Rising inflation in Asia stings in the West

BAT TRANG, Vietnam: The free ride is ending. For decades, Westerners have imported goods produced ever more inexpensively 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. Not just in China, where rising energy and labor costs have already made exports to the United States and Europe 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 their customers.

Developing countries have had bouts of inflation before - indeed, some are famous for them, like Brazil, which saw triple-digit inflation in the late 1980s and early 1990s.

But two things make this time different, especially in the United States, where the possibility of recession looms.

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.

Asian businessmen say they do not have a choice. "This is a tough time to do business," said Le Hoai Vu, the sales manager for the Quang Vinh Ceramic Co. in Bat Trang in northern Vietnam.

The company just increased the prices it charges Pier 1 Imports in the United States for hand-painted vases because labor costs are rising 30 percent a year.

Over all, Vietnam, one of the fastest-growing destinations for manufacturing investments, saw prices rise 19.4 percent from March 2007 to March 2008.

The cost of imports from less industrialized countries as a group is rising. A U.S. 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 a year earlier.

That contributes to rising inflation; from March 2007 to February 2008, the prices of goods for sale in the United States increased 4 percent, according to the government's consumer price index.

Yet 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 inflation at the consumer level had doubled in the past five months, showing a 6.4 percent increase in March over a year earlier, while weekly inflation at the wholesale level has accelerated further 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 currency strengthen in value against the mighty dollar. But the dollar is not quite as mighty as it once was.

Large U.S. trade deficits and other problems have weakened the dollar's appeal. And there are signs that the dollar could fall farther if developing countries' central banks stopped supporting it, particularly in Asia.

Vietnam's central bank even had to order the country's commercial banks a week ago 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 multinational companies and exporters had trouble wiring money into the country to pay their employees' salaries.

Additionally, the dollar's weakness is itself a cause of inflation in developing countries, particularly those that have barely let their currencies rise against the dollar in an effort to hold on to export markets.

In a street market around the corner from the 270-year-old Lungshan Temple in Taipei, Taiwan, Teresa Gau, a fishmonger, is charging up to a third more for fish and crabs than she did a year ago. That is because fishing boat owners are charging her more as they struggle to cover higher costs for diesel fuel, which is priced in dollars.

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