Unlocking the Trade Potential Public Disclosure Authorized of the Palestinian Economy Immediate Measures and a Long-Term Vision to Public Disclosure Authorized Improve Palestinian Trade and Economic Outcomes Public Disclosure Authorized Public Disclosure Authorized 16783_Palestine Trade Note_Final CVR.indd 3 9/11/17 7:19 AM Report No: ACS22471 16783_Palestine Trade Note_Final CVR.indd 4 9/11/17 7:19 AM UNLOCKING THE TRADE POTENTIAL OF THE PALESTINIAN ECONOMY Immediate Measures and a Long-Term Vision to Improve Palestinian Trade and Economic Outcomes The Palestinian economy is severely hampered by trade-related restrictions, high logistics costs, cumbersome procedures and institutional inefficiencies. Operating within an uneven Customs Union arrangement with Israel, the Palestinian economy has accumulated an enormous trade deficit and overdependence on Israel’s economy and has neither been able to develop dynamic export-oriented sectors nor to tap into larger and more com- petitive third markets. Over the years, this situation has contributed to slow growth, high unemployment, and stubborn persistence of poverty in the Palestinian economy. A bold reform agenda is urgently required to improve the Palestinian economy’s trade outcomes. Immediate steps should be taken to reduce the burden of existing trade-related restrictions and transaction costs. The Palestinian economy should also begin the transition toward an autonomous trade regime, and be able to exercise control over its own customs territory, in line with its long-term economic interest. It should retain an open trade regime and develop its links with overseas markets. The economic relationship with Israel should be recast in a manner that is comprehensive and exploits the large synergies that exist between the two economies. Such a course will provide the Palestinian Authority with some of the tools and incentives to undertake far-reaching structural reforms. The proposed reform agenda will neither be a simple endeavor nor will it alone determine the success or failure of the Palestinian economy. This note proposes ideas that could, in the fullness of time, and with the assistance of international donors help overcome existing dysfunctions and improve trade-related economic outcomes in the Palestinian economy. 16783_Palestine Trade Note.indd 1 12/15/17 10:56 AM Standard Disclaimer This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank Group. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Copyright Statement The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Dan- vers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. 16783_Palestine Trade Note.indd 2 12/15/17 10:56 AM CONTENts ACRONYMS AND ABBREVIATIONS . v ACKNOWLEDGMENTS . vii EXECUTIVE SUMMARY . ix 1 INTRODUCTION: MOTIVATION AND STRUCTURE . 1 2 THE PALESTINIAN TRADE PERFORMANCE: A DIAGNOSIS . 6 2.1 The Palestinian Economy: The Import Economy ....................................... 6 2.2 Trade Concentration on Israel ....................................................... 15 3 IMPROVING TRADE OUTCOMES: IMMEDIATE MEASURES . 23 3.1 Relieving Restrictions under the Customs Union....................................... 25 3.1.1 Updating the Special Goods Lists (A1, A2, B) ........................................ 25 3.1.2 Reducing the Dual-Use Goods Lists and Processes.................................. 28 3.2 Tr ade Facilitation: Border Crossings, Containerization, Ports........................... 35 3.2.1 Allenby/King Hussein Bridge and Kerem Shalom/Kerm Abu Salem Crossing........... 35 3.2.2 Containerization................................................................. 43 3.2.3 Trade through Israeli Ports ....................................................... 46 3.3 Strengthening Palestinian Institutions ............................................... 50 3.3.1 Customs, Fiscal and Border Management: Capacity Building and Coordination ........ 50 3.3.2 Quality Infrastructure: Enabling Access of Palestinian Products to External Markets.............................................................. 53 4 REFORMING THE PALESTINIAN TRADE REGIME: A LONG-TERM VISION . 57 4.1 Is an Improved Customs Union the Best Future Regime for the Palestinian Economy?..... 57 4.2 Alternative Trade Regimes . 62 4.3 Ten Features of the Palestinian Economy’s New Trade Regime.......................... 68 4.3.1 Objectives and Underpinnings..................................................... 68 4.3.2 Key Elements and Rationale...................................................... 69 5 CONCLUSION: SEQUENCING OF REFORMS . 74 APPENDIX 1 LISTS A1, A2, AND B . 79 APPENDIX 2 LIST OF CONTROLLED DUAL-USE ITEMS . 84 APPENDIX 3 TRADE FLOWS ANALYSIS . 90 iii 16783_Palestine Trade Note.indd 3 12/15/17 10:56 AM APPENDIX 4 GRAVITY MODELING OF THE PALESTINIAN Economy’s TRADE POTENTIAL . 103 REFERENCES . 110 Tables Table 1: Comparison of the Palestinian Trade Outcomes...................................... 9 Table 2: Neighboring Trading Partners of the Palestinian and Israeli Economies Exports of Goods and Services ............................................................. 17 Table 3: Palestinian Imports from Israel and Israel’s Exports to the World...................... 18 Table 4: Tariff Schedules 2011–15 .......................................................... 19 Table 5: Overview of Proposed Short-term Measures......................................... 25 Table 6: Process for Export of Goods at the Allenby/King Hussein Bridge ...................... 38 Table 7: Estimated Increase of Trade Volumes Resulting from Containerization................. 45 Table 8: Key Trade-Offs of Alternative Trade Regimes ....................................... 66 Table 9: Proposed Staging of Reforms ...................................................... 75 Table 1.1: List A1—Goods Imported Must Be Locally Produced in Jordan and Egypt .............. 79 Table 1.2: List A2—Goods May Be Imported from Arab, Islamic, or Other Countries ............. 81 Table 1.3: List B—Goods Imported Subject to Israeli Standards ............................... 83 Table 2.1: Section 1 (Applies to West Bank and Gaza)......................................... 84 Table 2.2: Section 2 (Applies to Gaza) ...................................................... 87 Table 2.3: Dual-Use Items for Construction Projects in Gaza .................................. 89 Table 3.1: The Palestinian Economy’s Top 10 Export Partners 2010–14......................... 90 Table 3.2: The Palestinian Economy’s Top 10 Import Partners 2010–14 ........................ 91 Table 3.3: Israel’s Top 10 Export Partners 2010–14 .......................................... 91 Table 3.4: The Palestinian Economy’s Top 25 Merchandise Imports from Israel 2010–14 (SITC 3–6 digit-level data) .................................... 93 Table 3.5: The Palestinian Economy’s Top 25 Merchandise Exports to Israel 2010–14 ........... 95 Table 3.6: Palestinian Top 30 Merchandise Exports .......................................... 97 Table 3.7: Palestinian Top 30 Merchandise Imports .......................................... 99 Table 4.1: The Palestinian Economy Actual and Potential Exports to World Regions ............. 106 Table 4.2: Israel Potential Trade with the Palestinian Economy and Actual Trade with Selected Peers ............................................................. 108 Table 4.3: The Palestinian Economy Actual and Potential Imports from World Regions.......... 109 Figures Figure 1: Trade Costs and Process Duration Comparison ..................................... 44 Figure 2: Volume of Trucks at Allenby/King Hussein Bridge ................................... 45 Figure 3.1: Israel’s Exports as a Share of GDP................................................ 92 Figure 3.2: Palestinian Merchandise Exports by Skill and Technology Intensity (current US$1,000) ....................................................................... 101 Figure 3.3: The Palestinian Economy’s Composition of Merchandise Exports (current US$1,000) ....................................................................... 101 Figure 3.4: Palestinian Merchandise Imports by Skill and Technology Intensity (current US$1,000) ....................................................................... 102 Figure 3.5: The Palestinian Economy’s