From 1967 to 1994, Palestinian trade policy was completely determined by Israeli trade policy. All Israeli-adopted import tariffs, other levies, requirements of standards etc. were automatically in effect for West Bank and Gaza too. Since 1994, the guiding principles for West Bank and Gaza Strip (“WBGS”) trade policy has been defined in the Protocol on Economic Relations between Israel and the PLO, signed in Paris on April 29 1994 (the “Paris Protocol” or “Protocol”). The Paris Protocol was, with only minor modifications, incorporated as Annex V in the Interim Agreement – the Oslo Agreement – signed in Washington on September 28 1995.
The Paris Protocol regulates economic relations in four sectors: labor, trade relations, fiscal issues and monetary arrangements.
1. Labor
The Paris Protocol requires that labor mobility between the WBGS and Israel should be the normal state of affairs but the Protocol leaves much to the discretion of either side. The Protocol stipulates that “both sides will attempt to maintain the normality of movement of labor between them, subject to each side’s right to determine from time to time the extent and conditions of the labor movement into its area. If the normal movement is suspended temporarily by either side, it will give the other side immediate notification.”
2. Trade Relations
On bilateral trade of goods, the Paris Protocol provides for duty and tariff free access for Palestinian and Israeli goods traded between the two sides.
On policies governing import from third parties, the Paris Protocol provides for Israel's common external trade regime and import policy to serve as the platform for the Palestinian external trade regime and import policy (i.e. the Palestinian Authority cannot set tariffs and other levies lower than those of Israel).
The Paris Protocol provides for specific derogations from the common external trade regime. These derogations apply to:
imports of specified items under a specified list (List A1) of products locally produced in Egypt, Jordan and other Arab countries with "locally produced" determined according to rules of origin agreed between Israel and the Palestinians;
a specified list (List A2) of goods imported from Arab, Islamic and other countries but without mention of "locally produced" or rules of origin;
a specified list (List B) of goods required for the Palestinian "economic development program".
Duties, tariffs, charges and other imposts (as well as licensing, standards and procedures) can be varied for Lists A1 and A2 within a quantitative restriction. Duties, tariffs and other imposts can be varied on List B without any quantitative restriction.
The Palestinian rate for the Value Added Tax can vary from that of Israel but only within a narrow band.
3. Fiscal Relations
The Paris Protocol provides for two types of fiscal transfers from the Israeli authorities to the Palestinian Authority. The first includes general fiscal revenue arising from
(i) income tax deductions of Palestinian workers in Israel,
(ii) VAT,
(iii) purchase tax for Israeli and third country goods and (iv) import duties on imports from third countries. The second pertains to the social security contributions of Palestinian workers in Israel.
Monetary Arrangements
The Paris Protocol created a Palestinian Monetary Authority which was given the traditional functions of a central bank but without the ability to issue currency. The Protocol required the circulation of the Israeli currency (the New Israeli Shekel or NIS) in the Palestinian territories and gave Israel an effective veto power over the issue of a Palestinian currency.
