Trade and economy in the occupied Palestinian territories has suffered greatly since the escalation of the conflict in 2000 due to three main factors - closure, budget deficits and decrease in trade with Israel.

According to the Palestinian Authority ministry of national economy, closures and restrictions on the mobility of goods and labor have resulted in "increased transactions costs". Palestinians pay an average of 30 percent higher tariffs for the movement of good in comparison to the rest of the world. The second reason for reduction in revenue, budget deficit, stems from Israelzzz*zs withholding of import duties on products destined for the occupied Palestinian territories.

Most importantly, the occupied territories are largely dependent on trade with Israel, both imported and exported goods. According to the ministry of economy, about 90 percent of Palestinian exports are destined to Israel while 70 percent of imported goods arrive from it. Thriving export revenues that were estimated at $600 million per year have dramatically declined since the second intifada in 2000 and the ensuing escalation of conflict.

TRADE WITH ISRAEL

Close ties to Israel’s economy have seen wages soar but the productive sectors have stagnated. Palestinian businesses have been restricted to providing low-value, labor-intensive goods such as garments and furniture for the domestic and Israeli markets, often serving as subcontractors for Israeli firms.

Furthermore, since Israel began opening its economy to global competition in the 1990s, Palestinian producers have lost the protected market they had relied on, and labor costs have increased further. Wage productivity in Palestinian industry is much lower than in Israel, Jordan and Egypt  - let alone than in China and India - and lack of competitiveness in the global market means the trade deficit continues to widen.

RESTRICTED TRADE

Palestinian economic and trade relations with Israel are regulated by the Paris Protocol of 1994, which in principle preserved Israeli-imposed customs and monetary union that had been in place since 1967.

The protocol stipulates that Palestinian products are not subject to export restrictions and that trade to and from the occupied Palestinian territories should have free access to, and equal treatment at, Israeli ports of entry and exit. Israeli regulations on customs, purchase taxes and quality standards apply to Palestinian imports, but as the external tariff is set by Israel without regard to Palestinian comparative advantage, the effective rate is much higher on Palestinian imports than on Israel’s (16.6% compared to 11%), due to the different types of goods imported to the occupied West Bank and Gaza Strip.

This disparity has been reported in detail by the World Bank. These taxes, which Israel charges to collect, are known as “clearance revenues”, and represent a sizable proportion of the Palestinian Authority’s income (around $850 million in 2007).

Israel’s control over Palestinian borders, strict security measures and arbitrary restrictions on movement have raised transaction costs and stifled the development of Palestinian foreign trade. Trade was particularly hard hit by the outbreak of the Palestinian Intifada in 2000 - Palestinian exports decreased from $763 million in 1999 to $306 million in 2002, while imports dropped from $3.7 billion to $1.98 billion. Since then the situation has partially recovered, with total Palestinian imports amounting to $2.8 billion in 2006, while Palestinian exports reached $339 million, says the Palestinian Central Bureau of Statistics. Almost three quarters of Palestinian imports come from Israel, according to its surveys.