Made in China

Many American companies, including some small businesses, have come to depend on China as a source of materials for manufacturing here in the U.S. According to one analysis, almost 60 percent of imported goods are either industrial supplies, like chemicals or commodities, or capital goods, such as machinery and equipment, which are used to create American products. For the last few years, the cost of these supplies has been kept down by the Chinese government, which pegged its currency, the yuan, to the dollar at a fixed rate. But those prices may soon start to rise.

There are increasing signs coming out of China that the government may be adopting a more flexible stance on its exchange-rate policy. It has been under pressure from the Obama administration to let the yuan float against the dollar in the belief that higher exchange rates would lower America’s chronic trade deficit with China, which reached $77 billion last year.

On Monday, for example, the yuan strengthened against the dollar by the largest amount in a year, rising 0.1 percent. Monday’s increase was the fourth in four trading days greater than .05 percent. "The Central Bank may be starting to permit more flexibility in trading,” said Zhao Qingming, an analyst at China Construction Bank Corp. in Beijing, told Bloomberg.

Analysts believe the Chinese may be preparing to take a larger step in revaluing their currency. Jim O’Neil, chief economist at Goldman Sachs, says he believes that the yuan could be allowed to rise by as much as 5 percent. The reason: The Chinese government is concerned about inflation after prices climbed the most in 21 months in January.

What will this do to American manufacturers? According to a study by the Federal Reserve Bank of New York, the prices of industrial supplies had large price increases from 2006 to 2008, while consumer goods and capital goods rose only moderately. The authors of the report said that while the rise in the price of commodities such as rubber and chemicals was the primary factor, the increase in the value of the yuan over this period also played a key role. As a result, the price of imports from China to the U.S. rose 6 percent over the period.

So American companies that use Chinese imports to manufacture in the U.S. could be facing steep increases in the near term. Even products wholly produced in China under American labels could wind up costing more. The question is how much of an increase in prices Chinese producers will pass on to American importers or will simply swallow to remain competitive with other exporters in the world market.