The Senate will be taking up Chinese currency this coming week. So I though I should offer a brief note about one of the arguments people make against focusing on Chinese currency manipulation — namely, the claim that China doesn’t really compete head to head with US manufacturing, so that a rise in the renminbi wouldn’t help.

I’d argue that this is wrong on three levels.

First, the notion that there’s no head-to-head competition is false. There have lately been quite a few stories about manufacturing moving back from China: the labor costs will always be much higher in America, but other advantages, especially logistical, can make even labor-intensive production worth doing at home.

Second, there are real effects on the US if production moves, say, from China to Mexico. To an important extent, global manufacturing is carried out by regional complexes — an Asian complex centered on Japan and China in effect competes with a North American complex in which labor-intensive stuff is done in Mexico or Central America. So there’s an indirect competitive effect.

Most important, however, is that you really need to think of this as a global adding-up issue. If China and other currency manipulators run smaller trade surpluses, who will be the counterparties? Emerging economies that compete more directly with China than we do are by and large not in liquidity traps, and indeed are facing inflationary pressure. So any Chinese appreciation, while it directly tends to raise their net exports, will probably show up in matching appreciation in their currencies, setting in motion a series of domino effects that end up pushing the adjustment onto countries that are in liquidity traps, namely the US, Japan, and Europe.

The bottom line is that Chinese currency policy does indeed matter for US manufacturing.