For an answer, we need to place China's inflation rate and U.S. trade with China in a larger context.
There's little doubt that China's official inflation rate of 5% dramatically understates the actual experienced of Chinese consumers. By one informal study, prices for basic food items in urban areas are higher than in the U.S., even though the average urban wage in China is about $3,200 -- or roughly one-tenth of the median earnings for U.S. workers (about $31,000 for all workers, full-time and part-time, and about $41,000 for full-time employees).
Anecdotally, our friends in China report some grocery items there have doubled in price within the past year. Other informal, "on the ground" accounts estimate price increases for both fresh and prepared food of between 25% and 60%.
Surveys have also found China's consumers are more worried about inflation now than at any other time in the past 10 years.
This explosion of easy money and credit has inflated a property bubble in China, driving up prices for urban apartments and rental units -- a topic I looked at last year.
Is inflation throughout the Chinese economy real? Yes. Does it pose a risk to the stability of China's economy? Many economists, including those working in China, think it does.
In that case, does Chinese inflation pose any risk to the U.S. economy? To assess that concern, let's put U.S. trade with China in perspective.
Not Everything Is Made in China
Though it often seems that much of what's on the shelves in the big-box retail stores is made in China, U.S. imports from China run about $366 billion, according to both the U.S. Census Bureau and the CIA Factbook. That's a mere 2.3% of the sprawling $14.6 trillion U.S. economy. U.S. exports to China were around $82 billion for 2010, a rise of about $12 billion, or 17%, from 2009.
And if we make an apples-to-apples comparison of trade -- imports and exports -- we can see that trade has a somewhat larger role in China's economy than it does in the U.S.:
GDP: $14.62 trillion
Per capita income: $47,400
Imports: $1.903 trillion (19.3% from China)
Exports: $1.27 trillion
Current account balance: -$561 billion
GDP: $9.854 trillion
Per capita income: $7,400
Imports: $1.307 trillion
Exports: $1.506 trillion (20% to the U.S.)
Current account balance: $272 billion
China's positive trade balance of $272 billion a year is about 2.7% of its economy, while the U.S. negative trade balance of -$561 billion is about 3.8% of the U.S. economy.
Total trade (imports and exports) makes up about 21.7% of the total U.S. GDP, while total trade accounts for about 28.5% of China's GDP. Imports from China are only one-fifth of all U.S. imports, and exports to the U.S. are about the same share of China's exports: 20%.
In other words, the economies of both the U.S. and China are still largely domestic: Trade makes up around one-quarter of each nation's GDP, and trade with the other nation is about 20% of each nation's total trade activity.
Companies Quickly Shift Their Outsourcing
Let's imagine that, in response to rapidly rising costs in China and a strengthening of its currency (the renminbi or yuan), the price of imported goods from China rises 20%. Since imports from China represent a mere 2.3% of the U.S. economy, these higher prices end up being a tiny sliver of the U.S. economy.
If you've purchased footwear recently, you may have noticed your shoes were made in an East Asian country other than China -- Vietnam, for instance. Global manufacturers respond to price increases in one country by shifting production elsewhere, and those adjustments will likely lessen the impact of higher production costs in China.
Compare the limited impact of trade on the U.S. economy with the major impact it has on Germany's:
GDP: $3.3 trillion
Exports: $1.337 trillion (4.5% to China)
Imports: $1.12 trillion (8.2% from China)
Fully 74% of the German economy is trade-related. Now there's an economy that could be significantly hurt by inflation from its trading partners.
Though the direct impact of China's surging inflation will probably be modest on the U.S. economy, there are potential indirect consequences. If China has to slow its growth to cool home-grown inflation, that will likely cut demand for commodities such as iron ore, copper and energy. And as its economy slows, China may well import less from other countries.
Both of these factors could chill global growth rates, and a global chill would offer the U.S. a mixed bag. On one hand, any reduction in commodity costs would be welcome, but a slowing world economy could crimp U.S. exports.
All in all, the impact of China's inflation on the diverse U.S. economy will likely be in proportion to its relative share of the U.S. GDP: modest.