China's struggle with rising prices is reverberating around the world. Domestic inflation is the highest in nearly three years. Wages are increasing at a double-digit annual pace. It is no wonder that many are asking whether the era of China as a low-cost producer for the world is at an end.
The thought makes some nervous. Cheap imports from China have helped keep price pressures low in many countries. But higher wages and rising export prices in China may actually benefit its trading partners and would arguably leave the country better off as well. Continued rapid wage increases would help shift more of China's income into the pockets of its workers.
This, in turn, would support the development of a more sustainable, consumption-oriented model of economic growth. The United States and Europe would see their trade deficits with China shrink as Chinese goods became less competitive and as their exports to China picked up, providing a boost to employment.
But a close look at recent developments reveals that expectations of such a shift are premature. China's inflation has mainly affected food prices. That matters to Chinese consumers who spend a significant share of their income on food. But food products make up a tiny fraction of what China sells to the rest of the world. Whether or not China is exporting inflation or becoming less competitive depends on what is happening to prices of goods that it exports.
We need to be careful when measuring export price inflation. The usual approach is to track the price of the "average" export. But this can be deeply misleading, particularly for a country like China. Its exports are far more sophisticated today than a few years ago, both because China has become the preferred base for companies assembling goods made from high-tech components produced elsewhere and because Chinese enterprises have increased their own technical abilities. The fact that average prices have risen tells us nothing about what has happened to prices of individual goods.