Trade policy in a sovereign Palestinian State: what are the options in a final settlement?

The Palestinian economic relations with Israel are governed by the Paris Protocol, which was initially negotiated for a transitory period that was supposed to end in 1999. The protocol due the asymmetry of power between the negotiating parties, and its bad implementation has caused over time a slow growth of the Palestinian economy and a heavy dependency on Israel. Both economic and security conditions on the ground call for a re-negotiation of the terms of the Protocol and ultimately a final settlement of the conflict. There is a wide consensus that a final solution should provide for a Palestinian State with unambiguous borders, and full ownership of economic and monetary policies. Within the framework of such a final solution, this paper provides a quantitative assessment of the impact of different trade policy options in order to inform the debate. The paper departs from previous studies, which examined the question in a descriptive way, by relying on a general equilibrium model. Four trade regimes are considered from a complete removal of tariffs with respect to all trade partners to the introduction of high tariffs on import from Israel. In addition, the paper addresses the question of optimal currency-regime by examining the four trade regimes under two different economic environments: floating and fixed exchange rate regimes. Finally, the paper addresses the prevailing unemployment issue by accounting for the unemployed population in the model. The results show that a liberal and non-discriminatory trade regime in the West Bank improves economic performance and reduces unemployment significantly. This of course requires full ownership of trade and monetary policy tools by the Palestinian National Authority including a separate currency and hence, a sovereign Palestinian State.