ECONOMIC POLICY PROGRAMME

1
ECONOMIC POLICY PROGRAMME

• TOWARDS AN ECONOMICALLY-VIABLE PALESTINIAN STATE
  
• The Regulation of External Trade

Monday May 23, 2005 Grand Park Hotel, Ramallah
2
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
3

• Palestines Current Trade Policy
• Background on Palestinian economy
• International Experience
• Quantifying Low and Uniform Tariffs
• Governance of Trade Policy
• Free-Trade Two-track trade regime (EPZ)
• Key Recommendations

4
Palestines Current Trade Policy

• 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

5
Current Palestinian Tariff Structure
6
PP Agreements vs. Reality

• 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

7
PP Reality Implications

• 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.

8
Designing Palestines Tariff policy

• Tariffs (and exchange rate policy) TRANSMIT
• PROFITABILTY SIGNALS TO THE ECONOMY
• 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)!

9
?Gains 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 TA 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

10
?Characteristics 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

11
?International 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

12
Quantification 260 products (98) for EU, Israel,
US, RoW

• 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 (-)

13

• 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 gt (4)2.5 gt(1)0.9gt(2)0.2

14
Caveats on simulations (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)

15
Governance of Trade Policy

• 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

16
?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 tgt10)
• Effects of possible adverse Israeli reaction

17
?Two-Track Regime (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
18
Key recommendations

• Low and uniform tariff best for Palestinian
  economic growth and future prosperity
• WTO binding at prevailing rate (not above!)
• Palestines 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)

19
ECONOMIC POLICY PROGRAMME

• TOWARDS AN ECONOMICALLY-VIABLE PALESTINIAN STATE
  
• The Regulation of External Trade

Monday May 23, 2005 Grand Park Hotel, Ramallah