Corridor of Difficult Decisions for the PA: Cancelling the Customs Envelope?

Israel should consider reevaluating the Customs Envelope. If the PA wants to maintain the agreement, Israel will be able to exert pressure on it to accept already existing agreements. Alternatively, dissolving the Customs Envelope will promote further political separation between Israel and the PA.

The head of the Palestinian Customs Authority recently discussed with his Jordanian counterpart (3/25/07) the possibility of joining the PA customs to the World Customs Organization. (See The Israeli Export and International Cooperation Institute).

This week, the PA's finance minister called for severing the PA's economy from that of Israel.

EU clerks admitted yesterday that major aid transferred to the PA has not solved its economic crisis (Ha'aretz, 3/26/07) and that until now, Israel has transferred only part of the tax money that it collects on behalf of the PA as part of the Customs Envelope.

The Reut Institute contends that with the establishment of the PA Unity government, Israel needs to reevaluate the Customs Envelope arrangement. If the PA wants to maintain the agreement, Israel will be able to exert pressure on it to accept already existing agreements. Alternatively, it is possible to dissolve the Customs Envelope and allow the PA to establish an independent customs system that will assure its political separation from Israel.

What is the Issue?

The "Customs Envelope" section of the Paris Protocol (5/94) which was included as an appendix to the Interim Agreement (9/95), stipulated the levying of identical customs (with limited exceptions) in the PA and Israel as well as similar indirect taxes (VAT and other duties). According to the agreement, Israel is responsible for the import and export of goods and to collect revenues on behalf of the Palestinians (Revenue Clearance Mechanism).

The assumptions that led to the establishment of the Customs Envelope in the Paris Protocol include: (1) There will be no physical boundary between the West Bank, Gaza and Israel (until the expected Permanent Status Agreement (5/99)); (2) Free movement of goods, services, labor and capital will continue; (3) Limits will be placed on the attributes of economic sovereignty of the PA, such as on agreements with third parties, currency, or standardization. (4) There is no reason to design a complicated economic interim arrangement in 5/94 when a Permanent Status Agreement is expected in 5/99.

After the building of the Security Fence and Disengagement from Gaza, the assumptions leading to the establishment of the Customs Envelope have collapsed.

The establishment of the Palestinian National Unity government may have several political consequences; most importantly:

  • Turning the PA into a stable address due to political interests, popular support and hesitant international backing:

  • Political Deadlock as a result of the mechanism established for ratification of agreements by the National Unity government. (See: Palestinian Unity Government - The Unilateral Option Returns).

Why is this Important? Why Now?

As stated, all the basic assumptions that led to the establishment of the Customs Envelope have collapsed. Moreover, the Customs Envelope weakens the Palestinian address because it takes responsibility away from the PA and causes the Palestinian economy to be dependent on Israel.

A PA that serves as an "address", would be able to discuss daily issues with Israel, enforce a ceasefire and provide for the basic needs of the population in the West Bank and Gaza.

The combination between the creation of an address and the political deadlock may put the unilateral option back on the table.

In this context, the Reut Institute contends that Israel should consider cancelling the Customs Envelope either unilaterally or in conjunction with the international community.

Cancelling the Customs Envelope may contribute to stabilizing the Palestinian address, promoting the political separation between Israel and the Palestinians, and reducing Israel responsibility for the residents of the PA.

Policy Options

Demanding that the PA explicitly ratify the agreed arrangement over the Tax and Revenue Clearance Mechanism in order to pose a dilemma to the PA government over whether to recognize Israel de facto.

Unilaterally work to cancel the Customs Envelope in conjunction with the US and other international economic bodies such as the World Bank, the IMF or the EU. If Hamas refuses to de facto recognize Israel (see above), it will be faced with the need to create an alternative Customs Revenue Clearance Mechanism that will strengthen the PA as an address and assure the principle of Israeli-Palestinian separation.