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ECONOMIC POLICY PROGRAMME. TOWARDS AN ECONOMICALLY-VIABLE PALESTINIAN STATE: The Regulation of External Trade. Monday May 23, 2005 Grand Park Hotel, Ramallah. Future Trade Policy Options: NDTP and Keeping Options Open for an FTA with Israel.

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Economic policy programme



The Regulation of External Trade

Monday May 23, 2005

Grand Park Hotel, Ramallah

Economic Policy Programme

Future Trade Policy Options: NDTP and Keeping Options Open for an FTA with Israel

Options for Tariff Policy for PalestineJaime de Melo, Jean-Marie Grether, L Alan Winters

Professor Jaime de Melo

Economic Policy Programme

  • Palestine’s Current Trade Policy for an FTA with Israel

  • Background on Palestinian economy

  • International Experience

  • Quantifying Low and Uniform Tariffs

  • Governance of Trade Policy

  • Free-Trade & Two-track trade regime (EPZ)

  • Key “Recommendations”

Economic Policy Programme

Palestine s current trade policy
Palestine’s Current Trade Policy for an FTA with Israel

Paris Protocol (PP) formalised q-CU with Israel

  • Tariffs set by Israel with few exceptions (Lists A1, A2, B)

  • Israel transfers customs duties, VAT and purchase tax on goods destined for WBG, to PA (subject to administration fee a-nd for long withheld)

  • Very limited autonomy to set own trade policy

    • though agreements with EU, EFTA and many others

Economic Policy Programme

Current palestinian tariff structure
Current Palestinian Tariff Structure for an FTA with Israel

Economic Policy Programme

Pp agreements vs reality
PP: Agreements vs. Reality for an FTA with Israel

Revenue loss through indirect imports

  • Approx 1/3 of imports from Israel are indirect = loss of 3% of GDP

    Closures and Restrictions

  • Goods & People transaction costs 

  • …and relative profitability of exports  (=60% tax on exports in illustrative example below!!!)

    +Destruction of Infrastructure & equipment

Economic Policy Programme

Pp reality implications
PP: “Reality” Implications for an FTA with Israel

Israeli border measures

  • Generate uncertainty

  • Often captured by interest groups for protection

  • Impede free flow of goods

  • Raise costs and discourage investment

    Palestine currently impeded from drawing benefit from economic relationship with Israel

    …but economic considerations suggest that Palestine should pursue close integration with Israel in the future in order to maximise gains from trade.

Economic Policy Programme

Designing palestine s tariff policy
Designing Palestine’s Tariff policy for an FTA with Israel

Tariffs (and exchange rate policy) TRANSMIT


3 Reasons for a low and uniform tariff policy

►Widely accepted gains from trade (no sustained growth by countries with ‘bad’ trade policies)

►Characteristics of the Palestinian economy

►Other countries have done it (international experience)!

Economic Policy Programme

Gains from trade what we know
for an FTA with IsraelGains from Trade: What we know

  • Big for small economies

  • For small economy, gains do not depend on (reciprocal) preferential market access

  • Channels by which trade raises income

    • Specialization (marble or T&A instead of cars)

    • exploitation of economies of scale

    • expands variety of inputs and consumer products

    • helps achieve a more competitive market structure

      (FT= substitute for competition policy in a small economy, e.g. HK)

    • greater access to knowledge and know-how

Economic Policy Programme

for an FTA with IsraelCharacteristics of Palestinian Economy

►High & variable transaction costs ( not suitable for active industrial policy = “pick winners”)

  • Difficult to predict pattern of trade

  • Difficult to compete on world markets

  • Protection would ‘tax’ exports further

    ►Financial transfers from RoW large ( 20% of GDP)

  • Non-tradables expensive for consumers, profitable for producers ( tradables activities less profitable)

    ►Trade taxes not key to raise govt revenue

Economic Policy Programme

International experience
for an FTA with IsraelInternational Experience

  • Liberal trade policy contributes to better policies in general

    • less potential for corruption

    • less volatile macro policies

  • Openness aids flexibility

    • better signals from world markets

    • more rapid adjustment to external shocks reduces overall adjustment costs

  • Links between openness and performance

    • Causality & relative strength of links hard to establish

    • …but no post WW2 evidence that openness hurts growth

Economic Policy Programme

Quantification 260 products 98 for eu israel us row
Quantification: 260 products (98) for EU, Israel, US, RoW for an FTA with Israel

  • Effects of tariffs on income: (-) = loss (+) = gain

  • Costs of protection = Sum of:

    • Average tariff level (-)

    • Variance in tariffs (-)

    • Terms of trade gain (+) / loss (-)

    • Market access to FTA partner (+)

    • Market access by FTA partner (-)

Economic Policy Programme

  • All scenarios start from current tariff structure (6.4% average):

    • And Maintain FTAs with EU and US

      • Scenario 1:  uniform 5% tariff

      • Scenario 2: Go to a uniform 10% tariff

      • Scenario 3: Go to free trade (0% tariff)

      • Scenario 4: Go to a uniform 5% tariff with an FTA with Israel.

        Ranking (quite robust) of scenarios (of which 2% recovery of tax leakage:

        (3)=[2.9%] > (4)=[2.5%] >(1)=[0.9%]>(2)=[0.2%]

Economic Policy Programme

Caveats on simulations effects not captured in quantification but important
Caveats on simulations average): (Effects not captured in quantification but important )

  • Additional gains from removal of NTBs (not modelled)

  • Cost of implementing duty drawback scheme

  • Loss to specific producers (e.g. agriculture)= Important: needs compensation.

  • Adverse implications of multiple FTA (costs of Rules of origin)

Economic Policy Programme

Governance of trade policy
Governance of Trade Policy average):

Correct bias towards interests of producers and away from interests of consumers

Need for contestability (remove rents)

Dangers of anti-dumping duties

  • Safeguard law better

    Dangers of variances in tariffs (lobbying, etc…)

    …In sum: Trade policy : “business friendly but not business owned”

Economic Policy Programme

Free trade 0 tariff regime
average): Free Trade (0% Tariff) Regime?

Additional advantages of free trade regime

  • Signalling

  • Avoidance of Trade diversion

  • Remove incentives for Rent-seeking activity

  • No need for Duty-drawbacks and RoO

    Objections to free trade regime

  • Loss of bargaining power (not applicable here…)

  • Real exchange rate adjustment (how to bring about real depreciation)

  • Adjustments in agriculture (substantial as t>10%)

  • Effects of possible adverse Israeli reaction

Economic Policy Programme

►Two-Track Regime average): (=EPZ for Gaza and low & uniform elsewhere)Successful strategy elsewhere (e.g. Mauritius)Policy likely to get more support (business can reinvest profits from protected sector) + less need for adjustmentA signal and incentive to attract FDI Spillovers (technological acquisition) from RoW

Economic Policy Programme

Key recommendations
Key “recommendations” average):

  • Low and uniform tariff best for Palestinian economic growth and future prosperity

  • WTO binding at prevailing rate (not above!)

  • Palestine’s unique opportunity: take advantage and implement this policy from outset upon statehood, (now to Gaza?)

    …. But beware of short term costs (especially on the poor in agriculture). To address through donor funded adjustment and expenditure-led compensation (not tariffs)

Economic Policy Programme

Economic policy programme1



The Regulation of External Trade

Monday May 23, 2005

Grand Park Hotel, Ramallah

Economic Policy Programme