The Chinese problem solves itself...

Good news for trade worriers concerned that cheap Chinese products will totally wipe out manufacturing in the US. The price of cheap is going up.

But now a perfect storm has hit China's manufacturers. So far this year, the renminbi has been appreciating at a 16 percent annualized rate. And prices for raw materials, which account for 60 percent to 70 percent of manufacturers' costs, are soaring. Hundred-dollar-a-barrel oil has raised transport costs and the price of oil-related materials such as plastics. Although some economists expect raw material prices to weaken in the second half of this year, in the long term, the emergence of millions of new car drivers, home buyers, and office workers in India and China will keep the price of steel, plastic, and other raw materials high.

At the same time, China is rolling out wage increases around the country and tightening its labor laws. Wages are rising at double-digit rates in coastal China. In January, Beijing introduced a new labor law that significantly strengthened the influence of the union in management decisions. The All-China Federation of Trade Unions, the country's state-backed labor organization, has launched an aggressive recruiting campaign. Beijing hopes that better protection for workers through the union and the new labor law will placate its increasingly restive manufacturing workforce. But a tidal shift in the country's demographics—a dwindling supply of young workers as a result of the "one child" policy in effect since 1979—will counteract Beijing's efforts. [More]

Of course this seemingly happy outcome for American laborers has a downside - a big one. Consumer (imported) goods are going to get more expensive here. In fact, so great is the rising consumption in China, India, Brazil, Russia, etc. that we will be bidding against them for consumer goods. And with pretty flimsy money at that.

One thing I will be looking for to indicate this shift in consumption leadership is whether our recession (I'll hazard the label) spreads deeply to these countries. If they continue to grow as we stagnate, it means we are not the engine of the world economy any more.

We'll adjust. It may even work out better than we imagine.