The Paris Protocol is the framework establishing the interim-period economic relations between Israel and the Palestinian Authority. The Protocol was signed in April 1994 and is part of Oslo 1, which was signed a few days later. The model established in the Protocol is known as a "customs union," the primary characteristic of which is the absence of economic borders between members of the union. The practical effect of selecting this model was preservation of the economic relations that had existed until then, i.e., a Palestinian economy integrated in and dependent on the Israeli economy.
Regarding goods from other countries, the Protocol established a joint external border for the interim period. Israel collects the import taxes on the goods and transfers to the Palestinian Authority the taxes on goods that were intended for the Occupied Territories. The Protocol further provides that Israel may unilaterally establish and change the taxes imposed on imported goods. Regarding V.A.T., Israel transfers to the Palestinian Authority, in accordance with a monthly accounting, revenues collected for goods and services sold in Israel and intended for consumption in the Occupied Territories.
This kind of relationship - unlike economic separation or establishment of a free-trade area - was preferable to Israel, which did not want to establish an economic border with the Palestinian Authority, an act that would give a clear flavor of sovereignty and create a binding precedent on the eve of the final status stage. The Palestinian Authority had no choice but to accept the model set forth in the Protocol, because Israel made acceptance a condition for Israel's continuing to allow Palestinians to work in Israel. Israel imposed the condition at a time that the Palestinian Authority was unable to provide employment within the autonomous areas to the tens of thousands of Palestinians working in Israel.
The Paris Protocol transferred to the Palestinian Authority several powers relating to economic policy, such as the authority to impose direct and indirect taxes, set industrial policy, establish a monetary authority to regulate financial mediation, and employ persons in the public sector. The Protocol also stipulated the gradual cancellation of export restrictions on agricultural produce exported from the Occupied Territories to Israel that had been in effect until then and protected Israeli farmers from competition.
The relations established in the Paris Protocol emphasized the disparity in power that had existed between the two sides from the start. The disparity was clearly evident during the first four years of implementation of the Protocol, which took place at the time (unexpected at the time of its signing) of suicide attacks and imposition of prolonged comprehensive closure of the Occupied Territories.
The customs union agreed upon gave Israel sole control over the external borders and collection of import taxes and V.A.T., thus enabling Israel to delay transfer of taxes that it collected for the Palestinian Authority, or threaten delay in transferring the monies, as a means of pressure or punishment. Israel employed such a measure several times since the protocol was signed, severely undermining the functioning of public services in the West Bank and Gaza Strip.
According to the agreement, Palestinian trade with other countries would continue to be handled through Israeli sea and air ports, or through border crossings between the Palestinian Authority and Jordan and Egypt, which are also controlled by Israel. The necessity of obtaining Israeli approval to conduct trade leads to substantial economic loss to Palestinians whenever Israel imposes a comprehensive closure on the Occupied Territories and cancels all the relevant permits, as was often the case between 1994 and 1997.
Although the customs union framework was intended to ensure free flow of workers, the Paris Protocol did not expressly prevent Israel from prohibiting workers to enter its territory. Since the Protocol entered into force, Israel has imposed prolonged comprehensive closures on the Occupied Territories and limited the number of Palestinians given work permits inside Israel. This caused a significant drop in income of Palestinians from employment in Israel and a substantial increase in poverty and unemployment.
The Paris Protocol remains to this day the economic framework for relations between Israel and the Palestinian Authority, even after the second intifada (the Palestinian uprising beginning in 2000) and Israel's Disengagement Plan from the Gaza Strip. In July 2012, the two sides signed a new agreement to facilitate components of the Paris Protocol.