Trade Policy in a Sovereign Palestinian State: What are the Options in a Final Settlement?

Economic development and trade performance in Palestine are strongly affected by the unusual links between the Palestinian and Israeli economies. After years of occupation and sluggish economic growth, the signature of the Paris Protocol was expected to achieve a rapid growth of the Palestinian economy and healthier economic relations with Israel. However, due to the asymmetry of power between the negotiating parties and the incomplete implementation of the Protocol provisions, the Palestinian economic and trade performances remain low. Both economic and security conditions call for a re-negotiation of the terms of the Protocol. There is a wide consensus that a final solution to the conflict should provide for a Palestinian state with unambiguous borders, and full control over economic policies. In line with such a solution, this paper provides an assessment of the impact of different trade policies and exchange rate regimes, using a general equilibrium model that allows for a quantification of the outcomes. The model is modified to consider a multi-trade-partners set-up, a differentiated treatment for large and small trade shares, and tariff rate quotas. The paper also addresses the unemployment problem in Palestine and assesses its connections with trade policy. The results show that a liberal and non-discriminatory trade regime provides the highest benefits for the Palestinian economy, in terms of welfare effects, GDP growth and job creation. The results also show the impact the exchange rate regime has on the outcomes of trade policies. Subsequently, a full control over trade and monetary policy instruments will improve the capacity of the Palestinian authorities to address the prevailing unemployment and sluggish economic growth.