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  • 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.

  • 1

    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.

  • i

    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 studys 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

  • ii

    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

  • i

    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 Israels 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

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