* Politics more dicey than economic impact
* Dispute touches historic Chinese grievances
* Leaders urged to hold talks quietly
By Paul Eckert, Asia Correspondent
WASHINGTON, Sept 14 (Reuters) - U.S. President Barack Obama needs to engage in deft diplomacy with China to keep anger over his decision to impose special duties on Chinese tires from spilling into a broader trade conflict.
Most China experts say the two interdependent economic powers have too much to lose to allow such a tiny portion of massive bilateral commerce trigger a trade war. Rhetoric may run hot but retaliatory actions will get bogged down by the slow moving rules of world trade.
Others warn, however, that China, goaded on by industrial interests and a population highly sensitive to perceived slights, could do a lot of damage if the tire dispute is not handled skillfully by Obama and Chinese President Hu Jintao.
All agree that the political fallout will be far more tricky to handle than the economic impact and legal niceties of Obama's decision, which slaps new duties of 35 percent on Chinese-made tires from Sept. 26 -- a day after he meets Hu at the Pittsburgh G20 summit.
Beijing agreed to an import safeguard mechanism as part of its negotiations with the United States to join the World Trade Organization. Known in U.S. trade law as Section 421, it allows nations to restrict imports from China in response to a surge.
"From a legal point of view, what we've done is OK," said economist Nicholas Lardy, a China expert at the Peterson Institute for International Economics.
"The politics of it, however, are quite adverse," he said.
"UNEQUAL TREATIES"
Charles Freeman, a former U.S. trade negotiator with China, said Washington hit a nerve by applying a law that targets only Chinese tires, rather than moving against all tire imports.
"People in China have compared this to the unequal treaties," he said, referring the 19th century pacts Western imperial powers forced on a militarily weak, humiliated China.
"The Chinese have no political choice but to respond with pretty serious retaliation," said Freeman, a scholar at the Center for Strategic and International Studies think tank.
China reacted swiftly to Obama's decision, announcing its own anti-dumping investigations of chicken products from the United States, a trade worth $800 million a year, as well as U.S. automotive exports.
Lardy said it was too early to tell whether the Chinese will press cases against the United States and much depends on whether the countries follow WTO rules they have signed on to.
"The rhetoric may escalate further, but the reality is if each side lives up to its (WTO) commitments, it would take quite a few quarters for this to really get going," he said.
Brookings Institution scholar Kenneth Lieberthal said that because China knowingly signed the WTO agreement containing the safeguard provisions, "it isn't as if we are doing something that is outside the boundaries of what we agreed to."
But with a world in recession and warily watching signs that two of its leading economies might turn protectionist, "both sides need to really take to try to limit the spillover effects of this action," he said.
CURSE TO BLESSING
China's threat to go after U.S. auto parts and chickens -- a more valuable trade than tires -- underscores the different styles and weapons Washington and Beijing have for pressing their trade interests.
"Whereas we go for capillaries, they'll go for the jugular," said Freeman.
"China is not a society with the rule of law, and tools in their toolbox for doing serious economic damage are rife," he said.
Experts recommend Obama call Hu to explain the decision and and put a brake on how far relations can slide.
"Both leaders need to be talking to each other quietly about this and assuring each other that they can keep this within manageable boundaries," said Lieberthal.
Heritage Foundation trade economist Derek Scissors -- who sharply criticized Obama's decision -- said the president could undo some of the damage by speaking about trade and removing uncertainty about his administration's policies.
"This curse could be turned into a blessing if the president would make a major speech on trade policy and clarify what his personal view is," he said.