Review and Assessment of Palestinian Trade Policy Options

There is hardly a sector in the Palestinian economy that has been as extensively researched as that of the problems and prospects of the Palestinian trade policy performance. The question whether the existing trade regime – principally the Customs Union with Israel – is the best available one, provided it can be fully implemented, or whether the Palestinian economy would benefit from a move towards a different regime, has been approached from diverse angles and with different political and economic assumptions. It is, therefore, not surprising that such research has yielded different and contradictory results.

This study on Palestinian trade policy is the first of its kind. Through an intellectual history documenting the framing and evolution of trade policy research, it provides a map of the terrain of existing research on trade policy reform and brings order into the conceptual confusion created by conflicting policy recommendations thus derived. It does so by comprehensively reviewing, and critically assessing, research by a wide range of authors and institutions produced over the past three decades. The study therefore provides a reference from which further trade policy research can draw and a guide to inform Palestinian policymakers and stakeholders engaged in trade policy formulation.

The study analyses four permutations of possible trade policy frameworks that have dominated the analyses and proposals of the studies reviewed here:

- the current framework established by the Oslo Accords, the Protocol on Economic Relations between Israel and the PLO, which reflects one form of a Customs Union (Chapter 2);

- a functional and improved customs union with Israel (Chapter 3);

- a Free Trade Area with Israel in different hybrid formats (Chapter 4); and,

- a Non-discriminatory Trade Policy, based on Most Favored Nation treatment of all partners (Chapter 5).

In presenting the literature that has analyzed the comparative advantage and disadvantage of these options and how they might function in the specific Palestinian context, the study encompasses all dimensions of the debate, in particular:

- the comparative theoretical advantages to the Palestinian economy of the different options, assessed especially through their relative impacts on viii trade creation and trade diversion, as well as other factors such as institutions and market dynamics;

- the political factors which have shaped and changed approaches towards what is considered as the preferable Palestinian trade policy regime, be they the PLO negotiating stance, Israeli security interests, joint Palestinian-Israeli peace-building initiatives, or international organizations privileging a particular view on the relationship between trade and development; and,

- the extent to which the current or proposed alternative arrangements correspond to, or are incompatible with, the twin imperative of Palestinian sovereignty and development.

The cumulative body of research reviewed here and ostensibly aimed at reforming Palestinian trade policy has proceeded along three tracks: proposals for piecemeal improvement of (some would say cosmetic changes around) the present trade policy framework; work assessing the optimal trade policy based on various economic theories and assumptions that has often abstracted from real world constraints on the ground; and, research that has taken these constraints into account with the assumption that the Palestinian economy should either chart its future from within these constraints or attempt to set itself free from them. Despite these established research approaches to Palestinian trade policy options, most analyses fail in systematically linking trade policy to wider development goals, economic sovereignty and political independence. The concluding chapter to this study outlines recommendations to avoid several flaws in future trade policy research, be they methodological, theoretical or political.