Business before politics: Merchants set up court to handle Israeli-Palestinian trade disputes

Secretary of State John Kerry has put Palestinian economic growth high on the agenda with his recent shuttle diplomacy to restart peace talks, but a group of Israeli and Palestinian business leaders are a couple steps ahead of him.

The last few years, amid a dearth of political progress, they have been working toward the establishment of an arbitration court, the first of its kind, to resolve cross-border-trade business disputes between Israelis and Palestinians that otherwise have no realistic address for adjudication. 

Economic collaboration between Israelis and Palestinians has been hobbled by the lack of a neutral forum for settling disagreements between Israeli and Palestinian businessmen when they arise. Palestinians and Israelis face restricted access to each other’s territory and have little trust in courts lying across the border. Without any legal recourse for problems like a bounced check, transactions become riskier and less attractive, cooling commercial ties.

So they created the "Jerusalem Arbitration Center," which is sponsored by chamber of commerce associations on both sides and slated to begin its work by the end of 2013. The goal is to give merchants and investors peace of mind, eliminating disincentives to expanding the trade relationship that totals $4 billion a year – Palestinians’ largest such relationship, by far. The court will consist of two Israelis, two Palestinians, and five international legal or arbitration experts. The Israeli and Palestinian governments have agreed to enforce the court's rulings.

"The trade community became a cash-based community, because there was no recourse if a check bounced," says Sam Bahour, a Palestinian businessman. "If [the arbitration court] gets traction, it could be something interesting."

Skirting politics  

As part of the revived push for a peace agreement, Israel, the US, and the Palestinians are devoting substantial time and attention to efforts to boost the Palestinian economy, believing economic growth would improve the environment for negotiations.

Many of the steps, such as ceding Israeli control over some parts of the West Bank so the land can be devoted to Palestinian economic projects and relaxation of restrictions on Palestinian movement, are likely to face opposition from hardliners in Israeli Prime Minister Benjamin Netanyahu’s cabinet. The US is also expected to transfer more aid for infrastructure projects     

The arbitration center is something different. Three years in the making, it is a homegrown, independent effort by business communities on both sides to smooth commerce – in spite of chilled relations between their governments, a vacuum of negotiations, and Israeli barriers on movement and access that handicaps Palestinian businessmen.

"It has nothing to do with the political process. It has to do with surviving the conflict and not ending the conflict," says Samir Hulileh, the chief executive of Padico, a Palestinian conglomerate with businesses from real estate to telecommunications to manufacturing. "It gives confidence to investors. Investors should see there’s an exit, and that they’re not part of a problem held up in the political process."

The effort has been spearheaded by Palestinian billionaire Munib Masri, the owner of Padico, and Oren Shachor, a former major general who oversaw the Israeli government’s civil administration of the Palestinian territories.

At the outset of a transaction, businessmen will sign contracts agreeing to use the Jerusalem Arbitration Center in the event of a dispute. Should a case be brought to the court, it will be handled by a panel of three arbitrators – one Israeli, one Palestinian and one international. The decisions will then be referred to local courts, whether in Israel or the Palestinian territories, which will oversee implementation and enforcement by police authorities.  

It’s unclear, however, how the court would handle a trade dispute linked to geopolitical issues like the movement and access restrictions on Palestinians dictated by Israeli security authorities.

Creating trust

Last month, days after the announcement of a plan to normalize estranged ties between Turkey and Israel, the local chambers of commerce said the arbitration center will be chaired by Rifat Hisarcıklıoğlu, a Turkish business leader close to Turkish President Abdullah Gul.

Turkey was chosen because it remained an important trade partner for Israel, despite the deterioration of relations between the two governments in the last couple years. For the Palestinians, Turkish involvement represents the presence of a Muslim regional power that has actively supported the Palestinian cause.

"Turkey is a country that is close by, and we have a huge cycle of business with," says Mr. Shachor, who believes trade between Israel and the Palestinians will double in five years as a result of the arbitration. "The center is a bridge between Palestinians and Israelis."

Israeli and Palestinian companies trade in everything from agriculture, to building materials, to telecommunications services. Companies in all industries might end up availing themselves of the arbitration center.

It will potentially simplify the lives of those like Brian Thomas, a British Israeli who imports computer equipment and then sells to Palestinian vendors in the West Bank. He says all of his transactions are in cash, which forces him to carry tens of thousands of dollars in cash at a time.

If a joint court worked as advertised, he says he might consider allowing Palestinian clients buy on credit, although he says he remains skeptical because enforcement of transaction claims is lax, even among Israelis.

"Everybody knows there is no legal recourse if they run away with your money. If I looked into it, and it was real, and I had confidence, it might mean that I would do more business with these guys," he says. "But Israeli courts chasing Israelis is hard enough, to go after an Arab in Nablus sounds stupid."

Improved trade with Israel would be an economic boon for Palestinians: the current $500 million in annual exports to Israel represents 80 percent of all Palestinian exports. Even a 25 percent increase would be significant, says Saad Khatib, the former director general of the Palestinian Federation of Industries.

Mr. Khatib says that in order to create the conditions for long-term growth of the Palestinian private sector, Israeli and Palestinian politicians need to sit down and negotiate a new customs regime that will give Palestinians control over tariffs on goods from abroad while preserving free trade between Israelis and Palestinians.

He suggests that politicians take their cues from the business community.

"The private sector wants to work together and wants to improve the situation," he says. "Generally, the private sector is miles ahead of any government. Hopefully it will play catch up."