April 8th, 2008
BAT TRANG, Vietnam — The free ride for American consumers is ending. For two generations, Americans have imported goods produced ever more cheaply from a succession of low-wage countries — first Japan and Korea, then China, and now increasingly places like Vietnam and India.
But mounting inflation in the developing world, especially Asia, is threatening that arrangement, and not just in China, where rising energy and labor costs have already made exports to the United States more expensive, but in the lower-cost alternatives to China, too.
“Inflation is the major threat to Asian countries,” said Jong-Wha Lee, the head of the Asian Development Bank’s office of regional economic integration. It is also a threat to Western consumers because Asian exporters, even in very poor countries, are passing their rising costs on to customers.
First, developing countries now produce nearly half of all American imports. Second, inflation in these countries is coming at the same time that many of their currencies are rising against the dollar. That puts American consumers in a double bind, paying at least some of producers’ higher costs for making their goods, and higher prices on top of that because the dollar buys less in those countries.
The cost of American imports from less industrialized countries as a group is rising. A Bureau of Labor Statistics index of average prices for imports of manufactured goods from such countries fell gradually through early 2004, but is now rising briskly and was up 5.6 percent in February from the same month last year. That contributes to rising inflation in the United States; in the 12 months through February 2008, the prices of goods for sale in the United States increased by 4 percent, according to the government’s Consumer Price Index.
But so far, Asian exporters have passed along only a portion of their costs. In China, for instance, prices are now rising almost 9 percent a year, triple the pace of a year ago. Workers in the developing world facing higher prices have been increasingly vocal in demanding higher wages, with protests erupting in recent days in Vietnam, Cambodia and Egypt.
At the same time, inflation keeps rising: the Philippines announced that its inflation at the consumer level had doubled in the last five months, showing a 6.4 percent increase in March over the same month a year ago. And weekly inflation at the wholesale level has accelerated in India, reaching an annual rate of 7 percent in the week ended March 22, up from 3.1 percent as recently as last October.
Not long ago, it would have been unlikely for a poor country with high inflation to see its money strengthen in value against the mighty dollar. But the dollar is not quite as mighty as it once was. Large American trade deficits and other problems have weakened its appeal. And there are signs that the dollar could fall further if developing countries’ central banks stopped supporting it, particularly in Asia.
Vietnam’s central bank even had to order the country’s commercial banks late last month to resume buying dollars within the tight range of exchange rates set by the government. Many banks had started betting on dollar depreciation and refusing to accept large sums in dollars, to the point that multinationals and exporters had trouble wiring money into the country to pay their employees’ salaries.Inflation in Taiwan has started to creep up partly because the government waited until this year to allow the currency, the New Taiwan dollar, to appreciate. Taiwan imports all its oil, and only now is the slightly strengthening New Taiwan dollar starting to hold down the cost for consumers in filling up their gas tanks.
Keeping the dong inexpensive in dollar terms helped Vietnam increase its exports by 24.1 percent last year, but also lured a flood of investment. Bank loans rose more than 50 percent last year, Breeding a real estate frenzy that has not yet abated.In addition to the weak dollar, economists say that countries like Vietnam, Egypt, China and Brazil are inherently more vulnerable to inflation when, as now, rising prices are led by increasingly expensive commodities.
Soaring food and energy costs have a far greater effect on developing countries like Vietnam, because of their large agricultural and energy-hungry manufacturing sectors, than on industrialized countries, which tend to have larger service sectors than manufacturing sectors.But many developing countries, led by China and India, have blunted the full impact of inflation so far through a combination of price controls and subsidies, and more countries are joining them — Vietnam has imposed price controls on transportation and gasoline over the past week, for instance.
As businesses figure out ways around price controls, like charging the same while shrinking the quantities in each package, and as the cost of subsidies may become unsustainably high, inflation may worsen.