Abstract: While political disputes occur frequently and widely among many countries, their impacts on domestic industrial economic system are unclear and less systematically investigated. Based on Miller and Blair,Jung^[7] static international trade inoperability input-output model(SITIM) is extended into dynamic international trade inoperability input-output model(DITIM). Considering the 2012 Diaoyu Islands Dispute as a political dispute, under several premises assumptions, the indirect economic loss is estimated and Chinese industries that are sensitive to the dispute are screened out. Results show that the static total indirect economic loss of China's gross trade lies between RMB365.3764 billion and RMB811.4575 billion. The dynamic total indirect economic losses when the 2012 Diaoyu Islands Dispute is solved in 1 year, 2 years, 3 years, 5 years, 10 years and 15 years are also calculated. Industries that are sensitive to the dispute include general special equipment manufacturing, electrical equipment and machinery, chemical, metal smelting and rolling processing, and fabricated metal product. The empirical findings suggest that China establish an early-warning mechanism and trade assistance system, so key industries that were damaged in protecting the fundamental national interests could be properly compensated.

Key words: political dispute, industrial economic system, inoperability input-output model, indirect economic loss evaluation, Diaoyu islands dispute