Okay, it’s a sniffle compared to the coronavirus, but Israel and the Palestinian Authority are now engaged in their very own trade war, though it isn't a "fair one" comparable to the United States and China. Israel controls the borders and the Palestinians can't trade with anybody without Israel's blessing.
The Palestinian Authority’s ban on imports of calves from Israel last October, which set off the war, is a business worth about $290 million a year. Israel’s decision last week to retaliate by banning imports of Palestinian farm products will cost West Bank growers about $60 million annually. The second round of retaliation by Israel announced this week, barring Palestinian farm exports to Jordan, is worth a few tens of millions more.
So in dollar terms, the Israeli-Palestinian trade war is little more than a skirmish. But there’s a lot more at stake because it signals the first salvo in what could be a new era of continuous trade crises that hurt both sides.
But first about the calves. The Palestinian Authority has framed its ban on calf imports as part of Prime Minister Mohammad Shtayyeh’s strategy of economic disengagement from Israel. Israeli Defense Minister Naftali Bennett says he’s retaliating in defense of free trade.
Both sides are being less than honest. Shtayyeh’s ban on Israeli calves was apparently due to Palestinian business interests pulling strings to wrest the business away from Israeli cattle breeders. Bennett’s response has less to do with free trade than projecting an image of toughness ahead of the March 2 election. It’s easier and safer to impose trade bans than to send the troops to Gaza – and doesn’t require his boss’ approval.
But the long-term problem isn’t politics, it's Shtayyeh’s vision of economic disengagement, which he unveiled last May shortly after taking office.
It’s a wide-ranging plan that calls for creating agricultural, industrial and tourism clusters (zones of economic specialization), education reforms that emphasize critical thinking over rote learning, more vocational education, as well as a new Ministry of Entrepreneurship and Empowerment. It also aims to strengthen Palestinian economic ties with Arab states and international markets and encourage banks to lend to the productive sector.
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As Shtayyeh explained in an interview with Haaretz: “We've adopted a strategy of trying to disengage from our colonial dependence on Israel. To this end we must strengthen the productive capacity of the Palestinian economy, particularly in agriculture and industry.”
It’s encouraging to see a Palestinian leader thinking seriously about economic development. But that doesn’t mean what he is thinking is necessarily correct.
Improving schools and adapting them to the needs of the job market is an excellent idea. In theory, so is an Entrepreneurship Ministry. It’s hard to imagine how more bureaucracy is going to be a catalyst for jump-starting new, innovative businesses, but at least it’s a gesture in the right direction.
The clusters are another matter entirely. They’re popular with academics and policymakers, but the most successful ones, like Silicon Valley or Startup Nation, don’t emerge by government fiat. A region has to have some competitive advantages that it can leverage.
In the case of Palestine, Bethlehem’s edge as a tourism cluster is straightforward enough. But why is Nablus (Shechem) a candidate for industry and Qalqilya for agriculture, as Shtayyeh plans? They don’t have any obvious advantage, certainly not in the global market.
The emphasis on agriculture is particularly problematic. In a political context, it’s understandable: Shtayyeh wants to strengthen the Palestinian hold on the land by putting more of it under cultivation. It’s exactly the same thing the Zionist movement did.
But as an economic strategy, it’s a step backward. Agriculture accounts for no more than 3% to 4% of the Palestinian economy, and the PA shouldn’t be figuring out how to increase it. Shtayyeh envisions savvy young entrepreneurs developing hydroponic farms, but the great majority of agricultural employment is the kind of low-skill, low-paid work Palestinians have enough of.
In any case, an economic sector based on using lots of water, farming is a non-starter in an era of climate change.
If Shtayyeh’s plans do get off the ground, they’re going to create more clashes with Israel because every attempt at Palestinian economic self-reliance will inevitably come at the cost of Israeli business interests.
The Palestinian market is worth about $4.5 billion annually – not much overall compared with Israel’s GDP of $350 billion, but important to some sectors, such as cattle breeders. If the Palestinian economy were truly competitive, it might be enough for the Palestinian government to foster new businesses. But it is not, so inevitably the PA will try to block competition from Israel and provoke Israeli retaliation.
As painful as it is for any self-respecting Palestinian patriot to hear, Palestine’s only competitive edge (apart from pilgrimage tourism) is its economic ties to Israel. The Israeli economy is many times bigger and richer than the Palestinian one. Israel is suffering labor shortages not only at the bottom of the labor market, where Palestinians have longed labored, but at the high-tech top as well.
The idea of being even more closely bound to Israel economically than Palestine is now is politically unpalatable to most Palestinians, but political and economic aspirations often don’t go hand in hand. As the case of Mellanox, the Israeli tech company that employs teams of Palestinians in the West Bank and Gaza, it can even be a win-win.