China-Japan-India Trilateral Economic and Monetary Union

The idea of a greater Asian Monetary Union or even a China-Japan-India trilateral economic and monetary union, in today's world, remains a farfetched dream. While one cannot deny the benefits that go with a Monetary Union, such as a seamless intra-regional transfer of capital and investment, reduced exchange risk, regional market integration, financial deepening and diversification, the herculean task of fulfilling the preconditions required to achieve this ideal often tends to dampen the general enthusiasm.

A quick look at the available international models of economic and monetary unions will establish the grounds to further discuss this subject. Currently, there are three major models of monetary unions:

(i) EU Model:

The EU model, having a conventional single legal tender and a single central bank system at the regional level, subscribes to the traditional idea of a monetary union. The prerequisites for this model include establishing reliable responsibility/reporting system, relatively tighter political integration with strong political institutions like the European Parliament and the European Court of Justice and most importantly considerable congruence in per-capita incomes within the region.   

(ii) NAFTA Model:

North American Free Trade Agreement is a little more than just a FTA. Its managed floating backed inflation targeting objective makes it another form of a monetary union which is less physical than the EU one. NAFTA ushers its member states (US, Canada and Mexico) to maintain a common monetary policy objective commitment to ensure low and stable inflation in the region. Canada and Mexico are formal inflation targeters while the US is a de facto inflation targeter. Even for a NAFTA like model, there is some fundamental spade work to be done before implementing it. A loose political integration, a coordinated monetary policy action, independent central banks, absence of fiscal dominance and a well defined policy transmission channels are some of the pre-conditions required.

(iii) Latin American Currency Unions:

The third model of a monetary union is a one that demands a rigid currency union where one country absolutely submits its monetary policy autonomy to another umbrella nation by pegging the local currency with the super regional currency of the umbrella nation. This model requires a great deal of political and economic sacrifice beyond other equally painful submissions.

Finally, the preconditions for any sort of monetary union are as political as economic. Convergence of economic structure across member countries, strong and uniform investor rights to facilitate a uniform monetary transmission, prudential supervision and regulation, culture of policy transparency etc are some of the its essential ingredients ( Barry Eichengreen).

In the context of a China-Japan-India trilateral union, none of the above experimented models can be currently employed. Moreover, there is a controversial question of ‘who will submit to whom’ to be answered. Also, there are also wide rifts in the economic (both monetary and financial) structures between these countries. Hence as a potential union they have a far way to go before they meet any of the presuppositions listed in the aforementioned models.

In the hierarchy of Economic Integration (proposed as the second best and practical alternative), preferential trade agreements form the first step, chronologically followed by free trade agreements, customs union, single market, economic and monetary union and complete economic integration. The trilateral relationship between China, India and Japan hasn't even matured to that of a free trade zone forget about a unified regional market.

Thus, in the given state of affairs, to toy with the idea of an integrated Asian market, a single power Asian legal tender and a congruent Asian monetary policy is nothing more than romantic.