Palestine Economic Policy Research Institute

NATIONAL TRADE POLICY FOR PALESTINE – ANALYSIS OF TARIFF AND INDUSTRIAL POLICY OPTIONS

A study prepared by:

Misyef Jamil

As part of the project:

“EU SUPPORT TO THE PALESTINIAN MINISTRY OF NATIONAL ECONOMY FOR

TRADE POLICY FORMULATION AND WTO ACCESSION (EU-TPS)”

Funded by European Union

Implemented by

GFA Consulting Group, GmbH / WTI Advisors, Ltd.

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NATIONAL TRADE POLICY FOR PALESTINE – ANALYSIS OF TARIFF AND INDUSTRIAL POLICY OPTIONS

Lead Researcher: Misyef Jamil Research Coordinator: Raja Khalidi Assistant Researcher: Besan Abu Joudeh Statistical Analyst: Husam Khalifeh This publication has been produced with the assistance of the European Union, as part of the project “Support to the Palestinian Ministry of National Economy for trade policy formulation and WTO accession”, implemented by the Consortium GFA Consulting Group/WTI Advisors (WTIA). The content of this publication is the sole responsibility of the authors and GFA/WTIA Consortium and can in no way be taken to reflect the views of the European Union.

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FORWORD

Building on its strong track record in producing action-oriented analytical and empirical research covering various aspects of Palestinian trade policy, MAS is pleased to present herein its latest contribution to this subject. Led by MAS researcher Mr. Misyef Jamil, the present study examines the current Palestinian tariff structure and proposes ways forward towards greater autonomy in trade policy-making, both under a future scenario of Palestinian independence and within the limits of the current trade regime established in 1994 by the Paris Protocol on Economic Relations. While MAS has had this subject on its research agenda since 2015, we are grateful for the opportunity to actually complete it in 2017 in collaboration with the EU-funded project “EU Support to the Ministry of National Economy for Trade Policy Formulation and WHO Accession”, implemented by GFA/WTIA. That the Paris Protocol is deficient, if not adverse, from a Palestinian development perspective, is no longer a source of disagreement among experts. As a 2016 MAS study, “Review and Assessment of Palestinian Trade Policy Options”, demonstrated, there have been numerous reports, studies and projects initiated by a range of Palestinian and international institutions on the optimal regime to govern future trade relations between the two states: Palestine and Israel. However, this latest study by MAS departs from the hypothetical analysis of theoretical options and engages in a detailed empirical investigation of what an alternative trade and tariff regime could actually look like. In particular, it abandons the focus on what is best for Palestinian-Israeli relations and instead revolves around the issue of what is best for sustained Palestinian economic development and achieving trade sovereignty. In this aspect, if in none other, the study is to be set apart from its various predecessors. In addition, an essential premise of the methodology and the goals of the proposed Palestinian tariff system that emerges from the analysis is that strategic Palestinian development considerations, especially those concerned with nurturing domestic industrial and agricultural productive sectors and transforming an economy distorted by half a century of occupation, must be the drivers of trade and tariff policy, now and in the future. Hence, the tariff analysis is rooted in a careful study of proved Palestinian industrial potentials to respond to domestic and export market demand and entails an industrial policy that supports the growth of viable and competitive infant industries without an undue protectionist bias. The proposals that come out of this examination should prompt serious attention by policy-makers, the industrial sector, and the concerned research community, since they provide ample justification for urgent attention to a set of immediately available autonomous trade policy measures that could bolster the ability of the Palestinian economy to survive and even thrive. Despite continuing political constraints on the study’s more ambitious agenda of a wholly separate, Most Favoured Nation, tariff regime, it is possible to begin today steps in that direction, entailing a vigorous effort by the Palestinian government and private sector to increasingly tailor economic and trade policy to the realities and needs on the ground and to building trade sovereignty step by step. Nabeel Kassis, Ph.D. Director General

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PREFACE The two high level objectives of the Palestinian government, as stated in the National Policy Agenda 2017-2022, are achieving political sovereignty and economic independence. An autonomous trade policy is a necessary condition for attaining economic independence and reducing dependence on the Israeli economy. In this regard, a major challenge confronting Palestine is to devise a trade regime, which will replace the interim arrangements under the Paris Protocol and assure a growth-enhancing transformation of the economy and sustainable improvements of the overall welfare of the population. Tariffs, or custom duties, constitute a core instrument of trade policy for goods. Until now Palestine is bound to the Israeli Tariff Book, which has proven dysfunctional to our development aspirations, responding exclusively to the characteristics of the Israeli economy and to its welfare and commercial interests. Furthermore, the reliance on Israeli-dictated tariffs creates an unpredictable business environment for the Palestinian private sector, with implications for investment decisions and the competitiveness and profitability of business endeavors. It is therefore imperative to elaborate a Palestinian Tariff Book, responding to the growth and welfare requirements of our economy, while providing policy predictability. This excellent pioneering study, prepared by MAS under the EU-funded project “EU Support to the Ministry of National Economy for Trade Policy Formulation and WTO Accession” (EU-TSP) constitutes an invaluable contribution to the further work to be undertaken in the immediate future to elaborate and implement our own tariff policy. As clearly stated, the objective of the study is not to dictate which should be the tariff policy to be implemented. Rather, it constitutes a first effort of identifying options to shape decisions on an autonomous Palestinian tariff structure. More work and extensive consultations with stakeholders certainly would be needed in order to adopt decisions regarding the most appropriate tariff policy for Palestine. This will only be possible with the effective and committed participation of all stakeholders from the public and the private sector in the future working agenda. The study makes three significant contributions. First, it proposes the basic orientation and the main principles that should govern tariff policy in relation to industrial and development policies. Secondly, it provides a methodological approximation, and a workable database, that will allow further exercises supporting the national debate that will have to take place before decisions regarding tariff levels and tariff dispersion are made. Finally, the simulations presented demonstrate that it is possible to achieve a good balance between three competing objectives of tariff policy: consumer welfare; adequate effective protection to domestic production; and, fiscal revenues. The study concludes that the Palestinian economy will be better off departing from the current Tariff Book and adopting a different tariff policy better tuned to the development requirements of the Palestinian economy. I wish to express the appreciation of the Palestinian government for the support received from the European Union, making this study possible, as well as many other valuable contributions of the EU-TSP, buttressing our efforts to device an autonomous trade policy and securing an effective integration into the multilateral trading system.

Abeer Odeh Minister of National Economy

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Table of Contents 1- INTRODUCTION 1

2- INDUSTRIAL PROTECTION AND TARIFF POLICY 3

2-1 Infant Industry Protection and Industrial Policy 3 2-2 Tariff Rates and Structures 5

2-2-1 The welfare impact of imposing customs tariffs on a small economy 6

2-2-2 Flexibility in designing tariffs for developing countries 6

2-2-3 The upside of tariffs for industrial development 7

2-3 Industrial Policies in Developing Countries 8 3- THE PALESTINIAN TRADE REGIME AND TARIFF POLICY 10

3-1 Protocol on Economic Relations and other Trade Agreements 10 3-2 Israel’s Tariff Policy 11 3-3 Overview of Palestinian External Trade Sector 12 3-4 Palestinian Trade Policy Options 14 3-5 Improved Customs Union or Alternative Trade Regime? 15

4- DESIGNING A PALESTINIAN INDUSTRIAL POLICY 17

4-1 Palestinian Industrial Sector Policies 17 4-2 Local Industrial Production in Palestine 20 4-3 The PA experience of imposing selective tariffs to protect local industries in 2013 27

5- IMPACT OF THE PER: PUBLIC REVENUES AND THE TARIFF SCHEDULE 28

5-1 PA public revenues from trade 28 5-2 Methodology for Establishing Tariff Rates, Standards and Implementation 32

5-2-1 Economic Standards 33

5-2-2 Technical Standards 33

5-2-3 Implementation Mechanism 34

5-3 Building the Palestinian Tariff Structure 35 5-4 Customs Duties Rates by Commodity Categories 35

5-4-1 0% level of customs duty 36

5-4-2 5% level of customs duty 36

5-4-3 10 % level of customs duty 36

5-4-4 15% and 20% levels of customs duty 37

5-4-5 30% level of customs duty 38

5-4-6 100% level of tariff rate and higher 38

6- ASSESSMENT OF THE IMPACT OF TARIFF RATES UNDER ALTERNATIVE TRADE

REGIMES 39

6-1 First alternative scenario: an independent Palestinian tariff schedule 39 6-1-1 Comparison of (Proposed) Palestinian and Israeli Custom Duty Rates 40

6-1-2 Comparison of (Proposed) Palestinian and Israeli Purchase Tax Rates 40

6-1-3 Comparison of Revenues under the (Proposed) Palestinian Tariff Schedule 41

6-1-4 Local Production, Exporting and Industrial Policy 42

6-1-5 Lists A1, A2, and B in the First Scenario 43

6-2 Second alternative scenario: tariff options under the PER 44 6-2-1 Mechanism of Implementation 44

6-2-2 Results of the Second Scenario 45

6-2-3 Impact of the Second Scenario on Revenues 46

6-2-4 Local Production and Exports 46

6-2-5 Commodity Lists (A1, A2, and B) 46

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7- COMPARATIVE ANALYSIS OF PALESTINIAN TARIFF OPTIONS AND

CONCLUSIONS 48

7-1 Main Scenario Analysis Results 48 7-1-1 An Independent Tariff Schedule 48

7-1-2 Modifying Tariffs Under the PER 48

7-1-3 Modifications of Tariffs under PER Commodity Lists and extending these Lists 49

7-2 Comparison of the Results of Proposed Palestinian Scenarios and the Currently Applied Israeli Tariff Schedule 49 7-2-1 Distribution of Customs Duties in the Currently Applied Israeli Tariff Structure 49

7-2-2 Distribution of Customs Duties on Imported Goods in an Independent Tariff Schedule 49

7-2-3 Distribution of Customs Duties on Imported Goods in a Modified PER Tariff Schedule 50

7-2-4 Comparison of the Simple Rate and the Weighted Rate 50

7-2-5 Comparison of Revenues Between Options 50

7-2-6 Cost of the Customs Union with Israel 50

7-3 Conclusions and Recommendations 51 REFERENCES 54

APPENDIXES 56

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Summary This study provides the empirical basis and exhaustive quantitative analysis to address a number of fundamental questions: What is the “optimal” proposed Palestinian tariff for responding to Palestinian economic conditions and strategic development? What is the customs policy that should be applied to commodity Lists in a more restricted horizon? Furthermore, this research has entailed examining the impact of Israeli tariffs have on both industrial policies and revenues, the best candidate goods to be added to PER commodity Lists, as well as identifying which domestic productive sectors should be protected and what level of protection would be required and justifiable? In particular, the latter investigation addressed the question of which products should be targeted for increased local production and exportation through the use of customs duty as a tool of industrial policy. The results of the analysis in this study answers these questions accordingly. To answer that the study has proposed a new Palestinian tariff schedule which reflects Palestinian economic development interests through adopting interlinked customs, industrial and trade policies under tow scenarios are envisaged; an independent non-discriminatory Palestinian tariff policy, or a Palestinian tariff which assumes the continuation of the status quo, that is, to exploit what is available within PER by setting tariff rates at higher levels than those imposed in the applied Israeli tariff, as well as apply an autonomous trade policy with respect to Lists (A1, A2, and B). The study also examined options for extending those lists to commodities that could be considered priority products to be included in new commodity lists to be agreed with Israel. This study has shown, particularly with respect to levels of rates used in tariff schedules, that “industrial policy” covers a range of optional measures: functional policies improve the overall performance of the markets, horizontal policies support specific activities across sectors; and selective policies are aimed at propelling specific activities or sectors. Five industrial branches of the 19 industrial branches employ more than 75% of total workers in the Palestinian industrial sector, classified by top employer of these five make up 70% of total Palestinian exports, which means that they are promising sectors and can be developed through adopting a supportive and protecting industrial and customs policy. The end result of Palestinian Tariff rate is not protection rate comparing with other country and WTO criteria since a protectionist customs duty rate ranging from 20% to 30% The main recommendations of the study guide the PA to any redesign of the Palestinian trade regime must take as its starting point a vigorous commitment to nurture industrialization and restructure a deformed economy, through using available tariff policy instruments and creating new ones in the future as they become feasible. The adoption of a new trade and tariff policy should be rooted in promoting a sustained and sequenced process of industrialization for Palestine. Government institutions (especially the Ministries of Finance and Planning and of National Economy) along with industrial and trade sector representatives to ensure dynamic linkages between export promotion, import substitution, tariffs, public revenues and productive sector investment. At the same time The two scenarios proposed are not mutually exclusive, though one assumes a much greater degree of autonomous policy making than currently available to the PA. The design of the more limited scenario of a modified PER incorporates the same basic industrial policy goals as the more ambitious independent tariff schedule. So, its adoption would not necessarily imply a permanent customs union with Israel, but indeed could be a building block that sets the scene for an independent trade regime. Finally, this proposed Palestinian tariff structure is a dynamic model that can be modified from time to time based on new developments in the economy and trade sectors and emerging industrial branches worthy of infant industry protection, as well as phasing out of uncompetitive activities.

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1- Introduction With the signing of the Protocol on Economic Relations (PER) or Paris Protocol in 1994,1 the Palestinian and Israeli economies entered into a quasi-customs union, with semi-free trade between the two parties and a common external tariff rate (with a few exceptions allowed under Lists A1, A2, and B). The PER resulted in a one-sided customs union with tariff rates that were designed to meet the interests of the Israeli economy, especially that Israel regularly modifies the tariff schedule in line with its national industrial and trade policy without consultation with the PA. While many studies have evaluated the merits of the customs union in comparison to alternative trade regimes, a detailed analysis on the tariff rates that best reflect the interests of the Palestinian economy has never been attempted. Such an effort is a necessary part of identifying economic policy tools to achieve an economic development vision for Palestine that is driven by strengthening local productive capacities through a comprehensive industrial policy. Such a tool-set would include a role for tariffs, and, eventually, will be necessary for any accession to the WTO, serving as the basis of negotiations for Palestine’s binding commitments. The study assesses the functioning and effects of the Israeli tariff schedule in force in Palestine and which in its current form wholly reflects the economic development interests of Israel, while stressing that the need for and shape of an industrial policy for Palestine has yet to be adequately studied. This leads to analyses the main criteria for designing a tariff regime appropriate to Palestinian development needs. The empirical investigation then proposes a new, Palestinian tariff policy under two main scenarios: a completely new tariff regime or an autonomous trade policy to be considered as a strategic shift in trade policy under changed political circumstances, or an improved tariff regime under the Paris Protocol that can be applied immediately. This tariff analysis is conducted in the context of a project “Support to the Palestinian Ministry of National Economy for trade policy formulation and WTO accession” funded by the European Union and implemented by GFA Consulting. The study builds on the accumulated experience of MAS in Palestinian trade policy issues, including a recently completed study on optional trade regimes (Samour, 2016), which emphasises the need to move the discussion on trade policy options forward from a conceptual treatment to one informed by the most detailed possible empirical analysis. The project’s overarching objective is to assist MoNE in four distinct but related areas of work: - Component 1: assist the MoNE in formulating a National Trade Policy for Palestine; - Component 2: assist the MoNE in its efforts to guarantee Palestine’s future accession to the

World Trade Organization (WTO), including designing a roadmap and supporting documentation; - Component 3: assist the MoNE with the development of a Compendium of Trade Agreements,

and provide consultation on how to improve the agreements and their overall application; - Component 4: assist the MoNE with the development of a Compendium of Trade-Related

Legislation, including draft legislation where critical gaps exist (and recommendations on what changes to expect to make to existing legislation in the event of WTO accession).

This tariff analysis is conducted in the context of Component 1: Formulating a National Trade Policy for Palestine. The overall objective of this study is to produce a set of tariff policy recommendations on how to optimize Palestinian tariff rates within a new national trade policy framework, but also to better understand Palestine’s proactive and defensive trade interests as based on actual trade dynamics and relationships.

1 Article XXIV on Economic Relations and Annex V of the Oslo II Accord

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Specifically, the analysis proceeds along three main axes: (1) Assessment of the effects of the current tariff schedule which reflects Israeli trading interests,

while it ignores Palestinian industrial and development policy strategic interests; (2) A scenario which assumes that there are no restrictions on tariff policy as currently framed

by the Paris Protocol and identifies a tariff regime commensurate with Palestinian industrialisation and development needs.

(3) A status quo scenario for targeted changes in the Palestinian tariff schedule permitted within the Protocol provisions, but hitherto unexplored;

The specific objective of the first part of the analysis is to understand the operation of the Israeli tariff regime and its impact on key Palestinian productive sectors. The first alternative scenario suggested projects the optimal ‘range’ and ‘direction’ of tariffs under a zero-restriction context, which establish ‘preferred’ effective rates of protection. The second alternative scenario proposes tariff modifications that could be envisaged in the immediate future, within the constraints imposed by the Paris Protocol. In both cases, the empirical analysis focuses on developing policy instruments to achieve the same objectives critical to the identified productive industrial developmental needs of Palestine, public revenue considerations and maximum trade policy autonomy. The methodology through which these alternatives have been developed according to clear criteria and simplified structure allows for systematic modification or revisions by policy makers in response to future changing trade patterns, the economic situation and strategic development goals. The secondary data used in the study were drawn primarily from Palestinian Central Bureau of Statistics published and unpublished series for the period 2010-2015, especially Economic Activities Surveys, Recorded Foreign Trade statistics, as well as Palestinian Authority (PA) Ministry of Finance data on trade revenue clearance at the HS 6-digit level. The full database elaborated in preparing the study and analysing tariff impacts under different scenarios is available in digital form to enable policy-makers to further develop the tariff proposals made here and modify PA tariffs as circumstances evolve.

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2- Industrial Protection and Tariff Policy ‘If I drove my five-year-old son into the labor market on the ground that he is able to earn his living,

he may become a very savvy shoeshine boy or even a competent unskilled worker, but there is

virtually no chance that he will become a nuclear physicist or a chartered accountant, as those jobs

would require at least another dozen years of parental protection and investment in education and

training.’Chang, 2004

2-1 Infant Industry Protection and Industrial Policy This study of an optimal Palestinian tariff regime takes as its starting point the need to integrate trade policy within an overall development vision that employs industrial policy as one of its main strategies, a “development-led approach to trade”. In theory, free trade allows countries to focus on their competitive advantage; allocative efficiency and productivity gains are achieved through trade with international partners. However, evidence from developing countries around the world, specifically the high economic growth of East Asian Miracle Countries as compared to the stagnated growth in Latin America, illustrates that free trade alone does not guarantee development gains. Empirical evidence from cross-country studies that previously claimed a causal relationship between free trade and economic growth frequently overlooked sequencing, and historical evidence suggests that trade liberalization is often the outcome of, rather than the prerequisite for a successful development strategy (Chang 2002, Rodrik 2001). During a country’s early stages of development, infant industry protection is necessary to allow an economy time to upgrade its capabilities. Trade liberalization should be gradual to allow infant industries time to ‘learn blueprints’ from international competitors in order to survive in the global arena. Standard economic literature assumes that the transfer of production technology is costless and instantaneous. However, any business manager knows that a company cannot simply take blue prints off the shelf and successfully implement the latest technology in another corner of the world. Infant industry protection provides firms with the time and resources necessary during an interim, risky period of knowledge transfer and learning (Chang, 2005). This does not imply a sterile debate of ‘export promotion’ vs. ‘import substitution’ as if they were mutually exclusive, one “good”, the other “bad”. Rather, industrial policy is about the appropriate mix of trade liberalisation, export promotion, and infant industry protection—across sectors, over time—in a way that enables a country to upgrade its industrial sector and grow fast. The strategic, yet organic, integration of free trade, export promotion, and infant industry protection is what distinguished the success of East Asia from the failure of Latin America (Chang, 2009). Today, few economists deny the necessity of state intervention in economic development, however the role of the government and the degree of intervention with free market forces continue to be a hotly debated. Former Chief Economist of the World Bank, Justin Lin argues (in the DPR Debate, Lin and Chang, 2009) for a ‘facilitating state’ that addresses the market failures that deny countries the immediate gains of opening their country’s borders:

It remains true that there are few if any examples of governments that have succeeded with a purely laissez-faire approach that does not try to come to grips with market failures…it is incumbent upon policy-makers and researchers to identify the most effective ways of promoting the productivity growth and change in industrial structure necessary for development.’

While Chang agrees that states need to address market failures, he argues that their role does not end there. Chang contends that a country cannot simply facilitate its current comparative advantage, but needs to defy it in order to upgrade its industry. Given the nature of the process of factor accumulation and technological capability-building, it is not possible for a backward economy to accumulate capabilities in new industries without defying its comparative advantage and entering the industry before it has the ‘right’ factor endowments.

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“Industrial policy” covers a range of optional measures that can be classified into functional, horizontal or selective policies, each with varying levels of government intervention. Functional industrial policies improve the overall performance of the markets, while horizontal industrial policies support specific activities across sectors, both of which are widely accepted. Selective (or vertical) industrial policies are aimed at propelling specific activities or sectors and often involve defying a country’s comparative advantage rather than building on it, leading the market, and ‘picking winners’ or sectors that are chosen to succeed for various considerations. If incorrectly designed or applied, these types of industrial policy can be the most distortive, and therefore controversial (UNCTAD, 2016).

While there is practically no example of a country that successfully developed without industrial policy, there are many examples of failures to implement industrial policy effectively in a manner that arguably did more harm than good. Arguments against state intervention in industrial policy include: governments cannot pick winners; developing countries lack the competent bureaucracies to render it effective; industrial interventions are prone to political capture and corruption; what is needed is not industrial policy, but across-the-board support for Research and Development (R&D) and intellectual protection (Rodrick, 2004). The take-away from this is not to dismiss the need for industrial policy, but instead to emphasize the importance of carefully designed, time-sensitive and targeted policies.

The key to success lies in the design and implementation of appropriate policies that support viable infant industries, without resulting in creating rent-seeking lobbies dependent on government subsidies. Chang (2004) identifies five critical steps for effective policy makers to increase their chances of success for industrial policy: realistic choice of ‘target’ industry; combination with an export strategy; government readiness to discipline rent-recipients; competence and political insulation of the implementing agency; and ‘embedded autonomy’ between the government and public sector. The latter refers to an ongoing relationship between the public and private sector where they work together to uncover the most significant obstacles to the structural transformation of the economy and identify interventions that are most likely to remove them (Rodrik, 2004).

The industrial policy toolkit is vast and includes a range of optional instruments. Weiss (2015) classifies the instruments available based on a country’s income level since many industrial policies require considerable fiscal resources from governments. Table 1 lists industrial policies available to low-income countries, classified as either market-based or public goods interventions. Import tariffs, export subsidies, duty drawbacks, tax incentives, and investment incentives are all used to target the product market.

Table 1: Industrial Policies in Low-income Countries

Policy Domain Market-based Public goods/ direct provision

Product Market - Import tariffs

- Export subsidies - Duty drawbacks - Tax credits - Investment/ FDI incentives

- Procurement policy

- Export market information/ trade fairs - Linkage programs - FDI country marketing - One-stop-shops - Investment promotion agencies

Labor Market - Wage tax credits/subsidies - Training grants

- Training institutes - Skills councils

Capital Market - Directed credit - Interest rate subsidies

- Loan guarantees - Development bank lending

Land Market - Subsidized rental - EPZs/SEZs, - Factory shells - Infrastructure - Legislative change

- Incubator programs

Technology - Technology transfer support - Technology extension program

Source: Weiss, 2015.

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While the World Bank (1987) has in the past made a case for subsidies by emphasizing that they ‘ do not raise prices, hurt customers, or raise costs to users,’, tariffs are often a more attractive policy tool for developing countries that are faced with limited fiscal capability since tariffs serve as a source of government revenue while still serving the objectives of industrial policy. In fact, tariffs have increased in importance as a policy tool for developing countries due to the declining availability and scope of other measures, specifically WTO restrictions on subsidies (Chang, 2004).

2-2 Tariff Rates and Structures In trade theory, the welfare effects of tariffs are an important consideration. Figure 1 uses supply and demand curves to illustrate the welfare effects of a tariff on a small country. There is a surplus to local producers and increased government revenue, but a decline in consumer welfare. Any change in tariff will impact these three parties depends. For a small country to realize national welfare gains from the implementation of a tariff, it must correspond with an effective development agenda and technological change that will improve the productive capacity of local suppliers.

Figure 1: Welfare Effects of an Import Tariff on a Small Country2

Source: Chang, 2009.

Despite this theoretical risk of distorting the market and creating allocative inefficiencies, tariffs continue to be used as an important tool for industrial policy by both developing and developed countries and vary greatly across economic sector (UNCTAD, 2016). Agricultural has the highest tariff rates (averaging almost 20 percent), followed by manufacturing products, which have a simple average tariff of almost 10 percent. However, in the case of natural resource products, tariff rates are generally very low (average about 6 percent) and trade is largely free under MFN rates. Tariff escalation is a common practice amongst policy makers, which is the practice of imposing higher tariffs on consumer (finished) products than on intermediates and raw materials. This is common in the tariff structure of many countries and is aimed at promoting feasible (light/medium) local industrial processing closer to consumers. Both developing and developed countries adopt escalating tariff structures, but to varying degrees (UNCTAD, 2016). High tariffs (above 15 percent) are

2 The tariff increases the price from the free trade price (Pft )to the price with a tariff (Pt). The higher price results in an

increase in supply from local producers (Sft to St), and a decrease in demand (from Dft to Dt). While there is additional government revenue (+C) and a producer surplus (+A), there is a loss in consumer welfare (-A –B –C –D) and the national welfare decreases (-B-D).

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generally referred to as tariff peaks and are levied on ‘sensitive products.’ They tend to be concentrated in products of interest to mass consumption in low income countries, such as most agricultural branches, in addition to apparel, textiles and tanning, furniture and light metal industries. 2-2-1 The welfare impact of imposing customs tariffs on a small economy

Economic analysis (Abed, 1998, AlKhadir, 2006) differentiates between the impact of a protective tariff policy applied by a small or large economy, as the former is largely influenced by world trade (price-taker), while the exports of a larger economy (and its demand for imports) can affect world prices (price-maker). The tariff impact analysis for a small country is constructed on the basis of similarity between local goods and imported ones and assumes that the local market is supplied from both sources. When local demand at a specified price is greater than the supply, the difference between the two is covered by imports. As a starting point when tariff conducting analysis, a customs duty is imposed on imported goods, which in turn increases prices for comparable local products and increases their supply, which eventually reduces demand for both locally produced and imported goods. This has the following impacts: 1. An increase in custom duty revenues resulting from imports. 2. A decline in the value of imports and improvement in the balance of trade (Producer Surplus

Effect). This benefits local producers by increasing the supply of their products. 3. Negative consumer welfare effects, whereby the lowered level of consumption and the higher

price of the quantities consumed (either of local or imported products) represent a net loss to the consumer. The consumer loses the consumption surplus, taking into consideration that the producer surplus would be less than the consumer surplus, and this difference represents a loss of revenues for the government, which is also referred to as the “cost of protection” incurred by the government and the consumer.

4. The cost of protection is a net loss related to consumer welfare: i.e., the amount that the consumer loses of the consumer surplus, and at the same time the amount that neither producers nor Government realize as revenue.

The implication of this for tariff design is that imposing a higher tariff has a direct impact of raising prices to the consumer, yet in the case of imposing tariffs on raw, intermediate or final products the effect is different. However, studies have found that the positive effects resulting from protecting local industries threatened by intense competition are far more than the negative effects on consumer welfare, especially when these commodities have weak elasticity, depending on their type: raw-intermediate-final products. Furthermore, local value added and its contribution to the production of goods is the determinant of the optimal industrial protection level. The higher the value added the more positive effects that protection has on employment and wages, through increasing the income of other companies, for example: protecting the bicycle industry will protect the income of bicycle producers and their employees and other producers working in the rubber, wheels and steel industries. To the extent that protection affects directly the value added of local industries which substitute for imports, tariffs would have positive effects on productivity. Therefore to achieve an effective industrial policy, tariffs should be imposed on final and intermediate goods that are produced locally. Also if the final product is completely produced locally, imposing higher rates on final products will be more effective. On this basis, the escalation approach, imposition of gradual tariffs on imported goods, is adopted in this study. 2-2-2 Flexibility in designing tariffs for developing countries A flexible tariff rate allows policymakers to determine the terms of trade, pursue industrial policy, support government revenues, and leaves room for negotiations at the WTO. However, there are political economy considerations, specifically the administrative convenience and reduction in

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smuggling and corruption that causes some economists to argue in favor of a uniform tariff. For example, Tarr (2000) advocates a uniform tariff, claiming that governments “are not very good at picking winners and there are serious dangers that the policy would be overwhelmed by requests for protection from vested interests irrespective of its economic merits”. However, given the critical role of the state in shaping and guiding industrial policy, such political economy considerations should not be grounds for a country to forfeit its role in stimulating development. In fact, few countries around the world have a low, uniform tariff rate. Even developed countries have a tariff schedule with most tariff bounds at low levels in line with WTO commitments, while retaining a few very high tariffs, indicating the importance of targeting. For example, the EU has a simple average final bound of 4.8%, which is considered low, but 0.4% of agricultural products have a final bound above 100% (WTO, 2016). 2-2-3 The upside of tariffs for industrial development

Economic models, such as Grossman and Helman (2010) endogenous growth models with R&D externalities, illustrate how tariffs can raise per capita GDP when they target the industry subject to externalities. Optimal tariff structure is a critical component often missing from the empirical tariffs-and-growth literature. Nunn and Trefler (2010) use cross-country industry-level panel data to find a significant positive correlation between productivity growth and the ‘skill bias’ of a country’s tariff schedule, supporting the argument that a country is positively transformed by tariff protection in ‘skill-intensive’ sectors. Today’s global context is profoundly different than it was three to four decades ago. The rise of international trading networks has created barriers for young firms to enter the world’s markets, while WTO rules have become more stringent, requiring even more ingenuity and innovation by policy makers to design effective industrial policy (Haque, 2007). A fundamental purpose of the WTO is ‘national treatment’, which prevents members from protecting their domestic industry at the expense of foreign producers or traders, but it still offers some flexibility for members to protect local interests. Under ‘special and differential treatment’ provisions, countries in early stages of development are permitted to protect local industry (Article XVIII:C and XVIII:D of the GATT). The WTO also allows for emergency tariff increases or ‘import surges’ on the grounds of a sudden surge in sectoral imports or overall balance of payments problems (Chang, 2009). Moreover, the Hong Kong Ministerial Declaration (WTO, paragraph 7) affirmed the permissibility of protection of politically sensitive sectors (for both developed and developing countries). By definition, sensitive products can be designated by each country, and are subject to lesser tariff cuts than specified by the formula. There is still no consensus on the selection and treatment of these products (proposals range from 1 percent of tariff lines by developed countries to 15 percent of tariff lines as proposed by developing countries) but the incorporation of sensitive products in the WTO leaves room for targeting (UNCTAD, 2011). Bilateral and regional agreements with and among developed countries and the IMF’s structural conditionality are generally more stringent in this respect than the restrictions imposed by the WTO. Rodrick (2004, p.32) states that it is easy to exaggerate the significance of WTO restrictions on industrial policy, and the largest constraint today is the ‘willingness to adopt’ industrial policy. To summarize, tariffs are particularly useful for developing countries with limited financial resources, but continue to be used by both developing and developed countries. While there is a general downward trend in tariff rates, both developed and developing countries continue to protect ‘sensitive goods’ that support a nation’s political and economic interests, which would be restricted under a uniform tariff policy. Most importantly, the impact of tariff rates on national income is subject to its design, with studies indicating that positive gains can be realized when tariffs target industries subject to externalities, particularly skill-intensive sectors.

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2-3 Industrial Policies in Developing Countries Developing countries adoption of industrial policies has always been linked to protecting infant industries, because of these industries inability to efficiently develop their production capacities due to lack of experience, technology and inability to compete in local and international markets. Nevertheless, the majority of developing countries continued to use protectionist industrial policies for decades, despite that many of these countries have joined the WTO and benefited from its

members’ privileges. There is still a broad divergence of opinion about industrial policies. One set of heterodox economists and experts emanating from the Keynesian tradition, such as Rodrik, Lloyd and Stiglitz, support using industrial polices. They contend that government protection helps in avoiding market failure and in protecting markets in developing countries from capital-intensive production, which is controlled by overseas and multinational value chain processes. Protecting infant industries by using selective protectionist tariffs is a key justification for the use of this policy, which provides for monitoring market competitiveness, import substitution, and the provision of foreign exchange, in addition to the general welfare affects of increased domestic production and employment (Quraishi, 2014). Neo-liberal economics and the agendas of international organizations like the International Monetary Fund (IMF), the World Bank, the WTO (the so-called Washington Consensus), have generally argued against adopting industrial policies. Customs-duty protection, which is one instrument of industrial policy, has been resisted by opponents of industrial policies, because of its alleged negative effects on market efficiency, misallocation of resources, and encouraging rent seeking behavior of industrial lobbies. It is believed that these factors lead to increased costs for consumers due to higher prices of protected goods, and thus less demand. Based on these pillars, most developing countries, including Arab countries in earlier stages of development, adopted protectionist tariffs as one of the tools of an industrial policy. Two types of industrial policies were employed: first, import substitution, which seeks to increase the production of local goods to replace imported (consumer) goods, through imposing higher tariffs and other measures against imported goods (consumer goods are the most targeted products by this policy). Alternatively, industrial policies have favored export promotion and targeting foreign market niches with manufactured products for which the country had a comparative advantage over other producers. Proponents of this policy contend that it leads to better growth rates than import substitution, since it provides equal incentives for local goods as for exported goods, as well as increasing productive capacity, skills development, and expediting technology transfers that enable industries to compete in external markets and to create jobs, especially in labor-intensive industries. Industrial policies, whether import substitution or export promotion, aim to: (Hantash, 2012) - protect local production and tap unutilized production capacity. - establish large industrial projects that benefit from economies of scale.

- expand production base and increase employment and thus GDP.

- develop the quality of local industrial production in order to access external markets. - improve the balance of payments and trade balance by increasing exports. The procedures and interventions for development of industrial exports and import substitution are multiple and possibilities for their application vary from country to other (Khalil, 2006). Some of these interventions fall within the promotion of industrial investments. Following are a quick review of these procedures, all of which should be considered in designing a Palestinian industrial policy and the appropriate tariff regime to enable it: 1. Imposing customs duty on a selection of goods that are good candidates for developing locally

and abroad. This procedure aims to reduce imports of consumer goods and to protect local goods

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against harsh competition. It entails a new approach to manufacturing by exporting local

production surplus while supplying local markets. 2. Direct export subsidies, in the form of financial grants provided to exporters by the government in

return for each exported unit, i.e. providing a lump sum for each ton of a specific good or material, or in the form of a percentage of the exported unit value. Countries often allocate part of import revenues for supporting exports.

3. Exemptions from taxes, which reduce export costs through the reduction or elimination of taxes and export license fees, as well as commissions for the benefit of institutions authorized to export. Exemption can include taxes on income resulting from exporting.

4. Refund of import duties is a customs system where producers are reimbursed for the costs they have incurred (taxes and custom duties), when importing raw and intermediate materials that are used in manufacturing exported goods. Accordingly, the exemption of these goods from custom duties and taxes will reduce the cost of these resources, and reduce the cost of production, thereby lowering the prices of finished products.

5. Increasing allowed depreciation percentages for industrial machinery and equipment to encourage exporters to invest in modern equipment.

6. Exempt imported equipment used in establishing export manufacturing ventures. This serves import substitution and goods targeted for exporting at the same time.

7. Foreign exchange quotas, under which exporters are allowed to keep a certain percentage of their earnings in hard currency in return for their exports, for using it in importing.

8. Loans and credit facilities. Countries usually resort to provide loans to finance fixed capital of new industrial projects, as part of the actions and efforts to promote industrialization, and for this purpose these countries resort to establishing specialized financial institutions like industrial banks, and may sometimes resort to provide low-cost loans for financing all or part of the working capital of new industrial projects.

9. Export credit facilities. The development of industrial exports depends on many factors, including the quality of the product, its price, packaging method…etc. If we assume that these conditions are met, then we can say that the easier the terms of payment for the importers, the bigger the volume and stronger the competitiveness of exports. This plays an important role in the promotion and development of exports.

10. Establishing industrial free zones and free trade zones, which result in an increase in its foreign exchange revenues, by increasing the volume of exports and re-exports, and increase in the flow of imports.

11. Encouraging investment policy for foreign industrial investments. 12. Transport services, by establishing a suitable infrastructure for movement of goods, through the

development of ports and road network. 13. Maintaining quality through the development of the specifications and standards system, and

inspection of goods that will be exported before exporting.

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3- The Palestinian Trade Regime and Tariff Policy

3-1 Protocol on Economic Relations and other Trade Agreements The Protocol on Economic Relations (PER) or Paris Protocol concluded in 1994 between the Palestine Liberation Organization and the Government of Israel governs the economic and trade relations between the two parties. The agreement was to be guided by “the principles of mutual respect of each other’s economic interests, reciprocity, equity and fairness” with the aim to empower the Palestinian side “in exercising its right of economic decision making in accordance with its own development plan and priorities” (Protocol on Economic Relations, 1994). The Protocol was an annex to the Oslo Accords and the Gaza-Jericho Agreement, as part of a broader political agreement and not based on purely economic considerations. Therefore, it is to be expected that political developments would determine its interpretation and application (UNCTAD 2014). The Joint Economic Committee was to be composed of an equal number of experts from both sides to serve as the decision-making body and resolve any disputes that might arise. However, this body has been almost completely inactive since 2000, illustrating how economic issues are often tied to political and security concerns. It is also important to note that the Protocol was part of an interim five-year agreement, and was scheduled to end in 1999. Hence its provisions, which were designed to address the challenges of the 1990s, have not been revisited despite the transformed economic and political landscape more than 20 years later. Drawn broadly along the lines of a customs union, the Protocol assumed that Palestine would benefit from the economies of scale that might emerge from trade with Israel. The customs union that resulted is alternatively described as a unilateral, modified or semi-customs union, whereby Israel retains a disproportionate influence. For example, while Israel engages in global trade and is a member of the WTO, this status does not benefit Palestinian trade and Israel does not recognize trade agreements that the PA enters into with other countries. The tight coupling of the Palestinian economy with Israel institutionalized trade dependency and also the importation of high living costs through Israel. As specified in the Protocol, the Palestinian VAT cannot be set more than two percentage points below the Israeli rate, despite the enormous difference in per capita income of the two economies. Moreover, the agreement was such that the Israeli government would collect the clearance revenue (VAT, import duties and other income) on direct imports from countries, then transferred to the PA monthly, something that has been repeatedly interrupted or delayed owing to Israeli political considerations. The cumbersome and unpredictable process to receive customs duty refund results in the private sector resorting to indirect imports through Israel, as opposed to direct imports from the rest of the world. The Protocol may have been the only possible framework for Palestinian trade in the 1990s when relations with Israel were still amicable and the rebuilding of the Palestinian economy was in its first stages, both conditions have been overtaken by events since. While it was appropriate for the maturing Israeli economy to begin a steady process of trade liberalization in the 1990s, such a trajectory was not in the best interests of a Palestinian economy struggling to mobilize its own resources and assets and pursue development of domestic productive capacity and autonomous trade relations with the world. Today, as a more diversified and competitive Palestinian industrial sector has begun to emerge despite adversity, the idea that Palestine should continue to apply the Israeli tariff regime, geared to Israeli industrial policy and strategic trade interests, is anachronistic. One aspect in which the Protocol is unsuited to Palestinian trade interests, is that of international preferential trade agreements. According to the Protocol (Article IX), the PLO may sign economic/trade agreements with third parties if they comply with the Paris Protocol and with Israel’s own agreements with third parties. Existing trade preferences granted to Palestine can be classified in three categories: those that are dependent on the Paris Protocol; those that are interlocked in the context of European regionalism strategy and Euro-Mediterranean Partnership; and those that are

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stand-alone agreements (Abugattas, 2016). Palestinian exports are granted duty free access to the US, Canada, GAFTA, and the EU. Preferential trade arrangements that are dependent on the PER include the US Presidential Proclamation of 1996 and the Joint Canadian Palestinian Framework for Economic Cooperation and Trade of 1999. Both measures grant duty-free market access to Palestinian products through an extension of bilateral trade agreements with Israel. The second category of trade agreements evolved around the European-Mediterranean Initiative, which was launched in 1996 and focuses on economic, social, and financial cooperation. In the economic sphere, the EU initiatives aim at establishing a wide FTA between the EU and all Mediterranean countries (Euro-Mediterranean Free Trade Area - EMFTA). The Palestinian trade agreements with the EU, the European Free Trade Area (EFTA), with Turkey and the AGADIR Agreement are embedded with this wider initiative. Of the stand-alone agreements, the Greater Arab Free Trade Area (GAFTA) of 1997 offers the greatest economic potential for Palestine, which provides duty-free, quota-free access for all goods exported to GAFTA members. All Palestinian imports from GAFTA members should enter exempted from custom duties, however since Israel does not recognize Palestinian FTAs, Israel collects custom duties from Palestinian importers, which the PA then refunds. The MERCOSUR agreement of 2010 also carries significant potential as a stand-alone agreement, but has not yet come into effect as it is still pending ratification by all MERCOSUR member countries. The MERCOSUR-Palestine agreement is practically identical to that signed between Israel and MERCOSUR but carries political significance, as it is signed by the State of Palestine with countries that have already recognized Palestine as a sovereign entity. In return, Palestine committed itself to most of WTO rules and regulations by direct reference to them in the text of the agreement. In the case of Palestine, an additional, explicit policy objective pursued by the PA when entering into these trade agreements, was to reduce the high dependence on the Israeli market and diversify trading partners. Despite the numerous trade arrangements that the PA has entered, there has been limited impact on exports, intra-sectorial allocation of resources, and within-sector upgrading of the Palestinian economy, as economic growth of the last decade has been driven mainly by non-tradables (Abugattas, 2016). Table A1 in the Appendix presents trade flows between Palestine and its preferential trade partners from 2007-2014. It illustrates the negligible effect of these agreements in enhancing Palestinian exports or diversifying markets, and their limited contribution to reducing Palestinian trade dependency on Israel.

3-2 Israel’s Tariff Policy Israel’s tariff policy is currently implemented by the PA, despite that it is designed and modified to reflect the development interests of the Israeli economy at different stages. According to the PER, the PA should be informed of any changes to the trade and tariff policy in advance of such changes, but Israel has progressively liberalized its trade over time and continuously modifies its tariff rates without consulting or informing the PA, which simply updates its tariff book as Israeli modifications are made. With a GDP of US$299 bn, Israel’s economy is roughly the same size as Singapore’s and approximately 24 times that of Palestine’s (US$12.7bn). Israel’s economy is dominated by high-tech goods and services as one of its core strengths is its capacity for innovation (WTO, 2012). Israel is classified as a high-income country with a per capita GDP of US$35,728 compared to US$2,867 in the West Bank and Gaza.3

3 http://data.worldbank.org/indicator/NY.GDP.PCAP.CD (Current USD, 2015)

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Over 95% of Israeli tariff lines are in the 0-20% range, over half (54.6%) are duty free, and the average applied MFN tariff rate was 7% in 2012 (WTO 2012). While the average applied MFN tariff on non-agricultural products is 4.2%, which is relatively low, it is 24.5% on agricultural goods. The tariff rate on agricultural goods has decreased since 2004, when it reached 40%. Tariff protection is particularly high on dairy products (an average of 109.9%) and live animals and related products (an average of 42.3%). Moreover, many agricultural tariffs are complex and non-transparent since they are compound or mixed duties. By ISIC sector the average tariff for agriculture, forestry and fishing is 29.6%; for mining and quarrying 0.2%; and for manufacture 5.8%. There is significant dispersion of tariffs, indicating different effective protection for different products (WTO 2012). Moreover, Israel applies value-added tax on imported and domestic goods and services currently at the rate of 16%, but several items, including fruit and vegetables, are zero-rated. In addition, more than 400 items are subject to purchase tax, which mainly consist of certain luxury and consumer goods, as well as alcoholic beverages. Israel also imposes quotas on both agricultural and non-agricultural products (including meat products, live animals, dairy products, cement, and carpets). The PA receives a portion of this quota (e.g. the PA receives 20% of the quota on milk products and 25% on the live animals). Israel also uses an export quota for its international trade agreements, and it does not allocate any amount of this quota to the PA. This is because the Rules of Origin identify products from the Palestinian Territory as domestic and they do not benefit from Israel’s international trade agreements.

3-3 Overview of Palestinian External Trade Sector According to the Palestinian Central Bureau of Statistics, during 2015 the Palestinian economy showed a progress compared with 2014 in different aspects, while it showed a retreating in other aspects. In terms of real GDP, it reached US$7,721.7 million for the year 20154, achieving a progress of 3.5% form 2014. The West Bank’s share of GDP amounted to US$5,895.8 million, and US$1,825.9 million for Gaza Strip. The per capita GDP also increased by 0.5% in 2015, where it decreased by 0.2% in West Bank and reached US$2,265.7, while it increased by 3.3% in Gaza Strip amounting to $1,002.8. The labor force participation rate for 2015 reached 45.8%, decreased by 0.5% in West Bank, while increased by 0.9% in Gaza Strip for the same year. The number of workers increased from 917 to 963 thousand workers between 2014 and 2015, 59.5% of them are working in the West Bank, 28.8% in Gaza Strip, while 11.7% are working in Israel and its settlements. Regarding to sectoral distribution of labor forces, the private sector is the largest employer of these forces, employing around 63.1% of workers. 22% are working in public sector jobs, around 11.7% are working in Israel and its settlements, and the rest (3.1%) are working in other different sectors. The unemployment rate decreased by 1%, from 26.9% in 2014 to 25.9% in 2015. This rate hits its highest points between young (15- 24 years old) labor forces, especially the newly graduate ones, where it reached 40.7% in 2015 amongst workers in this age group. An explicit goal of the PER was to reverse the asymmetric nature of bilateral trade, which has resulted into a chronic trade deficit. Therefore, the success of the PER should be measured on the basis of its ability to restructure its trade relation by diversifying its trading partners and penetrating into new markets, ultimately facilitating the establishment of a Palestinian economy with greater autonomy (Samour, 2016). Table A2 provides a general glance at the Palestinian’s economy trade performance from 1997 to 2014.5 Although the value of exports gradually increased (with the exception of the collapse caused

4 The nominal GDP in Palestine in 2015 amounted to US$12,673.0 million, distributed by US$9,538.9 million in the

West Bank, and US$ 3,134.1 million in Gaza Strip. 5 1997 is taken as a base year to allow for an analysis of the trade performance once the changes brought forward by the

PER to come into full effect.

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during the second intifada), its growth of 146.8 percent for 1997-2014 lags behind the growth rate of imports that registered at 153.9 percent for the same time period. Significantly, the export base of the Palestinian economy not only remained exceptionally weak, but also deteriorated when compared to its level in the 1980s. The ratio of exports to GDP for 1986 was 25.3 percent; between 1997 and 2014, the ratio moved between its peak of 10.2 percent in 1997 to its historical low of 6.5 percent in 2010. On the other hand, the import to GDP ratio, despite its decline in the period under investigation, increased from its levels in the 1970s and 1980s and remains exceptionally high an average of 51.3 percent. Thus, the trade deficit of the Palestinian economy steadily increased and its ratio to GDP (with an average of 43.5 percent between 1997 and 2014) was significantly higher than its level in the previous decades. From 2008 onwards however, there has been a notable decline of the trade deficit/GDP ratio from 50.3 percent in 2007 to 37.3 percent in 2014 which, at first sight, appears as a cautious sign of relative improvement in the Palestinian economy’s external balance but reflects the preponderance in the import bill of increasingly inexpensive bulk import items such as oil products. Indeed, a closer look at the data reveals that the downward trend of the trade deficit to GDP ratio was mainly driven by increased GDP growth. And since GDP growth since 2008 has been largely aid-driven (UNCTAD, 2011a), the resulting decrease of the trade deficit to GDP ratio was neither a sign of a sustainable recovery nor did it provide a basis for a structural improvement of the economy’s external balance. Table A3 highlights the nature of the Palestinian economy’s merchandise trade relation with Israel. The ratio of exports to Israel to total exports declined from 94.1 percent in 1997 to 83.9 percent in 2014. Likewise, the ratio of imports from Israel to total imports declined from 82.7 percent to 69.9 percent in 2014. Between 2008 and 2014, the growth in the Palestinian economy’s total exports, and those destined to Israel, outstripped the growth of its imports from the rest of the world and Israel. As a result, the ratio of the trade balance with Israel to the total trade balance declined from 80.4 percent in 66.8 percent in 2014 or, as expressed in relation to GDP, from 39.7 percent in 1997 to 24.9 percent. These gradual changes for the better notwithstanding, they are – more realistically – better interpreted as a small, slow and perhaps reversible improvement. On a more fundamental level however, the stylized data on Palestinian trade show that since 1997, export growth still lacks behind import growth and that the trade deficit, despite its decline, remains high. Likewise, despite relative improvement, the lopsided dependency on trade with Israel persists – about two-thirds of the Palestinian trade deficit is caused by trading with one partner – with potential significant economic and political costs. Table A4 shows that the composition of Palestinian exports that is dominated by capital intensive goods (67.8 percent in 2014) as opposed to labor intensive goods (32.0 percent). The bulk of exports in the former category consists largely SITC groups of manufactured goods (SITC 6) and miscellaneous manufactured articles (SITC 8). However, their dominance in Palestinian exports should not be confused with a strong or advanced domestic industrial sector since most of the goods consist of low technology and added-value products such as machine parts (SITC 8) and textiles, ceramics and building stone (SITC 6). Tables A5 and A6 summarize the geographical distribution of Palestinian exports and imports and together underscore the assessment of Palestinian trade dependency on Israel and, by extension, the untapped potentials for expanding trade diversification. While the value of imports from both Arab countries in Asia and Africa between 1999 and 2014 has increased considerably by 258.1 percent, respectively 179.1 percent, Palestinian imports from these sources remain insignificant accounting in 2014 for 3.8 percent and 1.0 percent, respectively of total imports. The EU as an import market also remains well below potential – although the growth of import value increased by 6.5 percent between 1999 and 2014, the relative contribution of imports from the EU to the total value of Palestinian imports has declined from 16.1 percent to 9.1 percent in the same period. Within the regional classification of Remaining Asian Countries – which includes Israel as the main source of imports – Turkey constitutes the second most important import source with 5.7 percent of total value of imports

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in 2014 and China the third most important source with 5.0 percent. Palestinian exports destined to countries other than Israel, despite being marginal in their absolute value, have experienced a relatively greater trade diversification than imports over the past two decades.

3-4 Palestinian Trade Policy Options As a member of a Customs Union (CU), the Palestinian economy was expected to benefit from access and proximity to a larger, and more technologically advanced economy. Economic theory suggests that entering a customs union would allow the economies to benefit from one another and their growth would converge over time. Contrary to economic theory, per capita GDP between Israelis and Palestinians has continued to diverge and resulted in a worsening of the Palestinian trade performance and a structural trade deficit. This is mainly because the premise of any CU is that it rests on open borders and free trade between the two sides in goods and labor, both of which have been subject to non-market restrictions and distortions. The existing trade regime prevents the PA from using fiscal, monetary, trade, and exchange rate policy tools to manage its ‘overly exposed’ economy, and given rise to many studies that assess alternative trade regimes. UNCTAD (2009) conducts policy simulations of alternative fiscal, monetary, exchange rate, trade and labor policies and boldly concludes, ‘the present Palestinian economic policy framework, still shaped by the Paris Protocol, is incapable of responding to the challenges of the economy and its eroded productive capacity.’ The inherent limitations of the Protocol and limited growth of the Palestinian economy and export sector has, at different stages since the 1990s, prompted extensive discussions of an alternative trade regime (Samour, 2016). Over twenty years, numerous academic studies and reports have revolved around three options for an alternative trade regime: an improved CU through stricter implementation of the Paris Protocol; implementation for Free Trade Agreements (FTAs) with certain nations; and a Non-Discriminatory Trade Policy (NDTP) with Most Favored Nation (MFN) tariffs applied on all trading partners. However, options for an alternative trade regime can be argued to include two main directions: a deepened and improved CU, or a separate trade regime, classified as an NDTP with the potential for preferential or free trade agreements with select trading partners. The debate on the most appropriate trade regime was comprehensively reviewed in a recent MAS study on the subject, which concluded that the next stage of research in this area should be rooted in a realistic, empirically substantiated assessment of the exact costs and benefits to the national economy of the current regime geared to integration with Israel (or even in an improved CU). This should be compared to the impact on key strategic economic goals of a tariff and trade regime that would discount the supposed premium of an integrative regime and allow for separation of the two economies if need be, with or without preferential exemptions. Forced integration has been tried and tested (since 1967) and the results continue to be negative and contrary to theoretical expectations. Moreover, under the Protocol, economic integration or dependence has been used to tie the hands of Palestinian decision-makers politically. The arguments against CU or an FTA and in favor of MFN should not be understood necessarily in the context of political separation, but rather as trade neutrality vis-à-vis Israel and trade integration with the wider region and globally. Such a strategy will entail adjustment costs however, losers must be compensated, new sectoral growth poles with job-creation must be created and new institutional discipline in managing the trade regime will be called for. More critically, the question of whether to move away from the Protocol (either to more or to less integration with Israel) and how that should be determined by a larger and deeper development and economic building vision has yet to be formally addressed. Indeed, if development is not possible under occupation, it is imperative for economic policy, including trade policy, to carve out space with greater independent economic decision-making so that the economic leverage of the occupying power is undermined – a necessary condition for Palestinian development to move into the realm of possibility. To facilitate a powerful role for trade in this process, Palestinian economic policy-making

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should be rooted in a development-driven approach to trade. Such an approach would necessarily reduce emphasis on Israel as the predominant, but not inevitable, trade partner in any future trade regime and would respond first and foremost to Palestinian imperatives of economic and social development. Hence the new research presented in this study is a step forward from previous work both in terms of the quantitative sectoral analysis of trade data that it employs and of the link it seeks between economic sovereignty and a trade policy that emphasizes strategic economic development needs and the impact on considers public fiscal revenues as well as on local productive capacity and structure. This relates to the potential use of tariff to shelter and promote promising industries, either via higher tariff on competing imported final products or lower tariff on imported intermediary inputs. While the impact of alternative tariff regimes on the standards of living and poverty is also important, particularly considering the large rural population and high Palestinian dependency on imports of food stuff, it is not easily captured from existing data series and hence could not be not analyzed here. Along with finding the right balance among the above-cited impacts, proposals for an optimal Palestinian tariff and customs policy should be compatible with possible international trade obligations of Palestine, whether multilateral trade agreements (such as the WTO) or regional and unilateral free trade arrangements. The overall impact of such research, of which this study constitutes the first step, would be to consolidate the PA’s effort in designing, assessing and implementing a sound, sovereign trade for development policy for an independent Palestinian state. It would also provide clear guiding economic development principles and goals for eventual WTO accession that would avoid the pitfalls that Palestinian efforts to date have suffered and the risks of an accession process that would lock in the current tariff system that has promoted structural distortions in the Palestinian economy and in its trade relations with Israel and the ROW (Khalidi, 2015).

3-5 Improved Customs Union or Alternative Trade Regime? Two optional paths thus frame the analysis in this study: either an autonomous (MFN) Palestinian tariff regime, or a set of modifications to the existing tariff regime as permitted under the terms of the PER, in both cases designed to serve key industrial policy criteria. Under a traditional CU, imports from third parties have a common external tariff. In the case of the Israeli-Palestinian CU, the common external tariff constitutes the prevailing Israeli rates (as specified in Article III.5). These rates act as a lower bound, giving the PA the ability to impose higher rates, in principle. The PER specifies exceptions to this rule, which take the form of List A1, A2, B, and provides the PA with some flexibility to apply independent import regulations and facilitate the integration of the Palestinian economy into the region. List A1 and A2 consist mainly of consumer goods, and the PA was given full discretion over import policy (tariff rate and standards) of items on this list, but for a limited quantity. List B consists mainly of capital goods and there is no quota limit, but the items must meet Israeli standard requirements (MAS, 2015). The number of items (739 products defined at the HS 8-digit level)6 and quotas specified have never been modified. The PER also allowed the PA to determine the purchase tax on imported motor vehicles. Moreover, through these Lists the PA would be able to enter into trade transactions with countries with which Israel had no relations. Within the status-quo of the PER, Lists A1, A2, and B provide two main options for Palestinian trade policy-makers. First, there is the opportunity to develop a trade policy for goods on the lists, either to decrease the rates to accommodate local demand, or increase the rate to protect local industry. The second opportunity is to expand the quotas specified for items on the lists, to meet the market demand, which have not been updated since the signing of the agreement. Items on the lists comprise 13 percent of total imports in 2013 (see Table 2).

6 HS: Harmonized System is the globally adopted classification of products for trade and customs purposes.

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Table 2: Value and Origin of Goods Imported in 2013 from List A1, A2, B

List No. of goods

Value of imports (thousand USD)

From Israel %

From a third country %

A1 543 317,478 25% 75%

A2 37 172,601 75% 25%

B 138 56,236 20% 80%

Total 739 649,381 45% 55% Source: MAS, 2015

A more vigorous implementation of available “policy space” in the PER will also imply addressing the current fiscal leakages and revenue loss by the PA. Under the current arrangement, Israel collects VAT, import duties, and other income on behalf of the PA and transfers the clearance revenue monthly. Fiscal leakages that arise due to the current trade regime include indirect imports through Israel, the undervaluation of direct imports, and VAT on bilateral trade. UNCTAD (2014) estimates that fiscal leakages resulting from importing from or through the Israeli market, and the ensuing evasion of custom duties to exceed $310 million in 2011, equivalent to 18 percent of the tax revenue of the PA. In a similar fashion, the World Bank (2016) estimates total fiscal leakages at $285 million, with the bulk resulting from tax leakage on bilateral trade with Israel and undervaluation of Palestinian imports from third countries. One benefit of a CU is that it imposes discipline in the administration of customs policy, and the introduction of a separate tariffs on all goods will generate uncertainty, potentially suppressing private investment. Schiff (2002: 18) reasons, “discipline imposed on the trade policy...that results from a CU with Israel may well be the major benefit of maintaining the present trade arrangement.” Nevertheless, abandoning the PER in favour of an autonomous trade regime is widely seen to be a prerequisite for a future independent Palestinian state and affords the opportunity to set an independent tariff structure on all imports in line with economic growth needs and development interests. This could enable a FTA with Israel or take the form of a NDTP. Both an FTA and CU are based on a spirit of cooperation and integration and benefit from increased market access, economies of scale, technological spillovers and FDI. Implementation of an FTA with Israel would provide privileged market access to an advanced economy in close proximity. However, unlike a CU, the FTA preserves the autonomy of members to determine trade policy with other countries. Therefore, full control over borders and clear Rules of Origin (RoO) are both required for an FTA. An FTA would also afford greater political independence than the existing CU and in previous rounds of negotiations the PA has shown a strong preference to abandon the CU and shift towards an FTA with Israel. Alternatively, across the board MFN treatment would mean that Israel will be like any other trading partner, removing the institutional framework that has sustained Palestinian trade dependency on Israel. Unlike the CU and FTA that have a strong bias to import goods from preferential trading partners, an NDTP can create a more level playing field. The spirit of the WTO is most aligned to this trade regime and Article 1 of GATT stipulates that members of the WTO must grant other members most-favored nation (MFN) status to level the playing field between trading partners. When assessing the merits of an NDTP, the fundamental question is whether the macroeconomic gains from reduced trade dependency with Israel and trade policy sovereignty can offset the costs associated with losing the preferential trade relation with Israel.

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4- Designing a Palestinian Industrial Policy Notwithstanding the vast body of literature on alternatives for future Palestinian trade policy, only a handful of studies have explored an appropriate tariff regime for the Palestinian economy. Those that have taken on this task have generally prioritized analysis of political economy concerns rather than the economic impact of specified tariff rates on specific sectors of the economy or criteria. In one of the early studies on this topic, De Mello (2000) argued that a uniform low tariff rate (proposed at 5%) would be best suited in the context of Palestine’s political economy, largely owing to its administrative convenience. Similarly, the World Bank (2012) has recommended ‘a single, small, uniform tariff, which would ensure that the future state will benefit from the high levels of competition that drive productivity growth.’ UNCTAD (2009) produced the only study that does not endorse a low liberal uniform tariff structure. Their model assumes a gradual increase in the average tariff rate on imports from Israel from its current zero level to the average tariff on a typical Palestinian basket of imports from the rest of the world (16.6 % at the time), linked to a development policy to finance domestic economic growth and reconstruction and absorb labor working in Israel. These initial explorations of the question of an appropriate Palestinian tariff regime leave much unanswered in terms of both rationale and precision, but little research has been provided to take the discussion based on evidence and development considerations. In response to the De Mello proposal for a flat and uniform tariff, Laird and Abugattas (2003) commented that “the starting point for policy choices should be the economy's supply capacity and structure, as well as the required measures for developing this structure within the context of well-articulated development program, trade and industrial policies, whereby the tariff structure is a component.” Similarly, Samour (2016) emphasizes the importance of a well thought out tariff policy and states, ‘pursuing a differential, flexible tariff strategy is more likely to reverse the entrenched structures that have made the Palestinian economy rely largely on low value added production and boost the prospects to increase productive capacity to climb up the technology ladder to produce high-value goods.’

4-1 Palestinian Industrial Sector Policies

A ‘development-driven approach to trade’ rather than a ‘trade-driven approach to development’ means that the starting point for designing tariff policy should be its utility to the development strategy for the country. Such an analysis should address the economy’s structural weaknesses and build on a growth strategy that strengthens and diversifies productive sectors (Samour, 2016). This section provides background that needs to be taken into consideration when developing a tariff policy for the Palestinian economy. As discussed above, there is a consensus on the need for state intervention in the face of market failures that traditionally arise from economies of scale, imperfect information, etc. Living amid occupation, the Palestinian private sector is faced with rampant market failures, and the government has a critical role to play, whether simply as a “facilitator” or to “defy its comparative advantage,” without state intervention, successful development is next to impossible. Industrial policy plays a vital role in the structural change of an economy. A country’s tariff policy is a tool to support its economic and industrial development plans, therefore it is critical to assess the productive capacities of Palestinian industry before formulating its tariff policy. While the PA has laid out various economic visions, the most recent being the National Policy Agenda (2017-2020), there has been to date no explicit industrial policy that links the design of an effective tariff policy to other industrial support measures. This part of the study sheds light on the prerequisites for a Palestinian industrial policy, particularly considering industrial development over the years, and the impact existing policies have had on nurturing Palestinian industries. As well it endeavors to assess whether industrial sector policy in Palestine is efficient and to what extent a tariff policy was pursued over the past years and any impact it may have had on the local industrial sector.

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Policymaking to support economic sectors is the responsibility of the PA, which wields whatever instruments are at its disposal to influence internal and external economic activities, especially that so many challenges facing the private sector cannot be tackled without the government’s direct intervention or over the short run. It is not within the means of the private sector to design and implement as policy to reduce dependence on the Israeli economy, unless the foundation for such an approach is set and facilitated by the government. Other economic, monetary and fiscal policies are also in the hands of the government, including industrial policy, which is at the heart of the process of structural transformation of the economy. The Palestinian industrial sector faces huge challenges, beginning with the occupation’s control over and or interference in all aspects of economic activity. In addition to other internal reasons, the industrial sector’s contribution to the Palestinian GDP is still low, not exceeding 13% over two decades. This percent is also low compared with comparable economies, like Jordan, where it reaches 25%. This indicates that the Palestinian industry has not seen a real change since 1994, meaning that the industry is in dire need of support policies as a result of the unusual prevailing circumstances in this sector (Abu Zarifa, 2014). The sector’s declining contribution to economic development is attributed to the following: 1. Factors related to occupation; some are related to trade restrictions affection production inputs and

industrial machinery which are largely contingent on the Israeli market (depending on raw materials imported from or via Israel). Others are related to licensing and registration, particularly

in Area “C” and almost total dependence on Israel as the main trading partner. 2. Factors related to the productive capacity of the machinery, not replacing depreciated machinery,

and high production costs arising from the low productivity of some factories.7 In addition to other factors related to infrastructure, lack of access to credit, the small size of industrial establishments, adopting inappropriate industrial organaisation procedures, and the weak competitiveness of local goods against imported goods.

Since 1994, the focus of the Palestinian industrial policies were on separate, specific policy interventions, some of which were pursued, while others have not been implemented due to inadequate financial resources and human capital. The following is an overview of such industrial sector support policies (Makhoul, 2001): 1. Specifications and Standards: This policy aims to protect the consumer and product quality and

increase competitiveness. Whereas in 2000, some 600 Palestinian specifications had been validated, by 2016, a total of 3700 standards had been approved.

2. Industrial Licensing: These policies still lack a specific strategy for directing investments, facilitating industrial activities, easing licensing procedures, and moving factories located in residential areas through creating new local industrial zones, all of which requires extensive

planning and significant resources. 3. Industrial Training: This policy is still underdeveloped due to lack of capacities, personnel and

technologies. 4. Investment Promotion: The legal and administrative structures of investment, have been laid

down. Nevertheless, its development is still hindered by many obstacles, notably the unstable political situation, the lack of credit for productive investment, cumbersome procedures for obtaining bank loans and the inadequate incentive structures.

5. Trade Fairs and Exhibitions: Despite the extensive and diverse efforts of many public, private and non-governmental organizations, until today no significant progress was achieved in increasing

7 UNCTAD reports 2012, 2013, 2014 indicate that as a result of the Israeli measures the Palestinian productive base

shrank by more than 6%, meaning that the Palestinian economy productive capacity is operating at only 40% of capacity .

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Palestinian exports to global and international markets. This is ascribed to the absence of a comprehensive national plan and vision, and lack of coordination between the relevant parties.

6. Industrial Unions Formation: Since 1999 around 21 industrial sectoral unions were formed. However, the lack of coordination and a weak financial and human resource base have meant that their role in developing competitive industrial branches has been limited.

7. Financing: There are no specialized industrial lending institutions in Palestine and the commercial banking sector has assumed some financing of industry. The wide range of banks operating in Palestine offer industrial sector loans at high commercial interest rates, entailing alot of complex lending provisions and guarantees, in addition to short amortization schedules. This also applies to other small-scale credit institutions which compete with commercial banks.

8. Rehabilitation Palestinian Industries: The WTO provisions for protecting the environment and public safety through enforcing a Standards and Specifications system may have boosted competitiveness in international markets, but in turn burdened Palestinian industries with additional obligations that are not easy to adhere to. To keep pace with these developments, 400 Palestinian establishments were rehabilitated, at least partially, by 2005. Upgrading nonetheless, focused on complying with some international procedures and manpower capacity building, leaving full industrial upgrading unaccomplished due to lack of funding.

The PA’s industrial policy and manufacturing strategy are founded on balancing import substitution and export promotion (manufacturing for exportation), as announced in the successive economic programs and plans (Industrial Sector Development Program 1998-2001, the Palestinian Development Plan 1994 -2000, the National Export Strategy 2014 -2016, the National Industrial Strategy 2016 -2025). The PA issued several economic laws within this framework, especially the Investment Promotion Law, the Law on Industrial Cities and Zones, and the Specifications and Standards Law, in addition to launching many other projects and programs that aimed at supporting these efforts and reforming structural distortions of the Palestinian economy. The Ministry of National Economy recently drafted a “National Industrial Development Strategy for Palestine (2016-2025)” which included a redesigning of the Palestinian industrial policies. The strategy focuses on building a value-added competitive industry based on creativity, innovation, exploiting available resources, and integration with local and global economies. These goals will be achieved, per the strategy, through adopting industrial export development and import substitution, aiming to achieve a growth in the contribution of local industry to GNP from 12.8% to 22% in 2025,

through the following: 1. Modernizing and capacity building of local industries and increasing competitiveness of industrial

exports. 2. Improving the quality of priority sectors, and the establishment and development of production

clusters. 3. Providing appropriate incentives to encourage investment and attract foreign investors.

4. Focusing on high value-added products and improving quality. 5. Continue efforts on capacity building, innovation and scientific research. However, comparative experience as well as the past twenty years of PA policy-making, have shown that in the absence of a complementary trade and tariff policy that accommodates the needs of both export and import-substitution industries, sectoral policies are not enough to spur a process of industrialization. The bottom line is that customs policies (tariffs) have not been used as a tool of Palestinian industrial policy, leading to a piecemeal approach to industrialization. The only exception to this was the application of higher tariffs on four commodity import groups since 2013, largely in response to sectoral lobbying by domestic producers for such protection. Furthermore, the success of the newly adopted import substitution strategy depends on the customs tariffs as its main policy tool. It also depends on a careful appreciation of the current structure of industrial production and export

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potential as determining criteria for identifying branches that should be eligible for industrial policy support. This is addressed in the following section. 4-2 Local Industrial Production in Palestine From a macroeconomic perspective, the industrial sector (extractive, manufacturing and energy industries) contribution to GDP is still low, at 15% in 2015, whereas its contribution to GDP had hardly exceeded 13% over the past two decades. In comparison, Jordan’s industrial sector’s contribution to GDP has reached 25%. Nevertheless, from a microeconomic perspective, this does not necessarily imply the sector’s low significance to the Palestinian economy. In fact, the number of industrial establishments continues to grow annually, amounting currently to more than 17,000 establishments, 80% of which are in the field of manufacturing, distributed mainly among metal products (3800), furniture (2900), food products (2240), clothing (1600). In terms of its contribution to private sector employment (which accounts for 63% of the employed labour force), the industrial sector occupies the third position (after trade and services), employing around 20% of the 413000 workers in the private sector.8 The total value added of the industrial sector in 2015 constituted about

21% of the total value added of all sectors, which was US$ 6.5 billion. Industrial activities in Palestine are classified within three categories: the extractive activities of mining and quarrying, manufacturing (including all its components: gas, water and electricity) and the rest of the sector’s activities comprise gas and water supply. While all economic activities are classified within 70 ISIC categories, 19 of these activities relate to industrial production, and produce 27% of the output of all 70 economic branches.9 As well the sector contributes 83% of Palestinian exports, including stone and marble (21% of all exports), furniture (12%,) footwear (5%), as well as a

range of other smaller industries.

The Palestinian local productive branches have seen a notable improvement over time. For example, the total production of the nineteen productive industrial activities in Palestine has grown over time, as the value of production for those sectors grew from US$ 2,282 million in 2010 to US$ 3,407 million by 2015. This increase in production coupled with an increase in the number of workers from 61,287 in 2010 to 83,814 in 2015. Meanwhile the annual value added of these branches has improved

during the same period, rising from US$ 1,110 million in 2010 to US$ 1,337 million in 2015. Figure 2 illustrates the relation between the average value of production and the average number of employees in these nineteen, key productive branches for the period 2010-2015. It is noted that (generally) the number of workers in each sector is proportional to the quantity and size of production, which indicates that the productive structure of industrial branches in Palestine is mainly labor intensive rather than capital intensive. Table 3 and Figure 3 show the average number of workers employed in each branch to the total number of workers in all 19 branches examined here, over the period 2010-2015. It is noticeable that non-metallic minerals industry had the highest average number of employees among all productive branches, whereby an average of 18.8% of all those employed in these branches during 2010-2015 worked in non-metallic minerals industry. Figure 3 shows that the percent of workers in the metal industry peaked in 2012, then declined in 2013 only to rise again in subsequent years. On the other hand, the food industry comes in second place, in terms of the share of workers it employs (17.1% of all employed in the productive branches). This share was volatile over time, peaking in 2013 and then declining until the end of the period under reveiw. The number of establishments working in food and non-metallic mineral industry exceeded 2200. Following these branches are apparel and garment manufacturing activities which employed an average of 14.4% of productive branches’ workers. Figure 3 shows that this percentage has been decreasing, from 18.3%

8 The total number of employed (963000) in 2015 were distributed as follows: 63% in the private sector, 25% in public

and NGO sector and 12% working in Israel. 9 International Standard Industrial Classification (ISIC) categories

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in 2010 compared with 11.9% in 2015. This decline might indicate discharge of a large number of workers employed by the garments sector in the period, due to closure of several establishments in the

face of cheaper imports, which severely undermine the competitiveness of locally-produced garments.

Figure 2: Number of employees and the average production (2010-2015) of nineteen Palestinian manufacturing branches (ISIC classification)

Source: PCBS (2010-2015), Economic Activities Surveys

Furniture manufacturing comes in fourth place, employing 14.3%. The number of workers in this branch grew from 12.7% in 2010 to 16.1% in 2014, declining slightly in 2015. The significant expansion in the furniture industry is indicated in improved performance of existing establishments or through the opening of new establishments, totalling more than 2900 by 2015. The total value of Palestinian furniture production reached US$ 452 million by 2015, compared to US$ 235 million in 2010, a clear indicator of the strong growth of this industry. Meanwhile, fabricated metals employed 12.9% of the workers in the 19 branches, with only slight fluctuations over the period indicative of the branch’s relative stability and robustness during 2010-2015 and its potential for transformation into a

more prosperous branch if selective and appropriate industrial policies were put in place.

These five productive branches employed (on average) more than 75% of the total labor force in the nineteen branches examined during the period 2010-2015. The other activities exhibit either a decline in the number of workers over time (other mining activities, tobacco, textiles, paper and paper products, chemicals and allied products, and basic metals industries) or a normal increase in the number of workers over time (eg. beverage, leather and allied products, printing and media reproduction, coal and refined petroleum products). Data on other industries reveal inconsistencies in employment patterns (wood and allied products, basic pharmaceutical products, rubber and plastics

product industries).

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Table 3: Shares of employed in main productive branches (averages, 2010-2015)

# Economic Activity % of Sector's

Employees/ Total Employees

1 Manufacture of other non-metallic mineral products 18.80%

2 Manufacture of food products 17.1%

3 Manufacture of apparel & garment 14.4%

4 Manufacture of furniture 14.3%

5 Manufacture of fabricated metal products, except machinery and equipment 12.9%

6 Manufacture of leather and allied products 3.5%

7 Manufacture of rubber and plastics products 2.9%

8 Manufacture of wood and products of wood and cork, except furniture; Manufacture of articles of straw and plaiting materials

2.9%

9 Printing and reproduction of recorded media 2.3%

10 Other mining and quarrying 2.2%

11 Manufacture of textiles 1.9%

12 Manufacture of basic pharmaceutical products and pharmaceutical preparations 1.4%

13 Manufacture of chemicals and allied products 1.4%

14 Manufacture of paper and paper products 1.2%

15 Manufacture of beverages 1.1%

16 Other manufacturing 1.0%

17 Manufacture of coke and refined petroleum products 0.8%

18 Manufacture of tobacco products 0.3%

19 Manufacture of basic metals 0.2%

Source: PCBS (2010-2015), Economic Activities Surveys

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Figure 3: Change in the Percent of Workers Between Nineteen Industrial Branches, 2010-2015

Source: PCBS (2010-2015), Economic Activities Surveys

As shown in the first column of Table 4, the gross value-added of the domestic tobacco industry reached 87.3% of the branch’s total output (while the remaining share of gross value added constitutes imported inputs of intermediate products). This is the highest level of domestic contribution to value-

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added among the nineteen branches, which together produced 26% of non-public sector final output (third column of Table 4), casting industry as a potential stronger player within the private sector of the Palestinian economy than is evident from its share of total GDP (under 14%). The high domestic contribution to value added of the tobacco industry is driven by the high custom duties imposed on imported tobacco and the successive and accelerating rises in its prices, which caused a consumer aversion to imported tobacco. Figure 4 shows the change in the percent of value added to total production over the years 2010 to 2015, indicating that this share for the tobacco industry remained high and stable from 2010 to 2013, dropping significantly in 2014 and rising since.

The gross value-added of the domestic pharmaceutical industry reached 64.7% of the branch’s total output, indicating the strength of this branch which can compete with imported pharmaceutical products, in spite of all the restrictions imposed on its activities, especially on the quantity and type of raw chemical inputs needed in manufacturing. This percentage has been volatile over time, declining during 2012-2014 but relatively stable over the period. The domestic apparel and garment industry contributed 61.5% of value-added of the branch, while other mining industries contributed 55.1%. Both branch’s contribution to local output during the period 2010-2012 was volatile, but relatively

stable afterwards. The average contribution of local production in each of the preceding four branches was above 50%, indicative of the potential development of their contribution to local production and capacity to substitute domestic production inputs for imports of such goods. The second and the third columns in Table 4 (and Figure 4) show that the contribution of food industry and non-metallic minerals industry to total output of the nineteen productive branches was the highest of all branches, constituting 46.7% of the total output of these industries. The fabricated metal products industry and the furniture industry together produce around 20.6% (on average) of the total output of the branches under review. These four top industries produce on average two-thirds of the total production of the Palestinian manufacturing industries and along with the garments and apparel branch, employ over 73% of industrial workers (Table 3). Excluding the contribution of the public sector to total output, these five branches produced on average between 2010-2015 some 16% of private sector GDP.10

10 Not to be confused with the overall share of the industrial sector in GDP (14%) which measures the value added of the

industrial sector as compared to total output which is by definition is greater than value-added (ouTput = intermediate + value added).

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Table 4: Production and Value-added in Nineteen Industrial Branches (averages, 2010-2015)

# Economic Activity Gross Value

Added/Output

Activity Output/ Total

Output

Activity Output/

GDP

1 Manufacture of tobacco products 87.3% 3.7% 0.96%

2 Manufacture of basic pharmaceutical products 64.7% 2.6% 0.66%

3 Manufacture of wearing apparel 61.5% 3.8% 1.00%

4 Other mining and quarrying 55.1% 2.9% 0.76%

5 Printing and reproduction of recorded media 48.8% 1.9% 0.50%

6 Manufacture of leather and related products 45.8% 2.2% 0.57%

7 Other manufacturing 44.4% 0.9% 0.23%

8 Manufacture of wood and products of wood and cork, except furniture; articles of straw and plaiting materials

43.0% 1.7% 0.46%

9 Manufacture of fabricated metal products, except machinery and equipment

42.2% 10.5% 2.76%

10 Manufacture of food products 41.1% 24.3% 6.35%

11 Manufacture of furniture 40.8% 10.0% 2.63%

12 Manufacture of rubber and plastics products 39.1% 4.3% 1.12%

13 Manufacture of chemicals and chemical products 37.9% 0.8% 0.22%

14 Manufacture of other non-metallic mineral products 37.5% 22.4% 5.84%

15 Manufacture of textiles 37.4% 1.3% 0.35%

16 Manufacture of paper and paper products 35.4% 2.1% 0.54%

17 Manufacture of basic metals 34.9% 0.3% 0.09%

18 Manufacture of coke and refined petroleum products 33.5% 0.9% 0.26%

19 Manufacture of beverages 31.4% 3.1% 0.83%

Total - 100.0% 26.13%

Source: PCBS (2010-2015), Economic Activities Surveys

.

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Figure 4: Changes in Total Value-Added in Nineteen Industrial Branches, 2010-2015

Source: PCBS (2010-2015), Economic Activities Surveys

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4-3 The PA experience of imposing selective tariffs to protect local industries in 2013 The PA Cabinet decision No. (13\46\14) issued on 12\03\2013 proclaimed that custom tariffs applied by the PA to 212 imported commodities (apparel and garments, shoes, furniture, and aluminum production sectors) would be raised. Following successive waves of liberalisation, the applied (Israeli) tariffs on these sectors were by then quite low: apparel and garments (0%), shoes (12%), furniture (0%-12%), and aluminum (0%-8%). Local producers struggled to compete in the face of increasingly cheap imports of goods like those they were producing. After a brief examination of the production cost structure of domestic production branches for these commodities and international sources of these imports, the decision was made to raise tariff rates on these commodities coming from the rest of the world by between 6 to 15 percentage points, with the highest increase and imposed rate on leather shoes (reaching 27%). While to be effective, such a decision needed follow up and customs control mechanisms to ensure that imports from (or cleared through) Israel of these commodities would not undermine this measure, such comprehensive treatment was not possible under the current Palestinian trade arrangements. Despite any design or implementation flaws of the Decision that might be noted, it is instructive to examine the changes in the targeted branches following the tariff hike, as this was the only industrial policy tool deployed, aimed at supporting the concerned branches since 2013. Table 5 illustrates the changes in one of the four branches since the tariff increase, furniture production. In this sector in particular, strong and positive trends emerged between 2013 and 2015, with a 150% increase in the value of output, accompanied by a growth of 10% in the number of establishments in the branch, which employed 30% more workers in 2015 than two years earlier. This robust performance implies a growth in output per employed (productivity) of over 13% the first two years following the tariff increase, or around 6% annually.

Table 5. Furniture production branch indicators 2010, 2013, 2015

year Value of Production (Million US $)

Employed Establishments

2010 $ 235 8000 2695

2013 $ 302 10000 2769

2015 $ 452 13000 3068

Source: PCBS (2010-2015), Economic Activities Surveys

In one of the other branches covered by the tariff increase, leather processing, output grew from $50 million in 2010 to $85 million in 2013, falling slightly to $79 million by 2015. However, employment in this branch grew from 2000 to 2350 to 3640, respectively. Meanwhile the number of establishments in this branch was stable over the period, indicating resort to unutilized production capacity in existing establishments though labour expansion. While this seems to confirm a positive employment response after the 2013 Decision, this has been in a branch experiencing declining labour productivity (of over 40% between 2013 and 2015) at an annual average rate of around 4% between 2010 and 2015. The relatively unchanged performance indicators in the two other branches covered by the tariff increase is explained mainly by the resort to imports of these products through Israeli channels to circumvent the price impact (on local products) of the tariff Decision. This differential performance between the different branches examined underlines the need for attention to accompanying border control measures, accurate targeting of tariff rate increases when considered effective and greater capital investment, and human capital enhancement in protected sectors as part of a wider industrial policy of which tariffs are only one component.

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5- Impact of the PER: Public Revenues and the Tariff Schedule

This chapter begins by examining the PA’s revenues: sources, growth trends, and the relative importance to public finances of each source. This analysis serves two purposes: First, to determine the relative importance of revenues resulting from direct imports from countries other than Israel and to determine their relative weight to indirect revenues. Second, a significant portion of PA revenues is derived from customs duties applied to Palestinian trade flows, highlighting one of trade policy’s politically and economically sensitive roles, namely contributing to public revenues. The chapter also lays out the general methodological and related Palestinian considerations for designing a new tariff structure adapted to Palestinian development realities and legal and policy options.

5-1 PA public revenues from trade

Palestinian indirect revenues depend on both the Israeli tax system and Israel’s trade policies, as set by the PER. The Palestinian tax system has two main components; the first is direct taxes, regulated mainly by PA tax laws and policies, which contribute to the treasury with less than 10% of total revenues 11. The second component is indirect taxes, regulated mainly by the Israeli tax system.12 These taxes are levied on goods and services produced, sold, purchased, consumed, or imported, and they directly affect the level of prices which reflect positively or negatively on the welfare of citizens through impacting disposable income (UNCTAD, 2014). There are four main types of indirect taxes:

custom duties on imports, purchase tax, excise and value added tax (VAT). Figure 5 shows the PA’s map for all tax revenues and its resources and the contribution of direct and indirect taxes in relation to trade.

Figure 5. PA Tax Revenue Map

Revenuse Resources 10,685 NIS Million

Local 22.3%Israel 77.7%

DirectIndirect

VAT Property TaxIncomeTax

Direct 1%Indirect 99%

Trade with Israel 44%

Trade with ROW 55%

VAT 65%

Excis 35%

Custom 5%

Purchase tax 50%

VAT 45%

Total Clearance

11 Article (5) of the Paris Protocol regulated this relation stating that “ Israel and the PA will specify independently its tax

policies governing direct taxes which include income tax for individuals and corporations, property taxes, and municipal duties”.

12 Articles (3,4,5, and 6) of the Paris Protocol regulate importation, exportation, VAT, transfer mechanism of Palestinian tax revenues collected by Israel, in addition to adopting a Palestinian trade policy dependent on Israeli trade policy.

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*Source: percentage and numbers for year 2016 from PA Ministry of Finance Note: Total revenue resources (10685 Million NIS) do not include PA non tax-revenues (i.e., fees).

Through the “clearing system”, one of the main institutions of the PER, Palestinian taxes and duties are collected and transferred to the PA by Israel. Regarding indirect taxes, the system deals with two components of clearance revenues, the first is fuel excise and VAT on goods purchased from Israel by a clearing unified invoice. The second component is indirect taxes on goods imported from countries other than Israel, using a customs declaration, which include: VAT, custom duties, and purchase tax.

Table 6 and Figure 6 show the development of the PA’s revenues during the last five years, 78% of which are transferred through Israel and 22% are collected locally. The total revenues rose from NIS 8.4 billion in 2012 to NIS 13.6 in 2016. This development had a clear impact on these revenues contribution to GDP, which increased from 19.4% in 2012 to 27% in 2016. Clearance revenues (generated through purchases from Israel and imports from countries other than Israel) constituted more than 66% of total revenues, reaching 17.7% of GDP in 2016, compared with 12.9% in 2012, which means that tax and non-tax revenues account for about 34% of total revenues, i.e. 9.5% of

GDP. The table shows clearly the positive development in the PA’s revenues in terms of value and contribution to GDP, and demonstrates the importance of clearance revenues as one of the main

sources of revenues to the Palestinian treasury.

Table 6: Revenues contribution to GDP

M NIS ITEM

2016 2015 2014 2013 2012

13,614 11,311 10,445 9,181 8,423 Total Revenues

27.00% 23.00% 23.00% 20.40% 19.40% %of GDP

4,684 3,323 3,115 3,078 2,806 Local Revenues

9.30% 6.70% 6.80% 6.80% 6.50% %of GDP

8,930 7,988 7,331 6,102 5,617 Total Clearance

17.70% 16.20% 16.10% 13.50% 12.90% % of GDP

Source: PA Ministry of Finance, 2016 Total Clearance: include (vat and Excise) from Israel and imports taxes (purchase tax, custom duty, VAT)

Figure 6 : Revenues contribution to GDP

Table 7 and Figure 7 show that the percent of clearance revenues collected from trade with Israel during the last five years ranged between 54%- 59% of total revenue clearance, with remaining

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percent the share of tax revenues from direct imports from the rest of the world. This shows the relative importance of clearance revenues to indirect taxes on Palestinian external trade. It also demonstrates the high importance of revenues raised from imports from the rest of the world (ROW) and its growth trends, as these rose from 41% of total clearance revenues in 2012 to 46% in 2016, at the expense of trade with Israel. This is evident in the declining percent of clearance revenues from Israel, from 59% of the total clearing revenues in 2012 to 54% in 2016.

Table 7: Total Clearance Revenues from RoW and Israel

Import Duty from RoW VAT from Israel

2012 2279 3338

2013 2543 3559

2014 3097 4234

2015 3668 4320

2016 4135 4795

Source: PA Ministry of Finance.

Figure 7: Total Clearance Revenues from RoW and Israel

Revenues from imports from ROW are directly connected to the custom tariff schedule through the purchase tax rates and customs duty rates collected from imported goods, and it is also related to the Value Added Tax (VAT) applied to those imports. The value of total revenues depends largely on the

nature and value of the imported goods and the level of the tariff rate imposed on it. Tables (8, 9, and 10) and Figure (9) show the distribution of revenues by type of tariff. “Imported cars” is used in tables 10 and 11 as an example of the significance and contribution to revenues of one major import item compared with the total of imported goods.

Table 8: Total Revenues from Import Duties (RoW) by Type

VAT Purchase Tax Custom Duty VAT from Israel

2012 1089 1023 166 3338

2013 1206 1183 153 3559

2014 1408 1514 174 4234

2015 1674 1790 203 4320

2016 1828 2086 220 4795

Source: PA Ministry of Finance.

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Figure 8: Total Revenue from Import Duty (RoW) by Type

From the preceding examination of the trade tax structure, the following points explain how the current structure interacts with public revenue considerations of trade and tariff policy:

• The contribution of custom duties to import revenues is low and even deteriorating, declining from 7% in 2012 to 5% in 2016. This reflects the low weight of custom duties in the tariff schedule, in line with the principles of minimizing custom tariffs as one of the underlying WTO

principles. • Revenues from purchase taxes imposed on imported goods, as fixed in the tariff schedule, are

growing, constituting about 50% of import revenues in 2016, compared with 45% in 2012.

• Revenues from VAT (set at 16%) constitute about 45% of total import revenues. This high percentage is attributed to the method of calculation, by adding the value of purchase and custom tax to the value of the imported good, before calculating VAT on that good. This means that the purchase tax has contributed to raising this share of VAT and that the purchase tax is the key source of revenues generated from imports from the rest of the world, in line with Israeli “smart” liberalization which complies with global trade trends by lowering tariffs while retaining a protectionist edge in certain branches of strategic importance.

• Regarding the nature of imported goods, Table 9 demonstrates that there is significant growth in car imports, from NIS 561 million in 2012 to NIS 1208 million in 2016, an increase of 115%. As well the contribution of imported cars revenues to total import revenues increased from 13% in 2012 to 21% in 2016, while its share of the value of imports rose from 8% in 2012 to 12% in

2016. • Table 10 shows that car tax revenues, in terms of type of tax, are constituted by 62% purchase tax

revenues, 34% VAT revenues, and only 4% custom duties. This illustrates how custom duties in the overall tariff schedule for car-related revenues carry little weight, and this applies to most custom tariffs, whereby the tariff column that has the greatest weight in terms of trade revenues is the purchase tax.

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Table 9: Share of Cars in Total Import Value and Revenues from Import Duty

Value of Imports from RoW (CIF Value)

Revenue from Import Duty (RoW)

Cars Non-cars Total Cars Non-cars Total

2012 561 6712 7272 303 1975 2279

8% 92% 100% 13% 87% 100%

2013 556 6636 7193 361 2182 2543

8% 92% 100% 14% 86% 100%

2014 680 7412 8092 480 2617 3097

8% 92% 100% 15% 85% 100%

2015 993 8551 9544 740 2928 3668

10% 90% 100% 20% 80% 100%

2016 1208 9076 10285 859 3275 4135

12% 88% 100% 21% 79% 100%

Source: Ministry of Finance (MOF)- Palestinian Authority

Table 10: Revenue Share By Type Of Duty For Cars

CUSTOM

DUTY VAT PURCHASE

TAX TOTAL

2012 3% 34% 63% 100%

2013 3% 32% 65% 100%

2014 3% 32% 65% 100%

2015 3% 32% 65% 100%

2016 4% 32% 64% 100%

Source: Ministry of Finance (MOF)- Palestinian Authority

To summarize, import tax revenues make up a large percent of indirect tax revenues, constituting 55% of foreign trade revenues. Tariff schedules and public revenues are linked mainly through the weight of purchase tax, which is levied on local products and imports at the same time to comply with WTO provisions on “national treatment”. This tax operates as a passive means of protection of locally produced (Israeli) goods, as it disproportionately and directly impacts imported goods that are not produced locally such as cars. This tax also contributes to a rise in the total VAT revenues on imports, while custom duties constitute a minor percent (7% on average at best) in line with WTO requirements.

5-2 Methodology for Establishing Tariff Rates, Standards and Implementation Developing and establishing a tariff structure rests above all on the policy goals that this structure is intended to serve. Generally, tariffs can respond to the following purposes:

1. Political – related to the government’s sovereignty and independence. 2. Economic - related to protecting local goods, or promotion of investment and exports, or import

substitution, or complying with bilateral or multilateral trade agreements, or accession to international organizations.

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3. Pubic revenues - related to the contribution of indirect custom revenues to public budgets considering the weak contribution of local sources in developing countries.

4. Social welfare - related to protecting society from unhealthy or environment-unfriendly imports and ensuring the prohibition of prohibited goods like drugs, arms and other goods deemed illegal in different countries.

5. Industrial policy - customs are a key tool used in influencing industrial policies in conjunction with industrial performance, as discussed previously. These policies can impact importing of consumer goods, promotion of exports, maintaining foreign currency reserves, reducing the trade deficit, and encouraging domestic production. The level of tariff rates has a direct impact on these policies, particularly import substitution or export promotion policy. In the Palestinian case, there is a related policy goal, namely “imports replacement”, i.e. increasing imports from the rest of the world to replace imports from Israel especially those goods which do not originate in Israel but have been imported through the Israeli market.

6. Strategic trade interests - other purposes related to objection and equal treatment with other countries or to counter harmful or unfair trade practices that other countries might resort to, eg. anti-dumping measures.

Naturally, tariff structures vary from one country to another depending on its industrial and investment trends which go in line with economic conditions prevailing in that country or in its trade relations. Where some countries adopt a FTA policy, others adopt protectionist tariffs, which is determined by the country’s scale of production especially in agricultural and manufacturing sectors. This section focuses on the economic and technical standards that need to be considered when developing a tariff structure which should be consistent with the WTO and the WCO most recent international standards for restructuring tariffs.

5-2-1 Economic Standards A future Palestinian tariff structure should consider the following economic standards: 1. Supporting the national industrial sector, by minimizing costs, and alleviating its liabilities

through reduced custom tariffs on imported raw materials used in manufacturing. 2. Investment promotion through imposing reduced or zero tariff on capital goods and inputs of

production and manufacturing. 3. Balancing the volume of local goods with that of imported goods, which could undermine local

goods and harm consumers as well, and to protect infant industries based on fair competitiveness serving the interests of both the consumer and the producer.

4. Tariff Escalation: the pricing mechanism of goods should be weighed based on its manufacturing and economic function. Tariffs on finished products and semi-processed products or intermediary products used in manufacturing, should be higher than those applied on raw materials and such products.

5. Tariff duties imposed on basic and essential goods should be low and close to the prices of similar local products.

6. Considering the needs of the public budget in terms of levied duties (revenues), through identifying goods yielding high-revenues which do not affect all citizens and upon which higher tariffs may be imposed to achieve the desired public revenue goal.

7. Considering harmful or environment unfriendly or unhealthy goods, through imposing high custom tariffs, and reduced tariffs on environment-friendly goods. This aims to protect the environment.

5-2-2 Technical Standards

As mentioned above, there are a number of technical standards that need to be considered when developing a tariff structure, which are consistent with international (WTO and WCO) standards:

1. A simplified tariff structure in order to avoid the complexity of implementation and different rates and number of digits (the WTO preferential scheme for developing countries is HS 7-digits). On

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the other hand, limiting the number of digits assists in saving time and effort of customs agents conducting periodic reviews. In addition to facilitating monitoring and control of custom procedures, simplified structures can help to reduce customs evasion, facilitate collection of revenues, enable investors to easily understand tariff schedules, and to limit trade disputes arising from difficulty in implementation and classification

2. Consistency with the Harmonized Commodity Description and Coding System (HS) established by WCO.

3. To limit local branching (disaggregation of commodity codes to 8 digits) and to comply with the international HS 6-digit level. This would facilitate the WTO trade negotiations, as well as bilateral trade agreements.

4. All international trade agreements should be incorporated in the tariff schedule to facilitate follow–up and updating processes, and application of the agreements provisions directly on the borders of the country.

5-2-3 Implementation Mechanism Including multiple levels of tariff rates in a schedule both responds to economic standards and assists in fulfilling the core objectives of developing a Palestinian tariff schedule. The following methodology is employed to achieve this goal: 1. Defining the components of the tariff schedule which include the following classification of trade

data:

• Classifying goods at the HS 6-digit classification level (except for some goods classified at 8-digit) with a description of each.

• Classifying goods into 19 groups based on the Broad Economic Group (BEC) system and sorting the goods within each group by HS classification (as reviewed in the preceding chapter – See Table A7 in the Appendix for the full list of BEC categories).

• Classifying each BEC group according to five mutually exclusive types of goods: raw materials, half-manufactured goods, semi-manufactured goods, fully manufactured goods, and spare parts.

• Classifying each BEC group according to the eight most relevant economic uses (whereby more than one type may apply to the same goods): final consumer goods, durable goods, intermediate goods, capital goods, sensitive goods13, public revenue-generating goods, precious goods, and medical goods.

2. Per the methodology of tariff escalation, the rates of the tariff structure should be consistent in

terms of the type of goods, their use, and whether an imported good is a substitute, similar or identical to other imported goods. This means that the rates identified for these latter categories of goods will be the same, whereas the rates on goods classified by type will have different rates to those classified according to use. Semi-manufactured goods have higher duty rates than those applied to half-manufactured and fully manufactured goods will have higher rates than spare parts.

3. Defining the percent of local production to total production, and defining the percent of production for the local market and that for export markets, which allows for an assessment of the competitiveness of local goods.

4. Regarding Lists A1, A2, B, the same criteria applied in this study will be applied. In the first scenario analysed in the next chapter, i.e. the separate tariff scenario, the same duties will be applied when re-classifying tariff rates for those lists. In the second scenario, i.e. an improved PER, tariffs suggested for Scenario 1 will also be valid for those Lists, i.e. the PA could apply those rates as a tariff policy specifically for those Lists.

13 Sensitive in terms of income or consumption: Income – sensitive products have high tariff duties to achieve high

revenues (like cigarettes). Consumption-sensitive products have low tariff duties since they affect citizens' income and society’s welfare (like basic consumption goods such as wheat).

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5-3 Building the Palestinian Tariff Structure

As explained earlier, the Palestinian tariff structure has a complicated schedule in terms of form and type of applied duties, as it largely manifests the accumulated reforms of the Israeli tariff schedule and trade regime over the past decades. First it contains four types of duties (customs, purchase tax, prohibitive tariff- high rates on some goods, and protectionist tariffs on other goods) applying more than 400 mixed rates (a percent + lump sum) within more than 50 tariff categories. As mentioned, the purchase tax is used either as protectionist tariff or as a revenue tariff, and are often levied on goods

that are not manufactured or produced in Israel. Hence, the proposed Palestinian tariff structure will be developed based on two guiding principles. First, the Palestinian tariff schedule will simplify the rate levels into seven major categories, with some exceptions for sensitive goods, and exclusion of mixed rates. Second, the tariff will use only two columns of duties, i.e. the customs and the purchase tax, based on the standards and justifications mentioned in the study, and considering that the purchase tax column will be applied selectively for revenue and social purposes (related to environment and health), and to ensure compatibility with

WTO rules.

The proposed Palestinian tariff structure focused on custom duties as the protection tool for local industries, rather than the purchase tax. This is because the purchase tax raises the final cost of production, as well as the fact that there are no locally manufactured or produced goods that are not imported (except for some agricultural goods), so there is no need to depend on the purchase tax for

industrial protective purposes.

This section of the study is of primacy for several considerations:

• First, it constitutes the economic and trade basis on which the proposed Palestinian trade and industrial policy is founded, especially the tariff customs policy. It is grounded in Palestinian economic development interests and the struggle to break free of PER restrictions and to replace that framework with an improved trade policy that promotes developmental needs and the growth

of productive sectors.

• Second, it could play a significant role in structural transformation of the Palestinian economy and future trade policy options through influencing the creation, conversion or replacement of

current multilateral trade relations.

• Third, it is an exercise rooted in exhaustive empirical research. This permits measurement of the impact of a non-discriminatory trade policy as a baseline option, with an alternative Palestinian tariff policy constructed to operate under a scenario of sovereignty and abandoning a trade regime

which is subordinate to Israeli economic prerequisites. Based on the principles and criteria set out above, six levels of direct and simplified tariff rates for a Palestinian non-discriminatory policy are proposed and distributed within the 19 BEC categories of classification of economic use, namely: 0%, 5%, 10%, 15/20%, 30%, and 100%. Tariff escalation (as compared to low, uniform tariffs) is an approach adopted by most countries of the world. Yet the system sets higher rates for sensitive products and income-generating commodities under justification of “revenues and health and environmental protection”. These goods are classified in the HS system in detail, and are also included within the BEC categories. The rate levels proposed for each category or commodity derive from current empirical observations and could be adjusted based on future

economic and industrial policy choices.

5-4 Customs Duties Rates by Commodity Categories

Following are the justifications for assignment of each level of tariff rate to each of the 5200 commodities included in the tariff analysis, identified as those which are imported to Palestine, some of which are also exported (and hence produced) by Palestine.

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5-4-1 0% level of customs duty This level includes around 28% of goods listed in the HS 6-digits level of tariff structure (1433 commodities) categorized within 9 of the 19 BEC categories. Those categories constitute more than 54% of total imports, as they include essential consumer goods, and more than 13% of total exports. These goods were classified at the zero-rate level for several economic criteria mentioned above, especially those related to the type of goods. These classes\categories of goods include: raw materials, primary production inputs, capital goods and heavy transportation means, and food and beverages in primary forms for manufacturing- such as oils, flour, rice, sugar, trucks and capital machinery used in production. Imposing a zero-rate level, as applied in most countries’ tariff schedules, is in accordance with the following considerations:

1. Reducing costs of production. 2. Enhance the competitiveness of industrial and agricultural products and increase production

efficiency. 3. Promoting free trade. 4. Compliance with WTO standards related to tariff rates imposed on primary products, which allow

adopting industrial policies that encourage manufacturing.

5. Promotion of investment in various industries and encouraging manufacturing for export. 6. Reducing the price of imports of those commodities which affect consumer welfare directly and

positively, especially if they are essential goods and used for general consumption (such as wheat and rice). An indirect impact would reduce costs of production for domestic producers of some

manufactured goods. 5-4-2 5% level of customs duty This level of tariff includes two of the 19 BEC categories, the largest tariff level group in terms of the number of goods it includes, accounting for around 46% of the total number of goods. It includes processed food and beverages used in manufacturing and processed supplies for industrial use, and semi-raw goods, such as stone and marble, and parts and spare parts of capital equipment and means of transportation. The total imports of these categories constitute about 27% of total imports, while

exports constitute 40%.

The 5% rate level has been proposed based on the following rationale: 1. To differentiate between the goods of this category and the goods of the first category (zero level)

since its goods are not primary products, and most of its goods are semi-finished products and products for industrial use.

2. To maintain a price difference between imported goods and goods that are processed and

transformed into a final good. 3. To take into consideration the competitiveness between this category and similar local goods, as

well as with imported goods. 4. Imposing low tariff rates on spare parts and of transport accessories in order to reduce

maintenance costs. 5. These goods are generally used in manufacturing and for consumption, so tariffs imposed on them

should be low, considering the value-added of these goods and that of final consumption goods.

5-4-3 10 % level of customs duty This level includes two categories, food and beverages processed for final consumption, transport for non-industrial use, engines and its spare parts, and auto parts. These categories include 27 commodities at HS 6-digit level. Total imports of this group reached around US$ 140 million, while

exports are only around US$ 305 thousand.

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The 10% level has been proposed based on the following considerations: 1. Most of these goods are not produced locally, and the small portion of goods produced locally is

currently non-exportable. 2. Most of these goods are intermediate and semi-processed goods, so it is necessary to differentiate

between them and the semi-final goods through tariff escalation. in doing so, the prices of final local and final imported goods have been considered, as well as the value-added of this group in

case it was produced locally. 3. To consider the quality of locally produced goods in this category, or that might be viably

produced in the future. 4. In addition, these categories contribute to total revenues.

5-4-4 15% and 20% levels of customs duty This level of duty includes three intersecting categories in terms of its goods characteristics, as they are identical and similar in type and use. These three categories are a) consumer durable and b) non-durable goods (concentrated mainly in clothing, textiles, footwear, furniture, electrical appliances), in addition to c) sensitive goods like cigarettes, alcohol and some chemical and plastic manufacturing

products. Imports of goods from these categories reached US$ 784 million in 2015, constituting 14%

of total imports, while exports amounted to US$ 235 million, constituting 25% of Palestinian exports. The tariff level of some goods of this category are set at 15%, while it is set at 20% for other goods. These differentiated rates have been set based on the following:

1. Consumption durability\expiry date, as some goods live longer than other goods, and the longer the expiry date the higher the tariff rate is, i.e.20% for durable and semi-durable goods and 15%

for non-durable consumer goods. 2. The nature\substance of the materials used in these goods, as cotton clothing is different from

non-cotton textiles, leather shoes are different from non-leather shoes, and wooden furniture is

different from metal furniture. 3. The Israeli custom rates imposed on these sectors ranged from 12-30%. Israel imposed this high

rate to collect revenues, and because a large portion of these goods are not produced locally. The 15% and 20% rates are proposed here to revive these industries and to protect them from harmful competition.

This category also includes some protected local goods such as leather, footwear, garments and furniture. Therefore, a small portion of these goods (around 200 goods) will have a tariff rate of 30%, in line with the Cabinet’s decision of 2013, regarding imposing higher tariffs on imports of four

sectors (footwear, garments and apparel, aluminum, and furniture).

Justifications for this level of tariff include the following: 1. Industries producing these goods can secure a large portion of Palestinian local market demand,

and are exportable especially furniture, footwear, and textile products. Therefore, imposing a high tariff rate aims to protect existing local industries, increasing employment and treasury revenues, and maintaining the quality of goods through fair competition.

2. Imposing lower tariff rates could endanger any Palestinian local industry producing exportable goods and could negatively impact competitiveness in local markets.

3. These industries employ a large percent of workers, for example there is 2000 establishment in the garment and apparel sector. The leather industries constitute 40% of industrial sector in Hebron, and another example is the footwear industries which constitute 22% of the industrial sector.

4. These industries have declined significantly (by more than 80% of capacity) due to Israel’s policy of liberalizing tariffs on imports of these goods. When Israel announced its latest modification on its tariff structure, which included the complete exemption of garment, apparel, footwear, and textiles sector from customs, this prompted the PA in turn to increase the tariff rates on clothing

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and footwear in order to avoid flooding the Palestinian market with these imports to the detriment of local producers.

5-4-5 30% level of customs duty This level includes two BEC categories, food and beverages in primary forms for consumption, and food and beverages processed for final consumption. The number of these goods is 590 commodities at HS 6-digits level. Imports of these goods reached US$ 721 million in 2015 constituting 14% of total imports, while exports reached US$ 170 million, constituting more than 18% of total exports in

2015. This category is one of the best candidates for selective industrial policies due to considerations of protecting local production and to reduce competition. So relatively high customs rate must be imposed on its goods.

The 30% level has been proposed for this category based on the following considerations:

1. These goods are final consumer goods. 2. The bulk of Palestinian local industrial production is classified within this category, and its

exports constitute more than 18% of total exports. Therefore, a margin of protection to local production should be provided and competitiveness between local and imported goods in terms of

prices should be maintained, which would in turn increase the market share of local production. 3. The high prices of imported similar goods, such as agricultural products, fresh red meat and

frozen meat encourage investment in these products which would lead to increased agricultural

and livestock wealth and food security of commodities from this category. 4. Local production of majority of these goods is less than local market demand, and a large part of

it is non-exportable. 5. Raising custom tariffs to provide protection and ensure fair competitiveness would lead to

increasing custom revenues collected from this category.

5-4-6 100% level of tariff rate and higher This level includes commodities with specific features, which are selected from several BEC categories, most importantly they are: 1. Sensitive goods subject to high tariff rates. 2. Luxury consumer products that have special uses. 3. Goods harmful to environment and public health. These goods have higher tariff rates for many reasons. All these goods fall under income-generating goods which play a big part in increasing custom revenues. They include cigarettes, alcoholic beverages and goods whose use produce environmental pollutants such as cars and others. Generally, many countries impose indirect taxes and import taxes on these goods. The number of these goods does not exceed 20 commodities at 6-digit HS classification. Annex A8 presents a representative extract of the tariff structure as applied to all scenarios.

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6- Assessment of the Impact of Tariff Rates Under Alternative Trade Regimes

6-1 First alternative scenario: an independent Palestinian tariff schedule

As explained above, the first alternative scenario assumes a Palestinian non-discriminatory tariff policy (NDTP), i.e. an independent tariff policy that responds to Palestinian economic interests.

Accordingly, the proposed Palestinian Tariff structure was built to achieve the following goals:

• A tariff system independent from the Israeli regime, which treats imports from Israel like those

from any other country.

• Responding to Palestinian economic conditions and best practices guided by industrial policy and national strategies, especially regarding protection of infant industries within reasonable parameters.

• A tariff rate compatible with a bound tariff rate of 30% which is applied by multilateral trade

regimes.

• This study is only the first effort to identify the shape of an autonomous Palestinian Tariff structure. It can be used to pave the way for a series of more focused sectoral studies, which may

suggest additional or modified rates. Therefore, the tariff rates proposed in this study are subject to alterations and modifications and need not be considered as final.

Furthermore, the Palestinian tariff has been built in a way that is compatible with the WTO structure, i.e. at the HS 6-digit level. The Israeli structure is also compatible with the WTO structure, yet it includes the purchase tax, protection tax, and uplift tax,14 which no countries apply other than Israel. The Palestinian system has discarded the protection and leverage percentage columns which are essential to the Israeli schedule, and retained the purchase tax and customs duty columns only. Therefore, rates of these latter taxes were modified from current levels based on the following

methodology and grounds: 1. Custom duty rates: rates were distributed on BEC economic groups at the level of HS 6 digits,

except for goods included in the anti-dumping decision (as goods protected by the resolution were distributed at 8-digit level for protection purposes). Thus, the Palestinian proposed structure contains 12 levels of custom duties (the seven rates outlined above plus the five levels created by

the 2013 Cabinet decision on anti-dumping).

2. Purchase tax: the following methodology was used:

• Taking the average of the purchase tax rate at 8-digit level,15 and applying it at 6-digit level, then reducing the purchase tax by 20% of the Israeli purchase tax level. This aims to achieve increased economic welfare for citizens, like the difference in the purchase tax currently

applied to cars.

• In respect to cars, alcohol, and cigarettes, no average rate was taken. The proposed Palestinian structure adopts the Israeli applied rates at 8-digit level and a purchase tax reduced by 20% of the Israeli purchase tax level. This was done to ensure estimating an accurate value of revenues resulting from these goods, since applying an average rate on these goods would lead to inaccurate results. This is ascribed to wide differences in the rates of items in the subdivisions, and the large volume of imports from each good branching from the main category, which in turn yield different tax revenues.

14 The Structure of the Israeli Tariff Schedule: a schedule comprising several columns on HS- 6 to 8 digits level. Four of

these columns are for import taxes ( customs, purchase tax, uplift tax on purchase tax, and protectionist tax), two columns for HS classification, a column for trade agreements in addition to other columns .

15 Average Purchase tax rate: goods are classified at HS 6 digits main level, which means that there are subdivision of the main category which are classified at 7or 8 digits level, and that each good in the subdivision has a rate different from the other good. Some main categories has multiple subdivisions, therefore an average rate of the subdivided items was applied to the main category which comprises 6 digits.

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• The PA applies a purchase tax of 50% and 75% on cars, depending on the engine horse power. Since the data is inadequate to help identify the different types of engines, a 63% rate of purchase tax is proposed to be applied to all types of cars.

• All local goods produced for exporting are exempt from purchase tax. This comes as a continuation of efforts aimed to promote domestic products, reducing costs, and so as not to

rely on the purchase tax to protect local industries. To assess the impact of the levels of purchase tax rates it is necessary to analyze the impact of applying the Israeli tariff structure on the Palestinian trade and productive activities, i.e. analyzing the Israeli custom tariffs, purchase tax, and the types of goods that these rates are imposed on, in relation to the Palestinian production and revenues. This is done through comparing the proposed Palestinian

tariff with the Israeli tariff imposed on the Palestinian economy, as below. 6-1-1 Comparison of (Proposed) Palestinian and Israeli Custom Duty Rates

• Israeli customs rates: There are 60 levels of Israeli custom duties ranging from 0% to 553%. The zero-rate is applied to 55% of total goods (2857 goods out of 5204 goods), 6% - 12% custom duty rate is applied to 1043 goods and 170% rate is applied to 11 goods. Other high rate levels are

imposed on a very limited group of goods.

• Proposed Palestinian tariff customs rates: There are only 12 levels of custom duties, ranging from 0% to 30%. The zero rate is applied to 28% of the total number of goods, 5% level is applied to

46%, 30% is applied to 11%, 20% is applied to 11%, and 15% is applied to 2% of goods. By comparing rates of the proposed Palestinian structure with those of the Israeli applied tariff

structure, we reach the following conclusions:

• The difference between the two schedules at the zero-customs duty level (i.e. there are 25% more

goods classified at zero-customs in the Israeli schedule) is ascribed to classifying a larger number of goods in the 5% category in the Palestinian tariff schedule. This category includes semi-final goods for industrial use, which were classified in a separate category to differentiate them from

intermediate goods and raw materials, in addition to other reasons explained previously. • Other levels of Israeli tariff rates which are relatively high are set for protecting a limited group of

goods. The Israeli level of protection ranges generally from 8% to 12%, while the Palestinian level of protection ranges from 15% to 30%, and includes a larger number of goods, in line with economic considerations previously clarified, relying on customs duty for protecting goods rather

than on the purchase tax.

• In the proposed Palestinian tariff structure, 1,300 goods should be protected, including the 200 items that were covered by the antidumping decision of 2013. This means that the antidumping decision did not include other sectors like beverages and food industries, which are also produced in Palestine. A large portion of these goods are not produced in Israel, therefore a zero or a low rate is proposed for these goods.

• Some of the rates of the Israeli tariff structure are extremely high, which are usually applied to agricultural goods produced in Israel. On the other hand, rates applied to Palestinian agricultural goods were not raised to the same level of the Israeli tariff structure, because of inadequate agricultural local production of many goods. Some of the Palestinian agricultural seasonal commodities need to be further investigated and regulated by a special agricultural and trade

policy using non-tariff barriers.

6-1-2 Comparison of (Proposed) Palestinian and Israeli Purchase Tax Rates Israeli Purchase Tax Rates. The purchase tax column is the most sensitive column in the Israeli tariff schedule, as it includes 267 commodities at 6-digit level. The purchase tax ranges from 1% to 570%. There are only 11 commodities that have a purchase tax rate of 500%: cigarettes, alcohols and some

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agricultural commodities, while the purchase tax imposed on cars is 83%. The value of purchase tax

of these goods account for more than 90% of total purchase tax revenues. Purchase Tax Rates in the proposed Palestinian tariff structure. The purchase tax column includes only 55 commodities, the highest rate of 456% is applied to one commodity only (cigarettes), and 416% applied to 7 commodities (alcohol and some agricultural goods). In general, only 13 commodities are subject to a purchase tax higher than 200%, while the rest of goods are assigned a purchase tax lower than the Israeli rate by 20%.

By comparing the purchase tax rates in the two schedules, the following can be inferred: 1. The Israeli purchase tax is imposed on large sectors of products including a large portion of

agricultural commodities, machinery, electrical appliances, and some metal industries. We deem it unnecessary for the proposed Palestinian structure to impose a purchase tax on these industries, since most of these industries do not exist in Palestine. Therefore, the proposed Palestinian structure limits purchase tax to sensitive products and goods that are harmful to the environment

and public health. 2. Reducing the purchase tax rate by 20% of Israel’s rate level goes in line with the requirements of

supporting local industries and economic welfare of citizens, by reducing costs that affect prices. Thus, prices for these Palestinian products will lower, with a positive impact on domestic

consumption and competitiveness with Israeli products. 3. With respect to agricultural goods, the purchase tax policy is not sufficient alone to protect

Palestinian products from dumping and competition. Therefore, it is necessary to examine each agricultural commodity separately in line with the Palestinian seasonal cultivation calendar before

designing agricultural policies responsive to Palestinian productive sector interests.

6-1-3 Comparison of Revenues under the (Proposed) Palestinian Tariff Schedule The different structures and tariff rates lead to different compositions and sources of revenues, which

is evident in the revenue results of the proposed Palestinian tariff structure compared with the Israeli structure. Table 11 shows the fiscal revenues that will result in the event of applying the proposed Palestinian tariff structure, leading to several observations:

1. The proposed Palestinian tariff structure achieves US$ 62 million more in import tax revenues

compared with revenues under the currently applied Israeli tariff structure. This increase is attributed to protectionist custom rates, set at 19% in the Palestinian structure against 9% in the

Israeli structure. 2. The contribution of purchase tax to total import revenues (51%) in the currently applied structure

is higher than that in the proposed Palestinian structure (43%). Nonetheless, revenues from purchase taxes are not higher than custom duty revenues in the proposed Palestinian structure,

hence the proposed tariff structure achieved higher revenues. 3. Only 50 goods of the 5204 goods studied contribute 77% of import revenues under the proposed

Palestinian tariff structure. In terms of tax type, revenues under the Israeli tariff are distributed as 63% in purchase tax, 30% VAT, and 7% custom duties. In the proposed Palestinian tariff structure these revenues are distributed as 55% purchase tax, 30% VAT, and 15% custom duties. Once again this stresses the relative importance of custom duties in the proposed tariff structure, and that revenues of the two structures have close values though from different sources depending

on the type of import tax applied. 4. There is a need for additional in-depth studies to determine the appropriate trade policy that better

serves Palestinian economic interests, revenue generation, and promotes consumer welfare through studying the possibility of reducing tariff on goods other than the top fifty commodities.

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Table 11: Revenues under Proposed Palestinian and Current Israeli Tariff Systems

type of import tax (US$ million) VAT PTX CD Total of

Revenues

Proposed Palestinian tariff structure 236 536 468 1240

Applied Israeli tariff structure 109 609 460 1178

Revenues of top 50 commodity in proposed tariff structure

147 530 284 961

Revenues of top 50 commodity in the applied tariff structure

54 573 277 904

6-1-4 Local Production, Exporting and Industrial Policy As indicated previously, the contribution of the Palestinian industrial sector to GDP, at the macro level, is still less than the targeted level, and until 2015 Palestinian Strategies focused on increasing the sector’s contribution to GDP from 15% to 22%. Nevertheless, adopting a tariff policy aimed at protecting local products has never been considered or proposed in PA strategies, most probably because of the limited powers and margins of maneuver in custom tariff policies.16 It was shown above that five industrial sectors out of the 19 industrial sectors (food industry, non-metallic industry, furniture industry, the garment and apparel industry, and footwear industry) employ

more than 75% of total workers in the Palestinian industrial sector. Generally, Palestinian industrial exports rely on these five sectors. About 40 exported goods come from these five sectors and make up to 70% of total exports. By comparing Israeli tariff imposed on these goods with the Palestinian tariff, we reach the following

conclusions: 1. Most Israeli custom tariffs are increasingly moving towards being set at 0% level, except for

goods that have alterable\fluctuating rates depending on Israeli economic conditions and interests. However, the maximum rate on almost all goods of the proposed Palestinian custom tariffs is 30%, as 17 goods out of 40 are subject to a tariff rate ranging from 0% to 5%, whereas 8 goods only are subject to a 30% tariff and the remaining goods are subject to 15% to 20% tariff.

2. Low-tariff rates in line with Israeli trade liberalization has an adverse impact on competitiveness,

evident in the balance of trade for Palestinian exports:

• Against US$ 957 million of Palestinian exports, there is US$ 3.3 billion of imports from the same list of products, i.e. there is a deficit in the trade balance of almost US$ 2.3 billion. More than 70% of these products come from (or through) the Israeli market. This illustrates the intense competition between imported products whether from the Israeli market or the rest of the world on one hand, and Palestinian products destined for local and global markets on

the other hand.

• Only a group of 40 goods recorded a surplus of US$ 173 million, i.e. Palestinian exports of these goods were higher than imports. However, this surplus is likely to be bigger were it not for the impact of Israeli tariff liberalization on exported goods by decreasing exports and local

market share of these Palestinian products.

• Israel is a market for 20% of Palestinian exports. Nevertheless, most exports of food, footwear, and furniture industries are exported to the rest of the world. Thus, it is crucial that selective industrial policies (using custom tariffs) are deployed for the promotion of these

industries.

16 As specified in PER the Israeli tariff rates act as a lower bound since the PA is not allowed to set tariff rates at a lower

level, but it can impose higher rates than those rates. This is another aspect in which the PER is not a traditional customs union, whereby the “common external tariff” is actually a “common minimum external tariff”

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3. All items of the Palestinian tariff structure are consistent with the WTO requirements in terms of compliance with the established tariff ceiling (30%), whereas the Israeli tariff structure shows

clear rate fluctuations, and escalation that reaches 200% for some goods. 4. Until today there has been no Palestinian tariff policy that targets encouraging local industrial

production and enhancing its capacity. There is good potential to increase Palestinian exports of selected goods, yet this is contingent on; first, adopting selective trade and industrial policies that ultimately strive to realize Palestinian economic interests; second, breaking free of the Israeli trade regime which has undermined the competitiveness of local products and impeded Palestinian industrialization.

6-1-5 Lists A1, A2, and B in the First Scenario These lists include 739 commodities at HS 8-digit level, and 513 commodities at HS 6 digit-level. In 2015, imports of these goods were about US$ 650 million, 45% of which were imported from the Israeli market. Since its establishment to this day, the PA did not use powers bestowed on it by the

PER to benefit from these Lists through applying any trade policies whatsoever. Commodities in Lists (A1, A2 and B) are included in the custom tariff column along with other commodities, therefore they no longer constitute separate tariff columns (as in the current trade regime). This also means that goods in these Lists will not receive any special treatment beyond that they might enjoy as part of industrial policy directions. Under the scenario of applying an independent Palestinian custom tariff, the same rates applied to other goods will be applied to these Lists’ in line with the established standards and criteria adopted for any commodity. In the alternative scenario (below) of an improved PER which can be implemented immediately until the proposed independent tariff structure is possible, the new tariff rates devised for Scenario 1 can also be applied to the Lists, based on the same standards as applied to other goods. In other words, revised custom tariffs proposed

for these Lists would be the same under both scenarios. Table 12 below compares the applied Israeli tariff structure and the proposed Palestinian tariff

structure on the Lists in terms of the trade results of the application of each structure: 1. 55% of the goods included in these Lists are part of the (22) BEC group that includes intermediate

industrial products (pre-final products used in manufacturing), that Israel exports to the Palestinian market. Therefore, a customs duty of 4% is proposed for these goods, since Israel imposes a tariff ranging from 4% to 13% on most of these commodities in addition to a purchase tax on more than 120 goods in these Lists. Israel imposed this low tariff to protect its economic interests by exporting these goods to the Palestinian market, and deterring their substitution with

goods from a third country. 2. In the proposed Palestinian tariff structure, no purchase tax will be imposed on these Lists, as they

mostly include primary and intermediate goods. On the other hand, tariff rates applied to these goods are in accordance with the standards employed in this study. As a result, about 90 goods of these Lists (which are also locally produced) are subject to customs duty protection. While most goods (55% of the Lists’ goods) which had a protectionist tariff in the Israeli schedule are subject to a Palestinian customs duty of 5% (intermediate products). This rate is very close to the applied

Israeli rate of 4%. 3. The average Palestinian customs rate proposed for these Lists is 7%, and this is two points higher

than the average rate on these goods now. This is because some of the goods in the Lists have protectionist tariff rates (see table below).

Hence, the PA can apply tariff rates to goods on these Lists guided by the proposed tariff rates,

directly and at any time, as specified in the PER.

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Table 12: Lists A1, A2, and B and their BEC distribution

BEC Code Count of

BEC Code

Average

Israeli_ CD

Average

Israeli_PTX

Average PA

CUSTOM DUTY

Average

PA PTX

111 6 14% 0% 0% 0%

112 8 18% 0% 30% 0%

121 14 7% 0% 0% 0%

122 9 13% 0% 30% 0%

21 6 0% 0% 0% 0%

22 279 4% 0% 5% 0%

31 1 0% 0% 0% 0%

41 87 5% 2% 0% 0%

42 25 5% 3% 0% 0%

53 1 6% 12% 5% 0%

61 15 9% 0% 15% 0%

62 44 7% 0% 21% 0%

63 18 8% 1% 20% 0%

Grand Total 513 5% 1% 7% 0%

Source: The table data is derived from the primary data of the study. BEC Codes are shown in Table A7.

6-2 Second alternative scenario: tariff options under the PER

The second scenario assumes the continuation of the status quo of the PER and the application of Israeli economic and trade custom policies, with some improvements to the tariff framework guided

by Palestinian industrial policy considerations and within what the PA is permitted to do:

1. The PA has full freedom to implement a trade policy with special tariff rates for Lists A1, A2, and B as it deems necessary. As well the PA has full freedom in adopting a specifications and standards policy for Lists A1 and A2 only.

2. The PA can set tariff rates at higher levels to the Israeli tariff rates, as it did in 2013 as an anti-

dumping measure.

The basic assumption of this scenario is the application of the same economic and technical criteria established for the first scenario to protect domestic production on all goods in the Lists of goods

specified in PER, and other goods that have low tariff rates. The additional assumption is that within the context of the PER coordination mechanisms, both the Palestinian and Israeli sides are ready to negotiate the specific aspects of some of the measures suggested below. 6-2-1 Mechanism of Implementation

This scenario calls for preparation of new lists of Palestinian imports that will be added to PER Lists (A1, A2, and B), to which the pertinent customs and trade policy may be applied. The implementation of this option can begin after agreeing to merge this new list of items with existing PER economic lists, hence paving the way for using marginal policy spaces available in the PER to initiate a new

trade policy trajectory.

This means that the tariff structure of this optional scenario will include a revised version of the current complex (Israeli) trade policy regime, rather than the transformed, simplified and restructured regime proposed under the preceding scenario:

1. The new tariff rates proposed in the first scenario for commodity Lists . 2. Those commodities which in the first scenario have a higher tariff rate in the proposed Palestinian

schedule than in the applied Israel tariff schedule.

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3. All remaining goods included in the applied Israeli schedule, which will retain the same rates they currently have.

4. The same purchase tax column included in the applied Israel schedule.

In the structure of this scenario there are two columns (see Table A8 in the Appendix for an example): custom duty column (pp + cd rate) which cover points (1-3) above, and another column of the Israeli purchase tax rates (pp + ptx rate).

6-2-2 Results of the Second Scenario

Since this scenario is a combination of the applied Israeli structure and the proposed Palestinian tariff structure, its structure is significantly different in terms of the number of rate levels and distribution of tariff rates on goods, summed up as follows.

a. Custom Duties

• This scenario has 152 custom duty levels (ranging from 0% to 553%), i.e. 50 duty levels more than the Israeli structure. This is a resulted of modifying rates of goods that PER allow the PA full freedom to modify (upwards). All other Israeli rate levels were retained and used, in addition to other duty levels that go in line with the Palestinian trade and industrial policy based on the economic and technical criteria of this study.

• The number of goods that are subject to a zero-rate level was 952, constituting 18% of total goods, and these are essential goods. This share of zero-rate tariff lines is low compared with other scenarios, owing to shifting a range of goods to another two categories: the 5% level, which includes semi-processed goods and processed industrial products, which constitute 38% of total goods; and, the 15% -30% level, accounting for 25% of total goods, which include final consumer goods. These goods benefit from significant industrial protection in line with the strategy outlined above. This change is the most notable difference between the applied Israeli custom tariff and this scenario’s customs policy that would ensure from agreement on an improved PER.

• Ten percent of goods, which are intermediate, semi-final and pre-processed goods, are subject to a rate of between 8% and 10%.

• There are dozens of goods which already have a tariff rate ranging from 40% to 70%, and cannot be reduced by the PA according to the PER.

• By comparing this scenario with the applied Israeli tariff structure, we notice that 1959 goods share the same rate among the two schedules, i.e. 38% of goods have the same customs duty rate as under the current regime.

• This scenario also includes 200 goods that are assigned lower tariff rates than in the applied Israeli tariff schedule, and this is attributed to the independent PA tariff policy which can be applied to Lists (A1, A2, and B) as specified by PER. These rates were reduced based on the economic standards and goals followed in the study.

In summary, under the PER the PA has full right to apply a custom policy on 58% of commodities listed in the currently applied Israeli tariff schedule, i.e. by raising their tariff rates for protective purposes and to achieve industrial policy objectives. As well, the PER permits the PA to negotiate with Israel on extending commodity lists (A1, A2, and B).

b. Purchase Tax As discussed earlier, under this scenario the purchase tax will not be subject to any modifications

for several reasons:

• The Palestinian tariff and industrial policy adopts a protectionist customs duty rather than purchase tax as its key instrument.

• The purchase tax is already fixed at a high rate and cannot be raised above that level. • PER prohibits reducing the purchase tax level. • There are no locally produced goods in Palestine that qualify for the same specifications and

standards according to which the purchase tax is imposed, and therefore there is no justification to impose a purchase tax on goods which are not produced locally.

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• There are only 9 goods (out of 637) in commodity lists (A1, A2, and B) that are subject to purchase tax. The first scenario addresses this issue and recommends abolishing the purchase tax.

6-2-3 Impact of the Second Scenario on Revenues Revenues under the second scenario amount to US$ 1483 million, which is 25% higher than revenues under the currently applied Israeli tariff structure. Around 55% of this increase results from custom duties, 32% from purchase tax, and the remaining percent result from value-added tax imposed on imports. It is worth mentioning that 50 goods alone contribute more than 70% of total revenues. This means that the high tariff rates in this scenario, distributed over 3046 goods, largely depend on 50 commodities for maximizing revenues

In this context, the study gives a clear indication about the real source of revenues, by extensively comparing the actual rates of the applied Israeli tariff structure with that of the proposed tariff structure imposed on imported goods, item by item. Nevertheless, it will be a good endeavor to study a selection of specific goods or to conduct a sectoral study that reconsiders the types of goods and customs rates that impact revenues, to develop an overall policy on customs revenues, in a way that do not affect industrial policy and economic welfare.

6-2-4 Local Production and Exports

The substantial changes in the distribution of tariff rates will directly impact local industrial policy,

resulting mainly from:

• Moving 38% of goods that were subject to a zero-rate level to the 5% tariff rate level, which is the category of primary goods processed for industry, beverages of all kinds, food processed for industrial use, stone, marble, and car spare parts. This move would help in protecting the market prices of similar local products against the prices of competing imported goods, while at the same time encourage importing some of these goods from the Israeli market (if produced in Israel), to avoid paying the 5% customs duty on imports. In this context, it would be helpful to further study goods that are produced in Israel and to reconsider the most suitable tariff rates policy that should

be imposed on this group in line with local industrial policy.

• Around 20% of goods are subject to a tariff rate ranging from 20%-30%. This is perhaps the most significant result of in this scenario, as it provides the margins necessary for developing a customs policy supporting overall industrial policy, to be reviewed further assessed, as has been done

above regarding the 2013 antidumping decision.

• A 70% tariff rate (that protects Israeli industries) is retained on a range of goods. Such a high rate diverts imports from ROW to imports from the Israeli market. This affects importing these products for local manufacturing because of Israeli protection which raised the cost of such goods

if imported. These goods are not produced or exported by Palestine in any case. 6-2-5 Commodity Lists (A1, A2, and B)

• This scenario sets the scene for developing a full customs policy with respect to commodity Lists. This means that economic and technical standards will be applied on these Lists, as in the first scenario, either by raising or reducing, or eliminating their tariff rates. This is considered one of the most important goals of this scenario, in addition to applying a tariff schedule on goods other

than these Lists’ goods.

• Under this scenario there are two approaches to enhance benefits from commodity Lists: first, developing a Palestinian customs policy using all instruments allowed for current commodity

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Lists as proposed in the first scenario. The second is the possibility of extending the number of items in Lists based on Palestinian considerations and through two options:17

1. Extending the current lists to larger selection of goods that correspond to Palestinian economic standards and criteria, and to develop a customs policy specially for these lists on which higher tariff rates may be imposed, compliant with the PER.

2. Identifying a “Minimum Priority List” from the above extended List in accordance with Palestinian economic and industrial priorities and economic criteria and standards, that includes priority goods that are produced locally for exportation.

In this framework, the following points should be considered (see Appendix, Table A9 for proposed tariff structure affecting these new lists).

a. Fully extended Lists (A1, A2, and B)

The proposal to extend the number of items on commodity Lists is intended to accommodate all goods of the proposed Palestinian tariff structure which have lower rates than their rates in the applied Israeli structure, and are not included in lists (A1, A2, and B). This is because the currently applied Israeli tariff structure applies higher rates on these goods based on criteria that are not in line with Palestinian trade and industrial policy. Therefore, there is a need to develop a customs policy for these goods that would ensure imposing lower rates. This could be achieved through negotiating with Israel to agree to add these goods to PER lists.

Based on this, the following aspects were considered when identifying the extended Lists:

1. The extended List includes 1058 (additional) goods at a HS 6-digit level, most of which are subject to a tariff rate higher than the rate proposed in the Palestinian tariff structure in the first scenario.

2. Imports of these goods reached US$ 801 million: US$ 498 million imports from Israel and US$ 303 million imported from ROW.

3. Most of these goods are final or semi-final and processed goods for industrial use.

b. Extended “Minimum Priority List” to be annexed to Lists (A1, A2, and B) This list of items is based on the same criteria as the extended commodity Lists are based on,

except for the additional criteria of according top priority to locally produced goods. This also means that all these goods will have lower tariff rates in the proposed Palestinian tariff schedule than their rates in the applied Israel tariff schedule, which constitutes a significant departure from the of the letter of the PER texts and the basic premise of the common external tariff of the customs union, hence will require a serious effort to engage with Israel on the issue.

Based on this, the following considerations are noted in identifying the “Minimum Priority List”:

1. This list includes 293 goods at a HS 6-digit level, which are locally-produced goods destined for exporting. Most of these goods are subject to an Israeli protectionist tariff rate and many of them are subject to purchase tax.

2. Imports of these goods reached US$ 514 million, US$ 375 million of which imports are from Israel.

3. Exports of these goods reached US$ 206 million, US$ 181 million of which are exported to Israel.

In summary, the PER gives the PA the right to extend commodity lists in accordance with the economic criteria and standards that uphold Palestinian interests. This is applicable for a range of between at least 293 goods and at most 1058 goods, i.e. 10%- 16% of total Palestinian imports.

17 Extending commodity lists cannot be achieved without negotiations between the two parties to the PER, and reaching

an agreement on adding these goods.

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7- Comparative Analysis of Palestinian Tariff Options and Conclusions

This study is the first effort to methodologically and empirically identify the shape of an autonomous Palestinian tariff structure under current or transformed political circumstances. It has endeavored to analyze the options for levying Palestinian custom duties on imports (excluding petroleum and its derivatives) under different scenarios and systematic criteria. Its findings support the contention that there is room within the existing constraints to fashion a tariff policy that better addresses Palestinian development interests, and that under a scenario of autonomous trade policy making, a modified tariff structure would be an essential part of an effective industrial policy.

7-1 Main Scenario Analysis Results

7-1-1 An Independent Tariff Schedule Under the proposed independent Palestinian tariff schedule there are 5204 imported goods at HS 6-digit level, and 7 levels of custom duties (0%, 5%, 10%, 15%, 20%, 30%, and more than 100%) compared with 110 levels in the applied Israeli tariff schedule (see Table A10 in the Appendix). About 35% of these goods are subject to 0% level, 29.3% to 5%, and 35% to a range from 5% to 30%. About 55% of imports are subject to a custom duty ranging from 0% to 5%, and 25% are subject to a protectionist custom duty (1300 commodities). The latter is the minimum protective tariff rate compared with the more protectionist tariff levels imposed in Israel and many other countries, and is consistent with the WTO requirements in terms of compliance with the established tariff ceiling, or

below the bound ceiling other countries adopt.

Only 55 goods are subject to purchase tax, which is reduced by 20% below the Israeli purchase tax level, to minimize costs incurred by local industries and to favour consumer welfare. In the Israeli schedule, there are 267 goods at HS 6-digit level subject to purchase tax. This reflects the principle that the proposed Palestinian tariff does not depend on purchase tax for industrial policy purposes (as

the applied Israeli schedule does).

Comparison of the first scenario and the applied Israeli tariff schedule, show that there are 20% more goods classified at the zero level in the Israeli schedule, and 12% more goods that are subject to protectionist custom duty in the proposed Palestinian schedule. A third difference between this option and the current schedule is seen in the number goods that are subject to more than 30% customs duty in the Israeli schedule, while the proposed Palestinian schedule does not have a category above that level (except for a handful of sensitive goods in the 100% and above level). 7-1-2 Modifying Tariffs Under the PER This optional scenario includes 152 level of custom duties, which is 50 level more than the applied Israeli schedule. This means that new levels of custom duties at higher levels than the Israeli tariffs were added based on Palestinian trade and industrial considerations and making use of what is

permitted under PER.

Under this option, 18% of goods are subject to 0% level, which is much lower than the applied level in the Israeli schedule, since there are several goods that are not produced in Israel and thus have a 0% level. This option also entails moving several imports from the 0% to other levels in line with Palestinian industrial policy interests. On the other hand, there are many goods that should have lower duties since they do not compete with local production, but the PER do not allow lowering their levels. The PA can raise custom duties of 3046 goods (58% of total number of imported goods) under the PER. A number of these goods must be further investigated within the framework of Palestinian industrial policy, so as to take a decision regarding raising or keeping the rates applied in the Israeli

schedule. Meanwhile. the purchase tax is already fixed at a high rate and cannot be raised above that

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level in this scenario to respond to the requirements of the Palestinian industrial policy, nor can they be reduced under the PER. 7-1-3 Modifications of Tariffs under PER Commodity Lists and extending these Lists These Lists include 739 goods with an import value of US$ 650 million in 2015. Around 555 of these goods are intended for industrial use and are imported mostly from the Israeli market. Israel imposes a range of between 4% to 13% custom duty on these goods, in addition to imposing a purchase tax on 120 goods of these goods. All of this diverts importing from the ROW to importing from the Israeli market. Within the framework of the proposed Palestinian modified PER tariff policy, this could be imposing 15% to 30% protectionist custom duty on 90 of the Listed commodities to protect local products (which would entail abolishing the purchase tax levied on them), while treatment of the rest

of goods in the Lists will be subject to economic criteria followed in the study. Regarding extending PER Lists, the study showed that an extended list of 1058 goods can be developed, which have an import value of US$ 801 million. This list is in conformity with the economic criteria and priorities of the Palestinian industrial policy. Also “A Minimum Priority List” was developed out of the extended Lists, using an additional criterion, i.e. giving top priority to locally produced goods. This List includes 293 goods with a total value of imports of US$ 514 million and exports of US$ 206 million. Extending commodity lists cannot be achieved without negotiations between the Israeli and Palestinian parties, and can be used as a prelude to applying an independent

Palestinian trade policy towards these Lists.

7-2 Comparison of the Results of Proposed Palestinian Scenarios and the Currently Applied Israeli Tariff Schedule

Previous chapters of the study have discussed and analyzed the two optional scenarios: an independent Palestinian tariff, or a modified tariff structure within the parameters of PER that can be implemented immediately in preparation for, or instead of, an independent tariff, including options for extending commodity lists (A1, A2 & B). Following the main results of the two proposed scenarios

are reviewed in comparison with the currently applied Israeli tariff structure: 7-2-1 Distribution of Customs Duties in the Currently Applied Israeli Tariff Structure

Tables A11 and A14 show the applied Israeli tariff rates and their distribution between Palestinian

imports, as follows:

• 54.1% of imported goods are subject to a zero-customs duty level, 16.9% to 5% level, 13% to 10% level, 7.8% to more than 30% level, and the remaining 8% to a range from 10% to 30%

level.

• 85.9% of goods imported from the Israeli market to the Palestinian market are subject to a zero-customs duty level, 28% to a range from 9% to 13%, and 13% to more than 30% level.

7-2-2 Distribution of Customs Duties on Imported Goods in an Independent Tariff Schedule

Tables A12 and A14 show the distribution of the proposed custom duties in the proposed Palestinian

tariff schedule, as follows:

• 35.1% of imported goods are subject to a zero-custom duty, 29.3% to 5%, and the rest of goods are subject to a rate ranging from 10% to 30%, while 15.3% of goods are subject to a protectionist

tariff rate of 30%.

• As explained earlier, under the proposed Palestinian tariff structure goods will not be subject to

purchase tax, except for specific goods.

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The applied Israeli schedule and the proposed Palestinian tariff schedule differ in the value of imports which are subject to zero custom rate, while the proposed tariff schedule is not considered (in WTO terms) as a protectionist tariff since the schedule’s customs duty rates do not exceed 30%. This is not the case in the applied Israeli tariff schedule, where 7.8% of goods are subject to custom duties of more than 30%. In addition, purchase tax is imposed on a large number of goods in the Israeli tariff

schedule. 7-2-3 Distribution of Customs Duties on Imported Goods in a Modified PER Tariff Schedule

Tables A13 and A14 show the distribution of the proposed modifications to Palestinian tariff rates

applicable under PER, as follows:

• 26.9% of imported goods are subject to a zero custom duty, 28.6% to 5%, 7.3% to more than

30%, and the remaining percent to a range from 5% to 30%.

• 23.2% of imported goods are subject to a custom duty ranging from 10% to 12.5%. Compared with the applied Israeli tariff schedule, under this scenario the distribution of the zero and 5% levels are different; imports that are subject to zero level are less than those subject to a

5% level.

7-2-4 Comparison of the Simple Rate and the Weighted Rate

Table A14 draws comparison of the two scenarios and the applied Israeli tariff structure, as follows:

• The weighted average of the applied Israeli tariff, the proposed independent Palestinian tariff, and

the proposed modified tariff under PER were 11.4%, 9.6%, and 17.4% respectively.

• The simple rate was 6% for the Israeli tariff schedule, 9% for the independent tariff, and 12% for

the modified PER tariff. The weighted and simple rates of the currently applied Israeli tariff are close to that of the proposed Palestinian tariff, while the weighted rate of the proposed tariff under PER was higher than the current Israeli schedule. This is ascribed to the fact that a larger proportion of imports in both the proposed Palestinian and modified PER tariff scenarios are subject to the 0% and 5% levels compared to other tariff levels.

7-2-5 Comparison of Revenues Between Options

Table A15 shows that revenues of the currently applied Israeli tariff structure reached US$ 1178 million, US$ 608 million generated from purchase tax, US$ 460 million from VAT, and US$ 109 million from custom duties. While the first-scenario produced US$ 1240 million in revenues: US$ 535 million from purchase tax, US$ 468 million from VAT, and US$ 236 million, from custom duties (i.e. US$ 62 million more than the total currently collected). In the PER scenario, total estimated

revenues reached even more, around US$ 1483 million.

7-2-6 Cost of the Customs Union with Israel This cost was calculated based on the counterfactual of all imports from the Israeli market being replaced with imports from third countries, subject to same custom duties currently applied by Israel. Under this assumption, import revenues could amount to as much as US$ 1670 million. If agricultural commodities are excluded from this calculation (i.e. US$ 962 million indirect taxes on agricultural goods are excluded) net revenues collected from indirect import taxes would be US$ 708 million (note: petroleum and its derivatives were excluded from this calculation).

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7-3 Conclusions and Recommendations

This study has proposed a new Palestinian tariff schedule which reflects Palestinian economic development interests through adopting interlinked customs, industrial and trade policies. To this end, two scenarios are envisaged; an independent non-discriminatory Palestinian tariff policy, or a Palestinian tariff which assumes the continuation of the status quo, that is, to exploit what is available within PER by setting tariff rates at higher levels than those imposed in the applied Israeli tariff, as well as apply an autonomous trade policy with respect to Lists (A1, A2, and B). The study also examined options for extending those lists to commodities that could be considered priority products to be included in new commodity lists to be agreed with Israel. The study provides the empirical basis and exhaustive quantitative analysis to address a number of fundamental questions: What is the “optimal” proposed Palestinian tariff for responding to Palestinian economic conditions and strategic development? What is the customs policy that should be applied to commodity Lists in a more restricted horizon? Furthermore, this research has entailed examining the impact of Israeli tariffs have on both industrial policies and revenues, the best candidate goods to be added to PER commodity Lists, as well as identifying which domestic productive sectors should be protected and what level of protection would be required and justifiable. In particular, the latter investigation addressed the question of which products should be targeted for increased local production and exportation through the use of customs duty as a tool of industrial policy. The results of the analysis in this study answers these questions accordingly. This study has shown, particularly with respect to levels of rates used in tariff schedules, that “industrial policy” covers a range of optional measures: functional policies improve the overall performance of the markets, horizontal policies support specific activities across sectors; and selective policies are aimed at propelling specific activities or sectors. If incorrectly designed or applied, the latter types of industrial policy can be the most distortive; this is not to dismiss the need for industrial policy, but instead to emphasize the importance of carefully designed, time-sensitive and targeted policies. The key to success lies in the design and implementation of appropriate policies that support viable infant industries, without resulting in creating rent-seeking lobbies dependent on government subsidies, whereby the public and private sector work together to uncover the most significant obstacles to the structural transformation of the economy and identify interventions that are most likely to remove them. The industrial policy toolkit in low-income economies such as Palestine, resorts mainly to import tariffs, export subsidies, duty drawbacks, tax incentives and investment incentives to target product markets in a way that at once encourages local production for import substitution and exports. Many countries, especially developing ones, use custom tariffs as an effective tool of an industrial policy through adopting tariffs suitable to nurturing local industry for both exporting and import substitution. Such policies are still applied and considered effective despite these countries accession to the WTO. While the PA is unable to benefit fully from this tool because of its obligations under the PER, there are margins that can be used under PER, especially if tariff escalation is applied. Also, though Palestine’s accession to the WTO is not yet on the horizon, Palestine can eventually benefit from the WTO provision that gives developed countries a differential treatment. In analyzing Palestinian local production, we find that the contribution of food industry and non-metallic minerals industry to total production of the nineteen productive branches was the highest of all branches, constituting 46.7% of the total production of these industries. The tobacco industry and pharmaceutical products contributed with the highest domestic contribution to value-added, accounting for 87% for tobacco and 65% for pharmaceutical products. Five industrial branches of the 19 industrial branches employ more than 75% of total workers in the Palestinian industrial sector, classified by top employer: non-metallic industry, food industry, the garment and apparel industry, furniture industry, and metals industry. Imports of these five industries make up 70% of total Palestinian exports, which means that they are promising sectors and can be developed through

adopting a supportive and protecting industrial and customs policy.

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Literature on customs and trade does not address explicitly the basis on which tariff schedules are developed and the basis for distribution of goods between different rate levels. Most countries build their tariff structures based on domestic economic considerations, and on trial and error, taking into account WTO standards. This study’s methodology is based on pertinent Palestinian economic criteria and standards, industrial policies and revenues criteria in distributing customs duties on goods, in

addition to technical standards in respect to the type of goods and their different uses. Based on these criteria and standards, the proposed Palestinian tariff rates have a bound rate of 30%, distributed among 7 levels starting from zero (in addition to a limited number of goods that were given 100% level for special considerations). The distribution of these rate levels was based on the following principles: reducing production costs, improving competition, compliance with WTO standards, and applying an escalation methodology based on type and use of commodities, i.e. escalation from raw materials to final, fully processed products, and deploying a protectionist customs duty rate for local

products ranging from 20% to 30%. The study found that those goods that should be subject to higher custom rates are concentrated in food and beverages in primary form and processed mainly for industry, in addition to furniture, footwear and clothing sectors’ products. These goods, imports of which reach US$ 1.5 billion, are subject to a proposed tariff set at less than 30%, with a large proportion of these goods currently exempted from taxes in the applied Israeli tariff structure as they were not produced in Israel. Goods that are subject to 100% or higher tariff rate are those which are particularly sensitive to revenues, environment, and nature of use, like cigarettes, alcoholic beverages, and goods pollutant to the

environment like cars…etc, but such goods number only 20. Against US$ 957 million of Palestinian exports, there is US$ 3.3 billion of imports of the same list of products which are fully liberalized in the Israeli tariff policy. More than 80% of these products are imported from the Israeli market, which negatively impacts Palestinian products and lessens their

market share. Assessing the 2013 antidumping decision aimed at protecting national products, it was shown that the furniture sector has made progress and grown since then, as evident in the increase in the value of production from US$ 235 million in 2010 to US$ 452 million in 2015, and the increase in the number of workers employed by the sector from 8,000 to 13,000 in the same period. It has been shown that the relation between revenues and the currently applied Israeli tariff structure changes depending on the proposed new customs policy applied, and that sources of revenues rely heavily on the weights of custom duties and purchase tax applied in these schedules. Some 55% of the PA’s revenues are generated from trade with third countries, distributed as only 5% from customs duties,50% from purchase tax (267 goods at 6-digit level), and 45% from VAT, while as few as 50 commodities contribute more than 70% of total import revenues.

In concluding, the main recommendations of the study may be summarized as follows:

1. Any redesign of the Palestinian trade regime must take as its starting point a vigorous commitment to nurture industrialization and restructure a deformed economy, through using available tariff policy instruments and creating new ones in the future as they become feasible. The adoption of a new trade and tariff policy should be rooted in promoting a sustained and sequenced process of industrialization for Palestine.

2. To succeed where previous incremental or partial efforts have not, calls for a political decision at the highest levels in this direction to ensure a systematic and durable arrangement that integrates the efforts of the competent Government institutions (especially the Ministries of Finance and Planning and of National Economy) along with industrial and trade sector representatives to ensure dynamic linkages between export promotion, import substitution, tariffs, public revenues and productive sector investment.

3. The two scenarios proposed are not mutually exclusive, though one assumes a much greater degree of autonomous policy making than currently available to the PA. The design of the more limited scenario of a modified PER incorporates the same basic industrial policy goals as the

53

more ambitious independent tariff schedule. So, its adoption would not necessarily imply a permanent customs union with Israel, but indeed could be a building block that sets the scene for an independent trade regime.

4. Hence, it is within the realm of the possible to start implementing now more vigorous trade policies with respect to PER commodity Lists.

5. Immediate measures could aim to benefit from PER provisions that allows raising customs tariff for protecting certain local industries, which would increase their market share and improve their

competitiveness. 6. This calls in turn for adopting an industrial policy under the (modified) status quo scenario using a

selective vertical industrial policy. 7. Meanwhile, the necessary negotiations with Israel could be undertaken to obtain agreement on

extending commodity lists, and to advance the “Minimum Priority List" as a short list of such an

extended list. 8. Such policy adjustments would be best accompanied by promoting direct importing in order to

reduce the costs of the current customs envelope and to increase indirect tax revenues, as well as

to reduce costs of Palestinian products. 9. A supplementary study should be envisaged on the impact of tariffs on economic and social

welfare. This study may revise or re-establish some of the proposed customs duties, and might be

consistent with the first scenario in which consumer income has been taken into consideration. 10. The first scenario is a manifestation of independence and sovereignty, but that this scenario is

flexible and any customs duties can be altered or adjusted to respond to Palestinian economic

needs in the future. 11. Future accession efforts to WTO should consider the potential benefits from the first scenario

through linking tariff reform primarily to the custom duties proposed in this scenario, since the proposed Palestinian tariff is not a significant protection duty as in other countries, especially that

it is much lower and does not exceed 30% and is imposed on specific commodities only. 12. This study is only the first effort to identify the shape of an autonomous Palestinian tariff

structure, paving the road for further research and investigation in the light of development priorities. No doubt there is a need for a series of sectoral studies, which may suggest additional

or modified rates. Therefore, the tariff rates proposed in this study are subject to alterations and modifications and need not be considered as final.

13. Finally, this proposed Palestinian tariff structure is a dynamic model that can be modified from time to time based on new developments in the economy and trade sectors and emerging industrial branches worthy of infant industry protection, as well as phasing out of inefficient or

uncompetitive activities that add to an already distorted market structure.

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56

Appendixes

57

Table A1: Trade Flows with Preferential Trade Agreements (2007-2014) (US$ Dollar)

2007 2008 2009 2010 2011 2012 2013 2014

Exports 3359 3559 6132 7273 8702 13577 10294 11980

US Imports 24304 37680 40356 41919 43222 43900 42397 51903

Balance -20945 -34121 -34224 -34646 -34520 -30323 -32103 -39923

Exports 243 268 2665 2029 1789 3259 908 521

Canada Imports 5152 1768 2650 8169 2593 2871 2687 2664

Balance -4909 -1500 15 -6140 -804 388 -1779 -2143

Exports 18076 8122 4738 9874 14463 14391 13152 20003

EU (28) Imports 250866 289237 348496 368073 481321 469297 455471 514751

Balance -232790 -281115 -343758 -358199 -466858 -454906 -442319 -494748

Exports 116 168 173 454 461 378 383 360

EFTA Imports 35462 53902 4670 37349 44148 14163 10140 21291

Balance -35346 -53734 -4497 -36895 -43687 -13785 -9757 -20931

Exports 512 567 53 489 418 854 2988 3005

Turkey Imports 82021 68512 113809 179112 232593 233144 289170 325915

Balance -81509 -67945 -113756 -178623 -232175 -232290 -286182 -322910

Exports 2 0 0 205 65 72 0 506

MERCO Imports 13087 21091 20481 11734 23709 24069 26396 27644

Balance -13085 -21091 -20481 -11529 -23644 -23997 -26396 -27138

Exports 34772 45833 47252 65899 74003 108778 84289 112523

GAFTA Imports 78243 81908 91960 129816 175809 187159 214775 274260

Balance -43471 -36075 -44708 -63917 -101806 -78381 -130486 -161737

TOTAL Total Export 57080 58517 61013 86223 99901 141309 112014 148898

Total Imports 489135 554098 622422 776172 1003395 974603 1041036 1218428

Source: ITC Database International Trade Statistics

58

Table A2: Total Value of Trade and Trade Balance in Palestine*, 1997-2014, in current $

Year Trade Transactions

Value Total

Exports Total

Imports Trade

balance GDP Exports/GDP

Imports/GDP

Trade Balance/GDP

1997 2,620,984 382,423 2,238,561 (1,856,138) 3,759,800 10.2% 59.5% -49.4%

1998 2,769,948 394,846 2,375,102 (1,980,256) 4,067,800 9.7% 58.4% -48.7%

1999 3,379,375 372,148 3,007,227 (2,635,079) 4,271,200 8.7% 70.4% -61.7%

2000 2,783,664 400,857 2,382,807 (1,981,950) 4,313,600 9.3% 55.2% -45.9%

2001 2,323,996 290,349 2,033,647 (1,743,298) 4,003,700 7.3% 50.8% -43.5%

2002 1,756,475 240,867 1,515,608 (1,274,741) 3,555,800 6.8% 42.6% -35.8%

2003 2,079,948 279,680 1,800,268 (1,520,588) 3,968,000 7.0% 45.4% -38.3%

2004 2,685,936 312,688 2,373,248 (2,060,560) 4,329,200 7.2% 54.8% -47.6%

2005 3,003,035 335,443 2,667,592 (2,332,149) 4,831,800 6.9% 55.2% -48.3%

2006 3,125,435 366,709 2,758,726 (2,392,017) 4,910,100 7.5% 56.2% -48.7%

2007** 3,797,014 512,979 3,284,035 (2,771,056) 5,505,800 9.3% 59.6% -50.3%

2008 4,024,614 558,446 3,466,168 (2,907,722) 6,673,500 8.4% 51.9% -43.6%

2009 4,119,140 518,355 3,600,785 (3,082,430) 7,268,200 7.1% 49.5% -42.4%

2010 4,534,025 575,513 3,958,512 (3,382,999) 8,913,100 6.5% 44.4% -38.0%

2011** 5,119,308 745,661 4,373,647 (3,627,986) 10,465,400 7.1% 41.8% -34.7%

2012 5,479,725 782,369 4,697,356 (3,914,987) 11,279,400 6.9% 41.6% -34.7%

2013 6,064,515 900,618 5,163,897 (4,263,280) 12,476,000 7.2% 41.4% -34.2%

2014 6,626,917 943,717 5,683,199 (4,739,482) 12,715,600 7.4% 44.7% -37.3%

(*):The data excludes that part of Jerusalem which was annexed forcefully by Israel following its occupation of the West Bank in 1967. (**): Revised Figures. Source: PCBS, Registered Foreign Trade,1997-2014

59

Table A3: Value and Trade Balance of Palestinian* Trade with Israel, 1997-2014, in current $

Year Trade

Transaction Value

Value of Imports with Israel

Value of Exports with

Israel

Trade Balance with Israel

% of Total Imports

% of Total Exports

% of Trade Deficit with Israel of Total

Trade Deficit

Trade Balance

Israel/GDP

1997 2,212,246 1,852,380 359,866 (1,492,514) 82.7% 94.1% 80.4% -39.7%

1998 2,214,638 1,833,123 381,515 (1,451,608) 77.2% 96.6% 73.3% -35.7%

1999 2,214,110 1,853,648 360,462 (1,493,186) 61.6% 96.9% 56.7% -35.0%

2000 2,109,221 1,739,541 369,680 (1,369,861) 73.0% 92.2% 69.1% -31.8%

2001 1,624,563 1,351,581 272,982 (1,078,599) 66.5% 94.0% 61.9% -26.9%

2002 1,333,455 1,117,129 216,326 (900,803) 73.7% 89.8% 70.7% -25.3%

2003 1,565,623 1,309,642 255,981 (1,053,661) 72.7% 91.5% 69.3% -26.6%

2004 2,028,999 1,747,850 281,149 (1,466,701) 73.6% 89.9% 71.2% -33.9%

2005 2,163,438 1,872,880 290,558 (1,582,322) 70.2% 86.6% 67.8% -32.7%

2006 2,328,715 2,002,150 326,565 (1,675,585) 72.6% 89.1% 70.0% -34.1%

2007** 2,763,215 2,307,987 455,228 (1,852,759) 70.3% 88.7% 66.9% -33.7%

2008 3,244,252 2,794,829 449,423 (2,345,406) 80.6% 80.5% 80.7% -35.1%

2009 3,104,623 2,651,129 453,494 (2,197,635) 73.6% 87.5% 71.3% -30.2%

2010 3,361,739 2,873,343 488,396 (2,384,947) 72.6% 84.9% 70.5% -26.8%

2011** 3,734,875 3,091,022 643,853 (2,447,169) 70.7% 86.3% 67.5% -23.4%

2012 3,989,979 3,350,799 639,180 (2,711,619) 71.3% 81.7% 69.3% -24.0%

2013 4,481,177 3,694,821 786,356 (2,908,465) 71.6% 87.3% 68.2% -23.3%

2014 4,749,799 3,958,259 791,540 (3,166,719) 69.6% 83.9% 66.8% -24.9%

Source: PCBS, Registered Foreign Trade,1997-2014 (*): The data excludes that part of Jerusalem which was annexed forcefully by Israel following its occupation of the West Bank in 1967. (**): Revised Figures.

60

Table A4: Composition of Palestinian exports, selected years (US$ Dollar)

SITC groups 1997 1999 2001 2003 2005 2007 2009 2011** 2013 2014

Food and Live Animals 57,240 60,878 34,073 34,226 36,180 68,537 61,324 107,676 140,406 145,308

15% 16% 12% 12% 11% 13% 12% 14% 16% 15%

Beverages and tobacco 19,639 14,567 13,478 12,980 14,322 15,649 21,957 30,403 45,206 46,858

5.1% 3.9% 4.6% 4.6% 4.3% 3.1% 4.2% 4.1% 5.0% 5.0%

Raw materials, inedible, except fuels 17,237 13,406 12,887 13,357 13,165 13,242 7,183 95,908 139,762 83,266

4.5% 3.6% 4.4% 4.8% 3.9% 2.6% 1.4% 12.9% 15.5% 8.8%

Mineral fuels, lubricants metal, and related materials

6,175 4,952 2,161 3,871 12,220 8,163 2,709 1,624 2,153 2,198

1.61% 1.33% 0.74% 1.38% 3.64% 1.59% 0.52% 0.22% 0.24% 0.23%

Oils and fats, waxes animal and plant 7,907 4,133 5,755 7,214 12,276 17,777 14,628 20,111 12,753 28,108

2.1% 1.1% 2.0% 2.6% 3.7% 3.5% 2.8% 2.7% 1.4% 3.0%

Chemicals and related products 22,701 30,250 27,594 26,028 28,866 66,650 67,747 52,731 49,387 46,869

5.9% 8.1% 9.5% 9.3% 8.6% 13.0% 13.1% 7.1% 5.5% 5.0%

Manufactured goods classified by material 165,578 151,241 120,473 110,530 129,788 222,014 210,548 256,047 279,699 328,844

43% 41% 41% 40% 39% 43% 41% 34% 31% 35%

Machinery and transport equipment 21,715 20,758 16,920 14,767 18,522 28,297 30,025 32,182 40,140 37,583

5.7% 5.6% 5.8% 5.3% 5.5% 5.5% 5.8% 4.3% 4.5% 4.0%

variety articles 58,877 71,545 56,496 51,024 64,645 71,734 102,233 148,979 191,114 224,684

15.4% 19.2% 19.5% 18.2% 19.3% 14.0% 19.7% 20.0% 21.2% 23.8%

Commodities and transactions not classified elsewhere

5,354 418 512 5,683 5,459 916 _ _ _ _

1.40% 0.11% 0.18% 2.03% 1.63% 0.18% _ _ _ _

Total 382,423 372,148 290,349 279,680 335,443 512,979 518,355 745,661 900,618 943,717

(*):The data excludes that part of Jerusalem which was annexed forcefully by Israel following its occupation of the West Bank in 1967. (**): Revised Figures. Source: PCBS, Registered Foreign Trade,1997-2014

61

Table A5: Sources of Palestinian imports, selected years (US$ Dollar)

International Groups 1997 1999 2001 2003 2005 **2007 2009 **2011 2013 2014

Total of Arab Asian Countries

25,563 60,886 23,779 26,643 36,399 50,274 56,475 127,632 171,484 218,043

1.1% 2.0% 1.2% 1.5% 1.4% 1.5% 1.6% 2.9% 3.3% 3.8%

Total of Remaining Asian Countries

1,947,951 2,285,629 1,534,842 1,514,979 2,250,059 2,845,158 3,044,078 3,625,895 4,350,773 4,712,764

87% 76% 75% 84% 84% 87% 85% 83% 84% 83%

Total of Arab African Countries

30,583 20,185 13,002 19,078 32,601 36,041 35,500 34,675 43,561 56,332

1.4% 0.7% 0.6% 1.1% 1.2% 1.1% 1.0% 0.8% 0.8% 1.0%

American Countries

29,294 98,806 52,009 42,891 51,077 48,350 70,270 76,303 87,142 94,328

1.3% 3.3% 2.6% 2.4% 1.9% 1.5% 2.0% 1.7% 1.7% 1.7%

Total of European Union Countries

178,903 484,644 358,829 154,564 250,356 246,352 348,467 443,818 455,472 516,116

8.0% 16.1% 17.6% 8.6% 9.4% 7.5% 9.7% 10.1% 8.8% 9.1%

Total of Remaining European Countries

17,691 41,340 32,743 27,204 33,107 52,907 36,946 53,018 38,768 65,075

0.8% 1.4% 1.6% 1.5% 1.2% 1.6% 1.0% 1.2% 0.8% 1.1%

Other Countries

8,576 15,737 18,444 14,908 13,993 4,953 9,049 12,306 16,696 20,542

0.38% 0.52% 0.91% 0.83% 0.52% 0.15% 0.25% 0.28% 0.32% 0.36%

Total 2,238,561 3,007,227 2,033,647 1,800,268 2,667,592 3,284,035 3,600,785 4,373,647 5,163,897 5,683,199

(*):The data excludes that part of Jerusalem which was annexed forcefully by Israel following its occupation of the West Bank in 1967. (**): Revised Figures. Source: PCBS, Registered Foreign Trade,1997-2014

62

Table A6: Destination of Palestinian exports, selected years (US$ Dollar)

International Groups 1997 1999 2001 2003 2005 2007 2009 **2011 2013 2014

Total of Arab Asian Countries

19,043 9,278 14,497 14,796 23,155 33,044 38,449 66,504 81,472 111,138

5% 2% 5% 5% 7% 6% 7% 9% 9% 12%

Total of Remaining Asian Countries

358,367 360,469 273,164 256,355 292,475 456,018 454,119 645,767 790,978 769,032

94% 97% 94% 92% 87% 89% 88% 87% 88% 81%

Total of Arab African Countries

15 360 79 181 2,701 1,728 11,832 7,498 2,873 1,472

0.00% 0.10% 0.03% 0.06% 0.81% 0.34% 2.28% 1.01% 0.32% 0.16%

American Countries

17 365 128 961 4,321 3,616 8,825 10,570 11,204 13,115

0.00% 0.10% 0.04% 0.34% 1.29% 0.70% 1.70% 1.42% 1.24% 1.39%

Total of European Union Countries

878 1,519 2,453 7,041 11,556 18,076 4,720 14,463 13,153 20,005

0.23% 0.41% 0.84% 2.52% 3.44% 3.52% 0.91% 1.94% 1.46% 2.12%

Total of Remaining European Countries

2,103 7 28 327 173 127 203 786 547 1,248

0.55% 0.00% 0.01% 0.12% 0.05% 0.02% 0.04% 0.11% 0.06% 0.13%

Other Countries

2,000 150 1 18 1,063 370 157 73 391 706

0.52% 0.04% 0.00% 0.01% 0.32% 0.07% 0.03% 0.01% 0.04% 0.07%

Total 382,423 372,148 290,349 279,680 335,443 512,979 518,355 745,661 900,618 943,717

(*):The data excludes that part of Jerusalem which was annexed forcefully by Israel following its occupation of the West Bank in 1967. (**): Revised Figures. Source: PCBS, Registered Foreign Trade,1997-2014

63

Table A7: BEC Codes distributed by imports and exports 2014-2015 Value in Thousand USD

BEC Description BEC Code

Imports Exports

2014 2015 2014 2015

Food and beverages primary mainly for industry. 111 264,023 239,317 11,431 8,047

Food and beverages primary mainly for household consumption.

112 187,201 187,760 72,520 98,664

Food and beverages processed mainly for industry. 121 161,387 144,169 1,525 698

Food and beverages processed mainly for household consumption.

122 504,080 533,329 97,750 110,066

Industrial supplies n.e.s primary. 21 58,662 75,270 76,493 66,863

Industrial supplies n.e.s processed. 22 1,357,208 1,348,264 388,161 382,382

Fuels and lubricants, primary. 31 1,847 4,681 1,613 1,226

Fuels and lubricants, processed for motor spirit. 32 1,009,319 514,835 2,178 1,572

Fuels and lubricants, processed for other uses. 322 843,052 612,937 2 1,587

Capital goods (except transport equipment). 41 345,182 426,557 26,607 32,374

Parts and accessories of capital goods (except transport equipment).

42 78,807 81,429 11,102 6,453

Transport equipment, and parts and accessories of passenger motor cars.

51 118,263 136,931 18 223

Transport equipment for industrial uses. 521 70,432 63,801 4,649 3,472

Transport equipment non - industrial uses. 522 1,162 2,973 24 81

Parts and accessories of all kinds of transport equipment.

53 60,837 68,456 14,328 15,960

Durable consumer goods. 61 159,307 176,325 63,724 62,136

Semi - durable consumer goods. 62 153,758 184,173 96,958 91,042

Non - durable consumer goods. 63 308,671 424,260 74,636 74,964

Goods n.e.s.in broad economic categories. 7 1 0 - -

Total 5,683,199 5,225,467 943,717 957,811

(*): The data excludes that part of Jerusalem which was annexed forcefully by Israel following its occupation of the West Bank in 1967.

64

Table A8: Example of the tariff schedule for all scenarios

Israeli Summary HS code description

BEC

PA Target

ing

Scenario 1: Independent

Trade Regime Scenario 2: PP+

HS 2 digit

HS code Isr_Avg

CD Isr_Avg_

PTX English

BEC Code

BEC Rate- PA

PROPOSED RATE

List A1/A2/

B

PA decesi

on 2012

FINAL PA CUSTOM

DUTY

FINAL PA PTX

Difference in

CD

CD_rate_Diff

PTX_rate_Diff

PP+ Rate (CD)

PP+ Rate

(PTX-Isr)

01 010121 0% 0% Pure-bred breeding horses 41 0% 0% 0% 0% 0% 0% 0% 0%

01 010129 0% 0% Live horses (excl. pure-bred for breeding) 111 0% 0% 0% 0% 0% 0% 0% 0%

01 010130 0% 0% Live asses 111 0% 0% 0% 0% 0% 0% 0% 0%

01 010190 0% 0% Live mules and hinnies 111 0% 0% 0% 0% 0% 0% 0% 0%

01 010221 0% 0% Pure-bred cattle for breeding 41 0% 0% 0% 0% 0% 0% 0% 0%

01 010229 40% 0% Live cattle (excl. pure-bred for breeding) 111 0% 0% 0% -40% 40% 0% 40% 0%

01 010231 0% 0% Pure-bred buffalo for breeding 41 0% 0% 0% 0% 0% 0% 0% 0%

01 010239 38% 0% Live buffalo (excl. pure-bred for breeding) 111 0% 0% 0% -38% 38% 0% 38% 0%

01 010290 40% 0% Live bovine animals (excl. cattle and buffalo) 111 0% 0% 0% -40% 40% 0% 40% 0%

01 010310 0% 0% Pure-bred breeding swine 41 0% 0% 0% 0% 0% 0% 0% 0%

01 010391 15% 0% Live pure-bred swine, weighing < 50 kg (excl. pure-bred for breeding) 111 0% 0% 0% -15% 15% 0% 15% 0%

01 010392 30% 0% Live pure-bred swine, weighing >= 50 kg (excl. pure-bred for breeding) 111 0% 0% 0% -30% 30% 0% 30% 0%

01 010410 85% 0% Live sheep 111 0% A1&A

2 0% 0% -85% 85% 0% 0% 0%

01 010420 85% 0% Live goats 111 0% 0% 0% -85% 85% 0% 85% 0%

01 010511 0% 0%

Live fowls of the species Gallus domesticus, weighing <= 185 g (excl. turkeys and guinea fowls) 111 0% 0% 0% 0% 0% 0% 0% 0%

01 010512 18% 0% Live domestic turkeys, weighing <= 185 g 111 0% 0% 0% -18% 18% 0% 18% 0%

01 010513 18% 0% Live domestic ducks, weighing <= 185 g 111 0% 0% 0% -18% 18% 0% 18% 0%

01 010514 18% 0% Live domestic geese, weighing <= 185 g 111 0% 0% 0% -18% 18% 0% 18% 0%

65

Israeli Summary HS code description

BEC

PA Target

ing

Scenario 1: Independent

Trade Regime Scenario 2: PP+

HS 2 digit

HS code Isr_Avg

CD Isr_Avg_

PTX English

BEC Code

BEC Rate- PA

PROPOSED RATE

List A1/A2/

B

PA decesi

on 2012

FINAL PA CUSTOM

DUTY

FINAL PA PTX

Difference in

CD

CD_rate_Diff

PTX_rate_Diff

PP+ Rate (CD)

PP+ Rate

(PTX-Isr)

01 010515 18% 0% Live domestic guinea fowls, weighing <= 185 g 111 0% 0% 0% -18% 18% 0% 18% 0%

01 010594 150% 0% Live fowls of the species Gallus domesticus, weighing > 185 111 0% 0% 0% -150% 150% 0% 150% 0%

01 010599 150% 0% Live domestic ducks, geese, turkeys and guinea fowls, weighing > 185 g 111 0% 0% 0% -150% 150% 0% 150% 0%

01 010611 0% 0% Live primates 111 0% 0% 0% 0% 0% 0% 0% 0%

01 010612 0% 0%

Live whales, dolphins and porpoises (mammals of the order Cetacea); manatees and dugongs (mammals of the order Sirenia); seals, sea lions and walruses (mammals of the suborder Pinnipedia) 111 0% 0% 0% 0% 0% 0% 0% 0%

01 010613 0% 0% Live camels and other camelids [Camelidae] 111 0% 0% 0% 0% 0% 0% 0% 0%

01 010614 0% 0% Live rabbits and hares 111 0% 0% 0% 0% 0% 0% 0% 0%

01 010619 0% 0%

Live mammals (excl. primates, whales, dolphins and porpoises, manatees and dugongs, seals, sea lions and walruses, camels and other camelids, rabbits and hares, horses, asses, mules, hinnies, bovines, pigs, sheep and goats) 111 0% 0% 0% 0% 0% 0% 0% 0%

66

Table A9: Proposed extension of Lists A1, A2. B

A9-1: Proposed full list

BEC code Number of goods

under BEC

Sum of imports from

Israel

Sum of Imports from

RoW

Sum of exports to

Israel

Sum of exprts to

RoW

111 32 107021 820 430 35

112 71 144726 2810 62839 19133

121 31 1074 8213 30 23

122 43 47703 20961 2634 181

21 41 33301 6317 2708 1646

22 418 82340 79817 74830 2618

31 1 0 235 0 0

41 234 47377 115111 11896 865

42 123 19829 17876 4662 47

521 13 832 29725 2640 28

522 1 45 0 81 0

53 31 13295 7155 4672 0

61 15 780 11819 13918 337

62 1 74 2291 0 0

7 3 0 0 0 0

Grand Total 1058 498397 303149 181338 24913

A9-2: Proposed limited list

BEC code Number of

goods under BEC

Sum of imports

from Israel

Sum of Imports

from RoW

Sum of exports to Israel

Sum of exprts to

RoW

111 4 40251 391 430 35

112 49 135251 2810 62839 19133

121 3 131 1061 30 23

122 9 27561 20698 2634 181

21 12 23043 3482 2708 1646

22 92 76036 45320 74830 2618

41 77 40349 45213 11896 865

42 29 18401 7225 4662 47

521 4 318 486 2640 28

522 1 45 0 81 0

53 10 13208 1774 4672 0

61 3 780 10615 13918 337

Grand Total 293 375372 139074 181338 24913

67

Table A10: BEC distribution of proposed Customs Duty (CD) rates

BEC CODE 0% 5% 9% 10% 11% 13% 15% 18% 18% 20% 24% 27% 30% Grand Total

111 80 80

112 249 249

121 87 87

122 344 344

21 309 309

22 2294 1 1 1 1 1 2299

31 9 9

32 4 4

322 15 15

41 595 1 1 2 599

42 266 266

51 8 8

521 45 45

522 19 19

53 109 109

61 142 3 3 148

62 357 11 8 376

63 219 219

7 19 19

Grand Total 1429 2403 1 27 1 1 143 1 4 582 11 8 593 5204

68

TABLE A11: Percentage CD distribution under current Israeli tariff schedule (US$)

Custms Rat Import

from_Israel

% of totalIMPORT FROM Israel

import from_RoW

% of total from M

RW

Total Palestinian

imports

% of total Palestinian

imports

0% 1,510,876 58.90% 1,044,482 48.4% 2,555,357 54.1%

5% 328,715 12.81% 470,028 21.8% 798,743 16.9%

9% 222,182 8.66% 356,294 16.5% 578,476 12.2%

10% 29,589 1.15% 19,397 0.9% 48,986 1.0%

11% 22,520 0.88% 15,503 0.7% 38,024 0.8%

13% 115,317 4.50% 178,270 8.3% 293,587 6.2%

15% 2,385 0.09% 15,675 0.7% 18,059 0.4%

18% 1,578 0.06% 32 0.0% 1,611 0.0%

20% 3,387 0.13% 2,852 0.1% 6,239 0.1%

24% 3,340 0.13% 7,046 0.3% 10,385 0.2%

27% - 0.00% 92 0.0% 92 0.0%

30% 625 0.02% 3,394 0.2% 4,019 0.1%

Sub Total 2,240,513 87.3% 2,113,065 98.0% 4,353,578 92.2%

Total 2,565,362 2,157,268 4,722,630

69

TABLE A12: Percentage CD distribution under proposed Palestinian tariff schedule (US $)

Custms Rat Import

from_Israel

% of totalIMPORT FROM Israel

import from_RoW

% of total from M

RW

Total Palestinian

imports

% of total Palestinian

imports

0% 1,078,395 42.0% 578,065 26.8% 1,656,460 35.1%

5% 762,700 29.7% 621,340 28.8% 1,384,041 29.3%

9% 8,843 0.3% 13,717 0.6% 22,560 0.5%

10% 2,000 0.1% 137,904 6.4% 139,904 3.0%

11% 271 0.0% 1,454 0.1% 1,726 0.0%

13% 28 0.0% 6,271 0.3% 6,299 0.1%

15% 108,599 4.2% 54,644 2.5% 163,244 3.5%

18% 863 0.0% 14,019 0.6% 14,882 0.3%

20% 196,031 7.6% 395,610 18.3% 591,641 12.5%

24% 2,138 0.1% 7,498 0.3% 9,636 0.2%

27% 4,455 0.2% 6,695 0.3% 11,150 0.2%

30% 401,038 15.6% 320,051 14.8% 721,088 15.3%

Sub Total 2,565,362 100.0% 2,157,268 100.0% 4,722,630 100.0%

Total 2,565,362 2,157,268 4,722,630

70

Table A13: Percentage CD distribution under proposed modified PER tariff schedule (US$)

Custms Rat Import

from_Israel

% of totalIMPORT FROM Israel

import from_RoW

% of total from M RW

Total Palestinian

imports

% of total Palestinian

imports

0% 869,045 33.9% 401,081 18.6% 1,270,126 26.9%

5% 699,317 27.3% 652,996 30.3% 1,352,313 28.6%

9% 92,840 3.6% 99,315 4.6% 192,155 4.1%

10% 25,152 1.0% 149,246 6.9% 174,398 3.7%

11% 1,746 0.1% 9,941 0.5% 11,687 0.2%

13% 32,899 1.3% 34,753 1.6% 67,652 1.4%

15% 108,599 4.2% 60,785 2.8% 169,384 3.6%

18% 1,573 0.1% 32 0.0% 1,605 0.0%

20% 196,769 7.7% 393,594 18.2% 590,363 12.5%

24% 2,213 0.1% 9,788 0.5% 12,001 0.3%

27% 4,455 0.2% 6,695 0.3% 11,150 0.2%

30% 208,811 8.1% 296,750 13.8% 505,561 10.7%

Sub Total 2,243,419 87.5% 2,114,976 98.0% 4,358,394 92.3%

Total 2,565,362 2,157,268 4,722,630

Table A14: Comparison between the two scenarios and the Israeli CD rates

IS CD rate

PA proposed CD rate

PP+ CD rate

0% / imports 54.1% 35.1% 26.9%

5%/ imports 16.9% 29.3% 28.6%

5%-30%/imports 21.2% 35.6% 36.8%

> 30%/ imports 7.8% 0.0% 7.7%

Weighted AVG 11.4% 9.6% 17.4%

Simple AVG 6% 9% 12%

71

Table A15: Total Revenues under current Israeli tariff schedule, proposed Palestinian schedule and modified PER schedule

Scinario Revenue (1000 $)

Isr_Rev_CD 109341.7

Isr_Rev_PTX 608797.0

Isr_VAT 460065.1

Isr_Total Revenue 1178203.8

PA_Rev_CD 236595.6

PA_Rev_PTX 535099.6

PA_VAT 468634.1

PA_Total Revenue 1240329.4

PP+_Rev_CD 275244.5

pp+_Rev_PTX 706155.8

PP+_Rev_VAT 502186.9

PP+_Rev_Total 1483587.2

72

Table A16 : DATA Keys and description of Columns DATA in shees

sheet section column number

Column Title Column Description

4 HS 2 digit Harmonize System 2 digit

(5) HS code Harmonize System description 6 digit

Israeli Summary 16* Isr_Avg CD Israeli averge Custom Duty

17* Isr_Avg_PTX Israeli averge Purchase Tax

HS code description

(18) English English Description HS 6 digit

(18a) Arabic Arabic Descriptin HS 6 digit

2015 Imports (19) M_Israel Imports from Israel

(20) M_RoW Import from the Rest of the World

(21) M_Total Total Imports

2015 Exports (22) X_Israel Exports to Israel

(23) X_RoW Exports to the Rest of the World

(24) X_Total Total Exports

(24a) More than 5 Million Palestinian Authority Export above 5 m$

(24b) Trade Balance Trade Balance for Exports

BEC (25) BEC Code Broad Economic Categories Code

(26) BEC Rate- PA Proposed Rate

Proposed Custom Duty Rate ditributed by BEC

Classification (27) WTO_Agr World Trade Organization Agriclture Goods

(28) UNCTAD_Classification UNCTAD Classification of Goods

(29) Singapore Excise Tax Singapore Clasifivation of goods subject to Excise Tax

PA Targeting (30) List A1/A2/B List A1/A2/B in Paris Protocol

(31) PA decesion 2012 Palestinian Authority decesion 2012 anti dumping

Revenue from Israeli Tariff

32 Isr_Rev_CD Israeli Revenue from Custom Duty

33 Isr_Rev_PTX Israeli Revenue from Purchase Tax

34 Isr_VAT Israeli Revenue from Value Added Tax

35 Isr_Total Revenue Total Isreali Revenue

Scenario 1: Independent Trade Regime

36 PA_Rev_CD Palestinian Authority Revenue from Custom Duty

Revenue from PA Proposed Tariff

37 PA_Rev_PTX Palestinian Authority Revenue from Purchase Tax

38 PA_VAT Palestinian Authority Revenue from VAT

39 PA_Total Revenue Palestinian Authority Total Imports Revenues

40 CD_rate_Diff Differant of Custom Duty Rate compared to the current rate

41 PTX_rate_Diff Differant in Purchase Tax Rate comparing the current rate

42 Cost of Custom Envelope-CD Revenue

Cost of Custom Envelope-Custom Duty Revenue loss

43 Cost of Custom Envelope-PTX Revenue

Cost of Custom Envelope-Purchase Tax Revenue loss

44 Cost of Custom Envelope- Cost of Custom Envelope-VAT Tax Revenue

73

sheet section column number

Column Title Column Description

VAT Revenue loss

45 Total Sub Total Loss

46 VAT from Isr Deduct VAT fro Isreal

47 Total Cost Total cost (loss)

Scenario 2: PP+ 48 PP+ Rate (CD) Paris Protocol Modified Rate of Custom Duty

49 PP+ Rate (PTX-Isr) Paris Protocol Modified Rate of Purchase Tax (Israeli Rate)

50 PP+_Rev_CD Revenue of Custom Duty from Paris Protocol Modified

51 pp+_Rev_PTX Revenue of Purchase Tax from Paris Protocol Modified

52 PP+_Rev_VAT Revenue of VAT from Paris Protocol Plus

53 PP+_Rev_Total Total Revene of Paric Protocol Modified

Option: List A1A2B Extention

54 Extention to A1A2B` Extention List for A1A2B under Paric Protocol Modified

55 Limited A1A2B Limited list for A1A2B under Paric Protocol

*Israeli Tariff includes the calculation of the ad-valorem equivalent of mixed tariffs