The New Cold War
America, China, and the Echoes of History
On September 30, just as he had warned a week earlier, Palestinian President Mahmoud Abbas dropped a “bombshell” at a speech before the UN General Assembly. In somewhat vague terms, Abbas said, “We declare that as long as Israel refuses to commit to the agreements signed with us...they leave us no choice but to insist that we will not remain the only ones committed to the implementation of these agreements.” By “agreements,” Abbas meant the Oslo Accords, signed in 1993 and 1995, which are considered the cornerstone of peace between Israelis and Palestinians. The accords established the Palestinian Authority and laid out a five-year timetable for the resolution of disputes between Israel and Palestine. Since then, peace has stalled in light of Hamas-sponsored terrorist attacks against Israel, the exchange of rocket fire between the two, intifadas, and the expansion of Israeli settlements in the West Bank.
Abbas likely wasn’t talking about the Paris Protocol, which was signed in 1994 and incorporated into Oslo II in 1995. Palestinians and Israelis have recently made calls to revisit this agreement, which defines nearly all economic relations between Israel and Palestine. The protocol, like the rest of the Oslo Accords, was meant to last for a five-year interim period, and sought to empower Palestine to take control of many aspects of its economy. It is centered on a customs union, which enables Israel to collect taxes on goods flowing to the Palestinian territories. Israel is supposed to distribute the revenue to the Palestinian Authority on a monthly basis. The agreement means that Palestinians rely on the Israeli Shekel and pay almost identical customs and value-added taxes (VAT) as Israelis with the exception of specific goods such as certain food items, metals, and household appliances, for which the Palestinian Authority can issue its own tariffs. The agreement also ensured the flow of Palestinian labor into Israel, established the Palestinian Monetary Authority, and created the Joint Economic Committee to arbitrate and resolve economic disputes.
Over two decades since the conclusion of the historic agreement in Paris, and 17 years past its original expiration date, the protocol still remains in effect, but many elements of it no longer function or have significantly diminished. For one, the Palestinian Monetary Authority has continued to operate, licensing and overseeing 17 Palestinian banks and determining monetary policy. Israel still collects and transfers customs and import taxes for the Palestinian Authority, while taking a three percent administrative fee. However, Israel will often withhold these taxes in response to violence or to unfavorable Palestinian initiatives. When Palestine became a member of the International Criminal Court in January 2015 in order to potentially bring war crimes charges against Israel, for example, Israel withheld over a third of Palestine’s annual budget, resulting in a budgetary crisis.
Other elements of the agreement have been significantly limited and in some cases have become defunct. The lists of goods that are not subject to Israeli tax, specified in lists A1 and A2 of the Paris Protocol, have barely grown since 1994 even though data shows imports have increased more than threefold since then—to five billion dollars. The protocol calls for annual reviews and updates, but new goods have not been added to these lists and the quantity of goods allowed have only been increased twice, both in 1999.
Further, the flow of Palestinian labor into Israel reached 25 percent of the Palestinian labor force in 1999, but has fallen to around ten percent since the Second Intifada from 2000–05. The Joint Economic Committee—which had a met a couple of times before 2000 to oversee important economic disputes relating to tax policy, lists A1 and A2, and Palestinian debt—has not met since the start of the Second Intifada, except for one unsuccessful gathering in 2009 to discuss visas for Palestinian businessmen and the import of milk and meat products during Ramadan. It has so far failed to assume its role as a forum for enhancing economic relations and resolving disputes between Israelis and Palestinians.
The Paris Protocol is not only defunct in some aspects, but also outdated. “Today the Israeli economy is knowledge based and export oriented and that requires different skills, and the need for our labor is different,” Mohammed Mustafa, Abbas’ economic advisor and former Deputy Prime Minister and Minister of Economy, told me. He has argued that the Paris Protocol thus has to be adjusted to match the region’s economic reality. He believes that reform should address the lack of implementation of the Paris Protocol; more specifically, the agreement must establish economic borders, which would allow the Palestinian Authority to control the goods entering and exiting its territory and wage its own customs and VAT taxes at rates more appropriate for its markets. And should the economic borders come under dispute, Mustafa argues that there should be, at the very least, “bonded zones,” or areas where Palestinians could collect some of their own customs and import taxes.
Mustafa also believes that the Joint Economic Committee, which could facilitate the implementation of the Paris Protocol, should be resuscitated. Something that would help would be expanding the lists of goods that are not subject to Israeli taxes.
Other Palestinian leaders such as Samir Abdullah, a negotiator of the Paris Protocol and Director of Research at the Palestine Economic Policy Research Institute, support efforts to reform the Paris Protocol, but also think that the Palestinian Authority should adopt a parallel strategy to become more independent from the Israeli economy. Abdullah told me, “We have to cut our dependence on the Israeli market. There are many goods coming from Israel that we can relinquish. We can use our own.” Abdullah, of course, recognizes that 70 percent of Palestinian imports come from Israel, but argues that Palestinians could import goods such as large domestic electrical appliances (refrigerators, for instance) from other regions including Europe, the Americas, and other countries in the Middle East. Palestine currently imports from Israel because it is cheaper to do so.
Amal Ahmad, a policy member of Al-Shabaka, The Palestinian Policy Network, echoed Abdullah’s sentiments regarding economic independence, but believes that reform will do little for Palestine’s economy without an actual end to the occupation. Ahmad explained to me that “To instigate real reform for the Palestinian economy, [Palestinians] must challenge Israel’s status-quo strategy, which is the containment of Palestinians in a perennial no-state solution.” Ahmad believes that Israel has demonstrated its lack of interest in meaningful interim economic reform and encourages Palestinians to pressure Israel into ending the occupation.
Israeli economists and former negotiators, however, believe that it is possible to renegotiate aspects of the Paris Protocol. “It is possible to establish bonding or tariff [areas], David Brodet, the chief Israeli negotiator of the Paris Protocol, told me, “if security can be ensured and the Palestinians cooperate with Israel.” However, Brodet thinks successful reform cannot merely be economic, and has said, “Economic peace without a political vision cannot survive.” Mike Herzog, a retired Brigadier General in the Israel Defense Forces and fellow at The Washington Institute for Near East Policy, said that when Salam Fayyad served as Palestinian Prime Minister, Israel and the Palestinian Authority made progress on a number of economic issues, such as establishing Palestinian bonding areas. But Fayyad’s departure in June 2013 and his replacement with Rami Hamdallah put that process on hold. Fayyad had developed close working relationships with Israeli leaders and the international community, but following elite criticism of his leadership and popular protests against it, Fayyad resigned, taking his program of economic cooperation along with him. Herzog also suggested that the current Israeli government may be more open to economic development in the Palestinian territories than the previous one, saying, “This Israeli government is open to economic relations because there is deep skepticism about the top-down approach.” Herzog argues that although the current Israeli government is unlikely to seek a political resolution, it remains open to an economic one.
Robert Malley, the U.S. National Security Coordinator for the Middle East, recently said, “The president has reached that conclusion—that right now, barring a major shift, the parties are not going to be in the position to negotiate a final status agreement.” It is possible that U.S. President Barack Obama and his administration may shift their efforts from achieving a comprehensive accord to maintaining the future viability of such an accord. As Israeli and Palestinian leaders recognize the need to address and improve their economic relations, perhaps the administration will focus on the Paris Protocol in an attempt to facilitate economic reform.