FTA, Customs Union or Unilateral Trade Policy? Final Status Options for “the West Bank and Gaza”

This paper considers regional and unilateral trade policy options for the West Bank and Gaza (WBG). It examines the welfare implications of a free trade agreement (FTA) with Israel, a customs union (CU) with Israel, and a nondiscriminatory trade policy (NDTP). The analysis captures the fact that the WBG is landlocked, that it has a large trade deficit with Israel, and that smuggling takes place between them. The paper concludes that i) a NDTP is unambiguously superior to a FTA with Israel; but ii) the WBG should only pursue a NDTP if the policy is open, transparent, and enforced by a credible lock-in mechanism; otherwise, a CU with Israel may be preferable, especially if trade and other taxes are shared more equitably.