into a full-scale trade war.

In London, the FTSE 100 dipped below 5,000 in early trading, Japan's Nikkei lost more than 2 per cent, and both the Dow Jones and Hong Kong's Hang Seng also fell, although the Dow Jones finished up. Oil futures also fell on the New York Mercantile Exchange, despite the positive outcome from last week's meeting of the Opec producers' cartel.

The row blew up after President Barack Obama signed off plans to impose extra import tariffs on tyres made in China. The move will boost duties by an initial 35 per cent on $1.8bn-worth of trade.

China retaliated, branding the policy as protectionist and in contravention of World Trade Organisation (WTO) rules, and said it will investigate US exports of car parts and chicken meat. The commerce ministry spokesman Yao Jian said: "The US has adopted protective measures against Chinese tyres shipped to the US. This is a violation of WTO rules."

The Chinese news agency, Xinhua, has reported industry experts warning of an overall cost to the country's tyre industry of $1bn (£604m). Up to 100,000 Chinese jobs may also be under threat.

The decision in Washington to change the tariff structure came after US trade unions complained that as many as 7,000 jobs had been lost because of an influx of cheaply imported Chinese tyres. Official figures show that the number of tyres coming into the US from China has more than tripled in five years. And the United Steelworkers union petitioned the government to complain that four US factories closed in 2006 and 2007, and another three are likely to shut before the end of this year.

The White House said on Saturday that the decision to boost the duty on tyres was designed to enforce trade rules, rather than break them. Robert Gibbs, the White House spokesman, said: "This is simply about enforcing the rules of the road and creating a trade system that is based on those rules and is fair for everybody."

"For trade to work for everybody, it has to be based on fairness and rules," Mr Gibbs said. "We're simply enforcing those rules and we expect the Chinese to understand those rules."

Mr Obama chose a lower duty rise than the 55 per cent recommended by the government-run International Trade Commission. But tariffs – which are currently set at 4 per cent – will still soar by 35 per cent in the first year, 30 per cent in the second and 25 per cent in the third.

The fight comes just weeks before world leaders are due to meet at the next G20 meeting, to be held in Pittsburgh in Pennsylvania. The Chinese premier, Hu Jintao, will be at the meeting, along with Mr Obama.