China's latest export is inflation

After falling for years, prices of Chinese goods sold in the United States have risen for the last eight consecutive months. American consumers could see prices increase by as much as 10 percent this year on specific products — including toys, clothing, footwear, and other consumer goods — just as the United States faces a possible recession. Whether Chinese factories will succeed in making wholesalers pay more for their goods and whether retailers will be able to pass much of their higher costs on to American consumers is unclear, analysts say. Starting last June, for instance, China removed or reduced tax rebates on hundreds of items for export, including toys, garments, leather, wood and other goods. The moves are also part of Beijing's desire to move China higher up the global manufacturing chain — away from the least finished products, like plastic children's toys, toward more advanced exports that require skilled labor, like small electronics and even automobiles. Whatever the government's motivation, many Chinese exporters say the timing of the rebate cut was disastrous. Their factories had been struggling to cope with an array of other problems, including power shortages, higher raw material costs, rising wages (up to 80% in some places) and inflation in other areas. Many Chinese factory owners say a tough, new labor law, which went into effect on Jan. 1, complicates the hiring process and threatens to raise labor costs even more, at a time when parts of the country are already plagued with labor shortages.

It looks like the days of outsourcing manufacturing to obtain cheap imports from China are at an end. There's that labor arbitrage at work again.