Eight Ways China Affects Us

The deflation in manufactured goods, however, has been offset by inflation in commodity prices in food and energy prices. So while the consumer price index rose 1.6% year over year in March, food climbed by 3.2%. The cause? Competition in the markets from Chinese buyers for everything from soybean oil to nickel.

Chinese demand has meant higher energy prices, especially at the gas pump. The energy inflation being exported from China is a special case just because it's so extreme. Wall Street broke out in a sweat after the March inflation numbers because inflation over the last three months has revved up. If you annualize the change in the CPI during the last three months, inflation is running at a rate of 5.1%. But that shrinks into insignificance compared with energy inflation, which has run at an annualized 38% rate over the same period.

I certainly don't expect energy prices to keep climbing at that rate, but I do expect inflation in the sector to stay well above inflation for the economy as a whole. Energy inflation was, after all, 6.9% in 2003. Consider this one example: Chinese consumers bought 2 million new cars in 2003. By 2014, projections put 100 million cars on China's roads.

China has resurrected 19th-century imperialism with a twist. In the bad old days, imperial powers turned less powerful regions into colonies. From the colonies, they then extracted raw materials and sold manufactured goods on their own very favorable terms of trade. In the 21st century, don't expect a return to such naked grabs of real estate. Instead, the industrial economies will fight a much more subtle economic battle to lock up critical commodities.

You already can see this in northern Asia, where China and Japan have been brawling over the route of an oil pipeline from Russia's Siberian fields. China thought it had a done deal to send the pipeline to Daqing in the heart of China's oil-producing region. But Japan now seems to have the inside track for a route that terminates in the Pacific port of Nakhodka -- and bypasses China's oil fields.