United States Institute of Peace

International Network for Economics and Conflict

Renegotiating the Paris Protocol

Following the failure of the Palestinian U.N. bid for their recognition as a State, the Palestinian Authority's President Mahmoud Abbas called for the reconsideration of the economic clauses of the Oslo agreement, the so-called Paris Protocol (PP) of 1994. At the heart of the PP lies a 'common customs envelope', actually a customs union, and its corollary, the remittance to the Palestinian Authority of the taxes collected on Palestinian imports from or through Israel. Given the absence, at the time, of a physical border separating the Palestinian territories from Israel, this was the only viable arrangement then. For without such a barrier, the fiscal and trade policies of either side could be vitiated by goods entering it through the lower tax jurisdiction. It also was expected to retain for the Palestinians free access to the Israeli markets, unencumbered by any tax, duty, or levy.

The outbreaks of Palestinian violence in the post-Oslo years, and the measures Israel adopted to suppress them, progressively eroded the benefits that the effective customs union of the PP could yield to the Palestinian economy. In particular, the El Aqsa Intifada, which erupted in late 2000, resulted in the setting up of innumerable road checks and road blocks that greatly hampered movement within the Palestinian territories, and between them and Israel as well as the rest of the world. Palestinian goods entering Israel continued to be exempt from import duties, but they found it more and more physically difficult, not to mention costly, to reach it. Coupled with the drastic decline in the number of Palestinians admitted to work in Israel, this resulted in a sharp fall in Palestinian income levels, even before the Israeli blockade of Gaza, and the military incursion into it, took their toll. 

People tend to deduce causality from comparisons of sequential observations. Thus, the view gained currency among Palestinians that their economic decline having chronologically followed Oslo and the Paris Protocol, it was also due to them. But given the restrictions on the "movement and access" of both goods and labour, no other arrangement regulating the economic relationship between the Palestinian territories and Israel, such as, say, a Free Trade Area (FTA) agreement, would have performed better.

Not that the PP did not need revising. As the rest of the Oslo agreement, it was originally supposed to apply only to an "interim period" of five years, by the end of which a permanent settlement of the Palestinian-Israeli conflict was to be reached. Nevertheless, already at the time of its conclusion it was clear that implementation difficulties, and situations which were not envisioned then, could arise in the meantime, which might require changes in the Protocol. But with the mistrust that developed between the two sides, the Joint Economic Committee intended to deal with such cases never stood a chance.

By now, the near completion of the Separation Wall between the Palestinian territories and Israel makes feasible a whole gamut of alternative economic arrangements. Export growth being crucial to a small economy's development, a customs union (CU), in the form of an improved Paris Protocol, remains the best prospect from the purely economic point of view. But even if it successfully addresses current Palestinian grievances concerning leakages in the tax remittances and similar matters, a CU will be inescapably plagued by problems arising from the sheer size disparity between the two economies. With the Israeli economy twenty times larger than the Palestinian one, it is difficult to envisage a joint decision-making mechanism for the common external trade regime. Whatever the future status of the Palestinian territories, their government would thus have to acquiesce in Israeli economic diktats, which even if acceptable per se, might be politically unpalatable to them.

The Palestinians may prefer instead to opt for a Free Trade Area agreement with Israel. This leaves each side free to determine its own tariffs on imports from the rest of the world. But it only exempts from custom duties those imports from the partner country that were produced there.

The FTA would also allow the fulfillment of the Palestinian desire for similar relations with other partners, especially in the Arab world. As Palestine already enjoys FTAs with the USA and the EU, agreements with additional countries will probably not greatly expand its export markets. And the small, resource poor, Palestinian economy might be hard pressed to manufacture locally the 35-45 percent of the value of goods, required to satisfy the condition of domestic content, which would allow their duty free entry into Israel.

But what might ultimately clinch the issue from the Palestinian angle, is that an FTA would also free them from the constant threat of Israel arbitrarily withholding the remittance of the tax revenues it collects on Palestinian imports, as it recently did in response to the PA being admitted to UNESCO.

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