For decades, plentiful Chinese labor kept down costs of a range of goods bought by Americans. Even as politicians in Washington accused China of hollowing out the American manufacturing sector, cheap DVD players, sweaters and barbecue sets were a silver lining for consumers who grew accustomed to ever-lower prices. China also kept down the value of its currency, giving domestic exporters a competitive edge.
"Inflation has been damped pretty dramatically in the U.S. because it exported work to China and other places at 20% or 30% of the cost," said Hal Sirkin, a consultant at Boston Consulting Group. The years of dramatic reductions in costs are over, the firm says.
Li & Fung traces the start of rising wages to the "Foxconn Effect." Foxconn is the trade name of Hon Hai Precision Industry Co., maker of iPads for Apple Inc., and computers for Hewlett-Packard Co., among others. After a string of worker suicides last year at one of its China plants spurred Foxconn to defend its treatment of employees, the company raised wages 30% or more in a bid to improve worker conditions. That raise came as workers at other factories, including staff at a Honda Motor Co. parts plant, went on strike for higher pay.
Since then, the Chinese government has supported higher wages in part to address labor unrest, but also as way to boost domestic consumption and reduce reliance on exports to expand the economy. The rising wages affect both foreign and domestic companies.
Other factors besides rising wages are pushing up the price of goods. Chinese workers, for one, are starting to buy more with their higher salaries. That's contributing to higher prices for commodities such as cotton and oil, which are already climbing in part because of a weaker dollar. Rising living standards in developing economies like China will keep prices of natural resources high as demand outpaces supply.
China's move to let the yuan slowly appreciate in value—something eagerly sought by its Western trading partners—adds fuel to the fire. A stronger yuan makes it cheaper for China to import the raw materials it needs, such as iron and soybeans, helping tame domestic inflation. But it makes its exported goods more expensive for other countries to buy.
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