Rising Costs in China Seep Into U.S. Market

By Ariana Eunjung Cha
Washington Post Foreign Service
Saturday, February 9, 2008

SHENZHEN, China -- A year ago, Mei Meng's factory sold foot-tall plush teddy bears, rabbits and ducks for export to the United States for $1.30 each. Now they're $2, and he doesn't rule out the possibility that prices will go up again.

Likewise, manufacturers say wholesale prices of cowboy hats made in China have gone from $1.65 to $2, cotton duvet covers from $3.30 to $4, portable electric ranges from $9 to $10 and office water dispensers from $50 to $56.

A confluence of events -- the weakening dollar, soaring domestic inflation, new labor laws, the end of some government export subsidies, the increasing cost of raw materials, more stringent product safety regulations, and bad weather -- means the cost of goods produced in Chinese factories is rising fast.

Those increased costs are already showing up in import prices. After falling for years, the price index of goods from China rose 2.4 percent in 2007, according to the U.S. Bureau of Labor Statistics division of international prices. That's the largest annual increase since the index was first published four years ago.

The added costs could compel U.S. companies to shift their manufacturing elsewhere -- particularly to Southeast Asia, where countries such as Cambodia have already seen an increase in U.S. investment.

Or the increases could be passed along to U.S. consumers.

That would mean that the cheap goods that were synonymous with China and allowed megastores such as Wal-Mart to dominate the U.S. retail sector will likely no longer be as plentiful.

"We'll see maybe a 5 to 10 percent increase in consumer prices, depending on who has power" in a specific part of the supply chain, said Sun Mingchun, a senior economist at Lehman Brothers.

As contracts between Chinese suppliers and U.S. importers are renegotiated in nearly every industry, Sun said that if consumers are lucky, increased costs could be absorbed anywhere from the Chinese manufacturer to an import-export company to retailers before hitting their wallets. If not, he said, the price of things like clothing and home appliances could jump significantly.

Among some economists, there's a larger concern: that inflation in China -- which was 4.8 percent in 2007, an 11-year high, and which forced the government to freeze prices of staples such as grain, edible oils and eggs -- is adding to inflation in the United States.

"In the past, the pressure of inflation in the U.S. mainly came from crude oil, but now it comes from developing countries like China, from those who provide the U.S. with cheap industrial products," said Li Huiyong, a senior analyst at Shanghai-based SYWG Research and Consulting.

The extent to which rising production costs in China affect the U.S. economy hinges on negotiations between suppliers and buyers. Chinese factory managers describe combative negotiations with U.S. importers regarding prices -- with each side seizing on every possible argument, including how long they have worked with each other, the size of their market and the quality of the work.

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