U.S. prices could rise with Chinese workers' salaries

For years, foreign companies have contracted with Chinese suppliers to make products, drawn by the low-cost labor. But as local Chinese governments raise minimum-wage requirements and workers clamor for higher salaries it's becoming more expensive to do business in the country.

Honda recently agreed to a wage increase after striking workers shut down plants that make its auto parts. Foxconn, which makes electronic components for Apple, Dell and Hewlett-Packard, doubled assembly-line workers' pay amid criticism of factory conditions and a spate of employee suicides. KFC, owned by the USA's Yum Brands, reportedly agreed to increase worker salaries this month in Shenyang, China, as part of a collective bargaining agreement, China's news agency, Xinhua, reported.

If wages continue to go up, "inevitably, companies like Apple will have to pass along some increased costs to customers," says Victor Shih, associate professor of political science at Northwestern University. U.S. consumers are probably already seeing higher prices, though it's difficult to pinpoint exactly how much is due to China's rising wages, says Gareth Leather, China analyst for the Economist Intelligence Unit.

Apple, Dell and Levi Strauss, among other U.S. companies that make products in China, declined to comment. Andrea Resnick, a spokeswoman for leather goods maker Coach, says the company has no plans to raise prices because it can offset higher labor costs by shifting production outside of China.

Other U.S. companies have also considered moving production to emerging markets such as Vietnam and Bangladesh, or from coastal areas of China to inland regions, where labor costs are typically lower. China's rising wages "will accelerate the process of companies reassessing what is the best place for production," says Bart van Ark, chief economist for the Conference Board, which has more than 1,200 corporate members around the world.

Generally, when costs go up, "Someone has to pay the bill," says Andreas Lauffs, head of the employment law group at Baker & McKenzie law firm. Chinese manufacturers can absorb them or pass them along to U.S. companies, which then have to decide whether to raise prices .

In the textile industry, labor can make up as much as a third of overall production expenses, according to the Economist Intelligence Unit. But labor costs in other industries may represent only a small percentage 3% to 5% by some estimates which could make it easier for U.S. companies to bear one-time increases. Worker productivity is also rising, a development that will help offset higher wages.