At present, the trade regime and trade patterns of West Bank and Gaza Strip are outgrowths of agreements with Israel and other trade partners, the Israeli control of borders, and autonomous actions taken by the Palestinian Authority. Indeed, officially, the current trade regime of West Bank and Gaza Strip is almost exactly the same as that of Israel. From 1967 until early 1994—a period essentially of military occupation—the West Bank and Gaza Strip was in a customs union with Israel, and the trade pattern of West Bank and Gaza Strip became highly oriented toward Israel. The April 1994 Protocol of Economic Relations between the PLO and Israel yielded a framework for the trade regime of West Bank and Gaza Strip, providing the Palestinian Authority with some options to modify the prevailing customs union. However, this envis-aged trade regime has not become reality; obstacles to trade have intensified, owing primarily to Israeli security procedures. These procedures have resulted in cumbersome administrative and logistical trade barriers, and in attempts by the Palestinian Authority to overcome some of these barriers through policies that may themselves have adverse resource allocation consequences to the Palestinian economy.
The following sections initially describe the factors that have molded the current trade regime and trade patterns of the West Bank and Gaza Strip. This is followed by a section that attempts to provide some trade policy recommendations for the near- and short-term for the West Bank and Gaza Strip to improve its allocative efficiency and enhance its economic growth.
Current Status of the Trade Regime
Owing to historical developments, the trade pattern of the West Bank and Gaza Strip is highly oriented toward the Israeli market. Indeed, based on most recent data, the West Bank and Gaza Strip is estimated in 1996 to have had a trade deficit of $1.6 billion, of which about 86 percent, $1.4 billion, was with Israel. The West Bank and Gaza Strip’s exports to Israel in 1996 were $242 million and consisted mainly of stone, textiles, and agricultural products. Its exports of $40 million to the rest of the world, mainly Jordan, consisted of fruits, stone products, and foodstuffs. Its imports from Israel were $1.6 billion and from the rest of the world only about $265 million. The latter were mainly from the European Union (EU), which is estimated to have accounted for about 66 percent of non-Israeli imports, followed by those from Egypt (about 16 percent of non-Israeli imports), Jordan (14 percent), and other countries (4 percent). Of the non-Israeli imports, it is estimated that consumption goods accounted for 60 percent, capital goods for 33 percent, and raw materials for 7 percent.
Protocol on Economic Relations and Other Agreements with Israel
The 1994 Protocol on Economic Relations (incorporated subsequently in the Interim Agreement of September 1995) defines the rules that are to govern economic relations between the Palestinians and Israelis during the interim period (i.e., until 1999). The proposed trade regime is very close to a customs union for the West Bank and Gaza Strip and Israel—under the Agreement, the Palestinian Authority is given some options to modify the prevailing customs union.
The trade regime of Israel is highly complex. It has more than 85 different ad valorem, specific, combined, and alternative tariff rates, with import duties ranging from zero percent to 100 percent, with an average of about 8 percent.1 Duty-free treatment is afforded to about 40 percent of tariff positions. In general, Israeli tariff rates on processed items are higher (average of about 10 percent) than those levied on semi-processed items (7 percent average), which in turn are higher than those levied on raw materials (about 2 percent). Israel is unilaterally committed to reducing its tariffs on imports from countries with which it does not have free trade agreements. Import licensing and quotas exist for a limited number of products.
Under the Interim Agreement, for goods other than those in Lists A1, A2, and B (see below), the Palestinian Authority has to apply, at minimum, the same level of customs and other duties and charges as in Israel.2 In addition, the Palestinian Authority is allowed to conduct in almost total freedom the exchange of commodities (the main exception being quotas on six agricultural products that are to be phased out by 1998) between the West Bank and Gaza Strip and Israel, and all customs revenue and fees levied on imports have to be distributed between Israel and the West Bank and Gaza Strip on the basis of the place of final destination.
The Palestinian Authority is given under the Interim Agreement some limited options to modify the prevailing customs union with Israel. These include, for certain clearly defined goods, the right to determine the rates of customs and other import taxes. The applicable goods are certain goods produced in Jordan, Egypt, and other Arab trading partners (List Al items), certain basic foodstuffs (List A2 items) from other countries, and certain tools and equipment related essentially to the development of the West Bank and Gaza Strip (List B items). The quantities of Lists Al and A2 items have to be in accordance with the Palestinian market need as agreed by Israeli and Palestinian authorities. For these agreed quantities of Al and A2 goods, Israeli standards (including quality, licensing requirements, classification, etc.), country origin requirements, and customs and other import taxes do not apply. As the situation has evolved, the Palestinian Authority has only marginally implemented these trade options. In particular, it has not set the rates of customs and other import taxes for goods in Lists Al, A2, and B, with the minor exception of some goods that are included in Palestinian Authority’s trade agreement with Jordan.3
An important feature of this Interim Agreement for the West Bank and Gaza Strip is that it bestows the West Bank and Gaza Strip with one of the least protectionist trade regimes in the region. Even more important, it provides the West Bank and Gaza Strip with tariff-free access to the large Israeli market as well as to the markets of the countries with which Israel has free trade arrangements (see below).
The Agreement, however, from the Palestinian perspective, has shortcomings related to the disposition of trade revenues, policy independence toward third parties, and the West Bank and Gaza Strip’s access to Israeli and other foreign markets. With respect to trade taxes, the Agreement does not provide for the Palestinian Authority to receive customs and purchase taxes on indirect imports, that is, goods imported from third countries when the final destination of the good is not clearly defined as being the West Bank and Gaza Strip. This flaw has contributed to the Palestinian Authority encouraging direct imports from abroad.
The second weakness of the Agreement is attributed to its severe limits on the trade policy independence of the West Bank and Gaza Strip with respect to third countries. According to the Agreement, the West Bank and Gaza Strip cannot lower its tariffs on most of its imports to below those in Israel, and the West Bank and Gaza Strip has to observe quality standards that may not be consistent with the Palestinian level of income,4 The West Bank and Gaza Strip has no say in formulating Israeli trade policy and, indeed, the Palestinian Authority has to conduct essentially the same trade policy as Israel, including with respect to having trade relations with third countries.5 Furthermore, the trade policy options in the Agreement are highly restrictive. These relate to the allowable tariff rates and quantity limits on goods for which tariffs could be set. In particular, for many of the items in lists Al, A2, and B, the Israeli tariff rates are already nil or very low. The option to set tariff rates above those in Israel is of no practical consequence since it would ensure imports leaking from one area into the other in the absence of customs borders. Additionally, the highly restrictive quantity limits on Lists A1 and A2 items also severely limit the ability of the Palestinian Authority to determine its own tariff rates because on quantities in excess of these limits, Israeli customs rates have to be utilized. The quantities of items in Lists Al and A2 have only once been increased since the inception of the Agreement but are expected to be increased shortly through agreement with Israel.
The final shortcoming of the Agreement is viewed as the nature of access it provides to the respective Israeli and Palestinian markets. Under the Agreement, trade advantages are given to the respective parties relative to other trade partners. As formulated, the West Bank and Gaza Strip benefits from the Agreement because Israeli tariffs are relatively high in the sectors where the West Bank and Gaza Strip has strong export potential—agriculture and labor intensive manufacturing, such as shoes, garments, furniture, etc. The Israeli exports to the West Bank and Gaza Strip reflect the Israeli tariff structure (in the case of reexports) and/or Israeli domestic prices (in the case of goods originating in Israel). To the extent that these prices are higher than those from other sources, the West Bank and Gaza Strip would be in a disadvantageous position.6 Given the substantial trade deficit of the West Bank and Gaza Strip with Israel, the advantages accorded to Israel by the West Bank and Gaza Strip would appear to be more significant than vice versa. This has been further enhanced by border closures and security measures, which have affected the West Bank and Gaza Strip’s access to the Israeli market—closures affect the exports of West Bank and Gaza Strip more severely than its imports from Israel.
Trade Relations with Countries Other Than Israel
The Palestinian Authority has trade agreements with various countries, such as the United States, the EU, and Jordan. Some of these agreements are outgrowths or parts of Israeli trade agreements with third countries, while others are recently concluded agreements between the Palestinian Authority and the countries concerned. The West Bank and Gaza Strip’s trade agreements with countries other than Israel have to be in compliance with the Israeli trade regime. The Palestinian Authority cannot offer any different import concessions than those applicable under the Israeli trade regime. So far, these agreements have had a relatively insignificant effect on the West Bank and Gaza Strip’s trade regime and trade patterns, as is evident from the continuing high concentration of Palestinian trade with Israel.
In February 1997, the Palestinian Authority signed an Interim Association Agreement with the EU. Before this Agreement, Palestinian trade with the EU was conducted under the Israeli-EU Association Agreement. With this new Agreement, which is similar to other Euro-Mediterranean accords in terms of structure and content, the Palestinian Authority has become a full participant in the Euro-Mediterranean partnership and has its own quotas of agricultural exports to the EU. The aim of the Interim Association Agreement is the creation of an EU-Palestinian free trade area by the end of 2001. This liberalization process is to supplement and provide a formal setting for the commercial arrangements currently taking the form of autonomous trade concessions that the European Commission has conferred in the past for farm and industrial goods.
Despite the signing of trade agreements, the West Bank and Gaza Strip’s trade with Egypt, Jordan, and other Arab countries has so far not developed much because of the strong trade ties of West Bank and Gaza Strip to Israel and to the lack of competitiveness of Palestinian goods in Jordan and Egypt. The Palestinian Authority has a trade agreement with Jordan, signed in January 1995, that calls for free trade in about 60 items. With Egypt, in January 1994 a technical and economic cooperation accord was signed by the Palestinian Authority to stimulate trade and give Palestinian goods access to world markets. Under this agreement, Egypt and the Palestinian Authority agreed to preferential trade status for some goods. The agreement stipulated practical steps to facilitate trade between the two entities, such as setting up a free zone for transit and easing of border restrictions, certificate of origin procedures, and the use of Egyptian ports and airports. This agreement, however, is a protocol and has not yet been implemented due to the above cited reasons. Currently the Palestinian Authority is seeking ways to establish a free trade zone at the Egyptian-Palestinian border, with the objective of getting Palestinian exports to other markets.
With the United States, the Palestinian Authority concluded in November 1996 a preferential treatment and duty-free access agreement, similar to the one the United States has with Israel.7 Under this agreement, the United States has abolished customs duties on all products imported from the West Bank and Gaza Strip, bestowing the same benefits on Palestinian products as those enjoyed by Israeli imports. The West Bank and Gaza Strip also benefits from the free trade agreement of the EFTA with Israel. In December 1996 the Palestinian Authority and EFTA signed a declaration of economic cooperation; the cooperation is to include the creation of a free trade area with preferential treatment. The final agreement, however, is awaiting the conclusion of a series of consultations between the Palestinian Authority and EFTA.
Security Considerations and Trade
The greatest influence on the trade patterns and volumes of the West Bank and Gaza Strip has been the restrictions imposed by the Israelis in connection with security considerations, which have raised costs and slowed the flow of goods substantially and thus undermined considerably the competitiveness of the Palestinian economy. These restrictions have impacted not only trade between the West Bank and Gaza Strip and Israel, between the Gaza Strip and the West Bank, and on occasion even among Palestinian cities in the West Bank, but also the Gaza Strip’s access to third countries because under the Interim Agreement Israel is allowed to control all international passages. To conduct trade through Israeli territory (between the Gaza Strip and the West Bank, between the West Bank and Gaza Strip and Israel, and between the West Bank and Gaza Strip and third countries) travel permits and transport vehicle permits are required. Moreover, there is different treatment of Israeli trade with the West Bank and with the Gaza Strip. In the case of the West Bank, Israeli trucks conduct trade. However, in the case of the Gaza Strip, goods have either to be transferred to Israeli trucks (licensed) before they could enter Israel or else the convoy system has to be utilized. Under the circumstances, at checkpoints between the Gaza Strip and Israel, trade is conducted through “back to back operations” (involving the transfer of goods from Palestinian trucks to Israeli trucks or vice versa) or convoys. The latter involves convoys of Palestinian trucks accompanied by Israeli security.
These methods are used to conduct all Palestinian trade because, at present, the West Bank and Gaza Strip does not have independent access to the outside world through airports or seaports. The airport in the Gaza Strip is completed but has not become operational. The Israeli authorities want to have joint control of the airport in order to deal with their security concerns as well as to ensure customs duty collection. Construction of a seaport in the Gaza Strip has not yet started. The Israeli authorities regard the port of Ashdod as providing the Gaza Strip with the necessary access to the rest of the world. Under these circumstances, Palestinian goods have to be transported to Israeli ports and airports and to borders with Jordan and Egypt using the above-cited transportation methods, which increase significantly the costs of Palestinian trade. For example, it is maintained that the utilization of both Israeli and Palestinian trucks may increase transportation costs almost five-fold.8
The West Bank and Gaza Strip have two passage points with Egypt and Jordan and at both highly complicated security procedures are in place. For instance, at one of these passages, Rafah, Egyptian vehicles unload their goods on the Israeli side for inspection, and then the goods are reloaded into Palestinian vehicles. For entrance into both Allenby and Rafah passages, Palestinian vehicles require security permission—a vehicle permit and a permit for the driver for a period not to exceed 10 hours a day.
Mainly reflecting the effects of security procedures, only a certain number of back-to-back operations can be carried out at the passages during the day. Thus, according to Israeli sources, when there are no border closures, some 20 convoys (of up to 20 trucks each) per day are allowed through the Erez checkpoint. Under normal circumstances only 15 vehicles are allowed to pass through Rafah during a full working day while at Allenby the number of vehicles is 40.
Israeli security procedures, which include travel permit requirements on Palestinians, also contribute to problems with respect to clearing Palestinian goods at Israeli ports and airports. According to the Palestinian Authority, such requirements make it too costly and/or difficult for Palestinians to make their way to these points of entry to clear their goods. Indeed, Palestinians have no presence at Israeli ports and airports (and are not allowed to be at the borders) and use subcontractors in Israel to clear their goods.9 According to the Palestinian Authority, it costs the Palestinians 7-10 percent more than the Israelis to clear and transport their goods; Palestinians pay about 12 to 15 percent for such services while the Israelis usually pay about 5 to 7 percent.
Although the same rules apply for clearing and securing trade licenses in the West Bank and Gaza Strip and Israel, these procedures involving Palestinians are reported to be more time consuming and costly. Thus, for example, clearing goods from countries with which there are free trade agreements requires no import licenses. The process for Paiestinians usually takes 2-5 days while for the Israelis it takes only a day. This is because, for Palestinian imports, the security verification and compliance with standards and specifications require more time and more papers for verification.
Autonomous Palestinian Trade and Trade-Related Measures
Owing in part to the prevailing framework within which trade must be conducted, the Palestinian Authority has allowed the formation of trading monopolies and initiated agency requirements. At present there appears to be trade monopolies for petroleum products, cement, and possibly meat and other construction materials. The effectiveness of these monopolies varies. Thus, with respect to the trade monopoly for cement, instructions to allow only one company to import cement appear to be disregarded.10 Similarly, meat import licenses were being issued even though there were efforts to control such trade. On the other hand, the petroleum monopoly is being enforced owing in part to the requirement of the Interim Agreement that petroleum imports comply with Jordanian standards. Consequently, such products cannot be imported from Egypt but, due to the Iraqi origin of such products, they also cannot be imported from Jordan. Under the circumstances, the Palestinian Authority utilizes an Israeli company to import petroleum products. These monopolies are due, according to the Palestinian Authority, to efforts to generate more fiscal revenues—to overcome the loss of revenue (customs and purchase taxes) stemming from indirect imports (see above).
During the last year or so the Palestinian Authority has started to encourage Palestinian agencies to import goods directly from overseas (outside Israel) and also from Israel (including both goods produced in Israel as well as reexported from Israel).11 The objective of these agency requirements is to bypass Israeli agents. The Palestinian Authority issued sole Palestinian ageney requirements for goods being imported from countries other than Israel on January 1, 1997, and up to recently some 200 agents have registered to be the sole distributors of their products in the West Bank and Gaza Strip. The Palestinian Authority was also introducing sole Palestinian agency requirements for imports from Israel, but this was being undertaken gradually in order not to disrupt trade, although plans are to eventually firmly implement it. The Palestinian Authority does not intend to apply this latter regulation to basic materials, such as food, raw materials, etc., but rather to goods requiring maintenance and to goods such as foodstuffs for which producers could be held liable. The Palestinian Authority is concerned over the fact that it has no jurisdiction over Israeli distributors and wholesalers who ship to the West Bank and Gaza Strip outdated or defective goods. Thus, the decision on Palestinian agency requirements is based on securing more fiscal revenue (by increasing direct imports to the West Bank and Gaza Strip), on getting better jurisdictional control of the domestic market, and on encouraging the development of the private sector. All these, how-ever, perhaps could be better attained without the likely adverse consequences of sole agency requirement, which to the extent they imply only one Palestinian importer would result in the establishment of monopolies for the products concerned in the West Bank and Gaza Strip. To avoid possible adverse consequences of this requirement on resource allocation, the Palestinian Authority should not confine Palestinians to sole agentries but should advocate competition among the agents.
Primarily in response to the prolonged border closure in the third quarter of 1997, which the Palestinian Authority indicated made importation of only essentials possible, a circular was issued in early September 1997 banning the import from Israel of about 15 groups of goods, such as cigarettes, paint, vegetable oil, electric appliances, electronics, furniture, canned foodstuff, vegetables and fruits, biscuits, chocolates, etc. The boy-cott was essentially on Israeli goods and, for some of the items in the list, exceptions were made if the goods were directly imported or else imported by a Palestinian agent.
In terms of conducting trade with both Israel and the rest of the world, basically the same import regulations are employed as in Israel, except that these are implemented by Palestinian Authority entities. The implementation of some of the regulations results in the Palestinian Authority and Israel exchanging information on a daily basis. For example, in accordance with Israeli requirements, the Palestinian Authority Ministry of Economy and Trade issues all import licenses and endorses export certificates of origin. Import licenses, according to the Palestinian Authority, are issued without any delay and are valid for a period of six months to a year depending on the product range. This issuance is dependent on information being keyed into the Israeli system in order to allow the goods (both Palestinian and Israeli) to be cleared at customs.
Implications of the Current Trade Regime
In view of the nature of the West Bank and Gaza Strip’s trade regime, both in terms of the situation on the ground as well as the parameters (i.e., Interim Agreement) within which modifications can be made, there appears to be room for some changes in the immediate future—even before permanent status arrangements are concluded—to derive greater benefits from trade. These initial, up-front measures can involve utilizing some of the trade options within the Interim Agreement, removing some of the weaknesses of the Interim Agreement in the trade area, eliminating trade barriers that are not essential for security, making existing security controls more efficient, and implementing regulations that remove impediments to efficient allocations of resources.
In formulating policies, the question arises as to what kind of trade policy would in the years ahead best induce growth in the West Bank and Gaza Strip over the long run. In view of the small size of the economy and limited resources, the development of strong linkages with external markets is critical. Trade needs to be the engine of growth for the West Bank and Gaza Strip. In formulating such a trade policy, account needs also to be taken of the advantages of the West Bank and Gaza Strip, such as the existence of “relatively sophisticated labor force,” strategic geographical position, and a relatively open economy with little industrial base at risk and with a revenue base not dependent on customs duties. At the same time, another critical factor that needs to be considered in formulating trade policy for the West Bank and Gaza Strip is the trade relationship it has had with Israel since 1967. It would be very costly to end this relationship since at present, as noted above, the bulk of the West Bank and Gaza Strip’s trade is conducted with Israel and the West Bank and Gaza Strip has very limited trade infrastructure to carry out trade with third parties.
Taking all these factors into account, the West Bank and Gaza Strip’s trade policy would need to be geared to attracting investment and opening up new growth opportunities based on comparative advantage. The former calls for trading rules that are credible and stable and the latter calls for multilateral liberalization, that is, liberalization on a most-favored-nation (MFN) basis. Unimpeded access to all markets, including by securing the necessary trade infrastructure (by diversifying trading routes—airports and seaports, renewing and expanding existing infrastructure, and establishing links between the Gaza Strip and the West Bank), is essential. Given the limited availability of natural resources, the West Bank and Gaza Strip’s trade strategy would have to be one that moves gradually from low- and medium-skilled exports to higher-valued manufactured exports derived by processing raw materials and semi-finished regional products.
Thus, the aim of the West Bank and Gaza Strip should be a nondiscriminatory trade regime, that is, multilateral trade liberalization and free trade. The achievement of this objective would have to be in stages. Indeed, until the permanent status arrangements are concluded, some of the existing trade arrangements will have to be continued. After that period, the West Bank and Gaza Strip could possibly move toward a free trade agreement with Israel and eventually toward a completely open trade regime—multilateral free trade. The Palestinian Authority could use the free trade agreement to set tariffs to its trade partners to less than those being affected in Israel, to the extent that this reflects Palestinian development priorities. The preferential trade arrangement with Israel, as well as the free trade agreements with some of its other trade partners, could be used as a building block for multilateral trade liberalization.
A free trade agreement with Israel would give the Palestinians trade policy independence whilce continuing their preferential arrangement with Israel. The West Bank and Gaza Strip would be able to develop new markets, including by reducing its customs duties to less than those of Israel.
Such an arrangement would allow the West Bank and Gaza Strip to have access to other markets not only through its current arrangements but also by being able to make concessions to third parties (e.g., reductions or elimination of tariffs on an MFN basis) while moving toward realizing its overall trade strategy.12 A free trade area would also result in higher tax revenues for the Palestinian Authority, since taxes that at present leak to Israel can be collected at the customs borders and the West Bank and Gaza Strip would gather more of the purchase and excise taxes. The disadvantages of a free trade area with Israel would be the introduction of customs borders and also rules of origin, which ensure free trade is confined to goods and commodities that are actually produced within the member countries.13 Another problem with the formation of a free trade area might be that since the West Bank and Gaza Strip would be independent to set its tariffs, lobby groups might try to influence the rates. To overcome that problem, the Palestinian Authority would need to set out clearly at the outset its trade policy strategy of liberalizing on an MFN basis (with the aim of multilateral free trade in the near future).
In the short run, it has to be assumed that the Interim Agreement with Israel would not be rescinded or modified significantly. Given this assumption, what can be done at present to enhance the trade prospects of the West Bank and Gaza Strip?
As noted above, the binding constraint on Palestinian trade at present appears to be the barriers entailed by Israeli security procedures through increased costs and occasionally physical disruptions. Therefore, the Gaza airport and the Gaza port are essential to improve the West Bank and Gaza Strip’s links with the outside world. Establishment of such infrastructure would remove one of the major barriers to Palestinian access to third markets. In addition, measures could be implemented to make security controls both more efficient and effective. For example, Israelis are at present building a new checkpoint at the border in Qarni to conduct export trade from the Gaza Strip to Israel on an automated basis. The operation involves having some 500 “sterilized” Palestinian trucks on the Israeli side pick up the goods delivered from the Gaza Strip on other Palestinian trucks. The loads of the trucks will be x-rayed at the checkpoint. The “sterilized” trucks will have special “boxes” to allow monitoring within Israel and to ensure they travel to their designated destinations. This facility, which is expected to become operational in early 1998, is anticipated to significantly hasten trade and reduce the transportation costs of trade for the Palestinians—although the Israelis will charge a fee for the use of the facility. Israel is considering a similar arrangement at Allenby and has begun a project to upgrade the Rafah terminal facility to ease the flow of traffic in both directions.
Along the same lines of reducing unnecessary barriers due to security procedures, safe passage is essential for trade between the Gaza Strip and the West Bank. Various possibilities are being debated, such as the utilization of existing Israeli roads but monitoring Palestinian movement through special passes, or having a completely separate passage.
Related to security restrictions, Palestinians need to be given clearance agency privileges at Israeli ports and airports and be issued travel and vehicle permits more leniently. Palestinians should be allowed to compete with Israelis as clearance agents and as transporters of goods. Such measures would contribute to reducing costs of trade and to increasing the competitiveness of Palestinian goods in the regional markets.
Simultaneously with these endeavors to reduce the adverse consequences of security restrictions on trade, the Palestinian Authority should try to utilize the trade options within the Interim Agreement. In particular, the Palestinian Authority should seek to utilize the option to fix customs duties (to below those in Israel), and to reduce tax leakages. Fixing customs duties on goods would provide the Palestinian Authority with some trade policy independence, allowing customs duties to be more in line with the economic circumstances of the West Bank and Gaza Strip, and, more important, providing an opportunity to reciprocate to trade partners. (As noted above, this is at present a very limited option because goods on Lists Al, A2, and B account for about $5 million to $6 million in West Bank and Gaza Strip’s trade.) For essentially the same reasons of trade policy independence (including opportunity to be free of Israeli quality standards), the Palestinian Authority should seek to expand the number of goods for which it can set customs duties. In expanding the coverage of these lists, the issue of goods leaking into the Israeli market would have to be addressed. Under the current Agreement, it is maintained that such leakages are prevented by the low customs duties in Israel, the quantity restrictions (and consequent lack of quality standards) on Lists A1 and A2 imports, and regulations requiring Arabic packaging of goods imported into the West Bank and Gaza Strip. The use of Arabic makes identification of West Bank and Gaza Strip goods easier.
At the same time, to derive the benefits of efficient resource allocation, Palestinians would need to improve their operations at the crossing points (by having the latest equipment to process traders as well as new fleets of special trucks to carry out trade between Jordan and the West Bank); allow competition in the trade area by eliminating monopolies and sole agency requirements; and invest in improvements in the infrastructure.
Conclusion
To garner the benefits of outward-oriented strategy—economic growth and efficient resource allocation—the Palestinian Authority must in the near future work with the Israeli authorities to eliminate trade barriers that are not essential for security and make existing security controls more efficient so that the focus is on security and maintenance of trade. Simultaneously, efforts should be undertaken to utilize more fully the trade options within the Interim Agreement and to remove some of the weaknesses of that Agreement in the trade area. The Palestinian Authority should also be wary of introducing or maintaining measures that adversely affect efficient allocation of resources—such as sole agency requirements and import monopolies. Indeed, the aim of the Palestinian Authority should be to have economic decisions relating to production and investment based on market-based incentives, which means, among other things, having a non-discriminatory trade regime—that is, multilateral trade liberalization and free trade.
This chapter has benefited from information and insights from “Trade Relations Between Palestine and Israel: Free Trade Area or Customs Union?” by Nu’man Kanafani, Palestine Economic Policy Research Institute, December 1996, and “Development Undcr Adversity? The Palestinian Economy in Transition,” Chapter 7, prepared by the Palestine Economic Policy Research Institute and the World Bank, October l997 draft.
Excludes preferential tariff rates under free trade arrangements. Most imports from the United States, the EU, and the European Free Trade Association (EFTA) benefit from preferential duty-free status.
There are also exemptions from tariffs and purchase taxes (and specifications) with respect to imported vehicles registered in the West Bank and Gaza Strip and petrol derivatives. The Palestinian Authority, however, has not utilized these options.
Under this agreement with Jordan, customs duty rates are set at zero for specified goods.
Technical and nontechnical standards, sanitary and veterinary conditions, as well as packing and labeling specifications of imported goods are important elements of Israeli trade policy. Israel has faced complaints against the use of such standards as a means to protect local products and discriminate against imports. Israeli quality standards employed with respect to food items are very rigid.
The West Bank and Gaza Strip cannot (with the exception of List Al and A2 countries) conduct trade with those countries with which Israel does not have relations. This has curtailed the West Bank and Gaza Strip’s trade relations with the majority of Moslem countries.
Negative effects of trade diversion can be reduced by having the tariffs in the West Bank and Gaza Strip be lower than those in Israel.
The United States Congress does not recognize this agreement and regards it as part of the agreement with Israel.
According to Israeli authorities, the use of an Israeli truck costs about NIS 2,000 per day, while a Palestinian truck in Gaza charges about NIS 500 per day. Using the combination of both or, for that matter, just the Israeli truck, adds considerably to the cost of Palestinian trade. For further details, see Palestinian National Authority’s “Back to Back, the Palestinian Trade Realities at Crossing Points,” January 1997.
According to Israeli authorities, Palestinians are given the same services and are subject to the same costs as Israeli traders. Israelis, moreover, maintain that they put up no clearance barriers to Palestinians.
According to the Palestinian Authority the cement monopoly was established in order to allow the Palestinian Authority to benefit from the difference in the high prices at which cement was being marketed in Israel and the actual, lower production cost of cement.
The aim is to have Palestinian dealers or representatives responsible for all foreign products entering the West Bank and Gaza Strip.
In this context, reductions in external tariffs to below those in Israel would be essential to reap the benefits of a free trade agreement, otherwise there would be trade diversion.
Rules of origin are necessary to prevent trade deflection (i.e, goods are imported into the free trade area through the country with the lowest external customs tariff, then transferred, without tariff, to another country in the area that has higher tariffs).