Ringing in the New Year with a familiar tactic, Israel has frozen the transfer of some $127 million in tax revenue to the Palestinian Authority (PA). This time around, Israel is retaliating against Palestine’s formal request to join the International Criminal Court. On previous occasions, it retaliated against Palestine’s attempts to take action against the settlements, to establish a unity government, and to bid for full membership at the United Nations.

These Israeli measures, which are strongly condemned by the international community, debilitate the PA. Its budget relies heavily on import taxes, which are collected (and controlled) by Israeli customs agents before being transferred to the Palestinians. Withholding them has dire implications on healthcare and education in the occupied territories and thousands of Palestinian families will go without salaries this month.

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Yet it is insufficient to condemn Israel without reference to the strategic interests that guide its actions. In fact, Israel’s ability to cut off Palestine’s tax revenue at will is simply a manifestation of its plans for the Palestinian people. To understand why, it is helpful to quickly review the trade and tax arrangements in place before examining the core Israeli interests that underlie them.

Up until 1994, when Israel and the Palestine Liberation Organization (PLO) signed the Paris Economic Protocol, the economic appendix to the Oslo Peace Accords, the Israeli military had directly administered trade with the territories since their occupation in 1967.

The Protocol, far from fostering Israeli-Palestinian peace and partnership as the rhetoric claimed, actually codified the asymmetric relationship between the Israeli military occupation and the occupied Palestinian population.

The Protocol codified into law the informal customs that had been in place, binding the Palestinians almost entirely to Israel’s trade policy, and increasingly stunting the Palestinian economy, with ongoing attrition of the productive base and heightened dependence on imports and aid.

The customs union has also deepened the dependence of the Palestinian economy on the Israeli market: lower “internal” taxes encourage Palestinian merchants to import goods from Israeli producers rather than the outside world.

This, combined with the fact that Israel makes it exceptionally difficult to import goods from Jordan or Egypt, forces between 70 and 90 percent of all Palestinian imports to come from Israel or via Israeli ports.

The trade arrangement comes hand in hand with Israel’s exclusive right to collect taxes on imports at both external Israeli ports and “internal” crossings with the Palestinians – this too represents continuity from the pre-Oslo times codified by the Protocol. And, where economic systems stop, military might triumphs. On the remaining crossings where Palestinians have a right to collect taxes, Israel has repeatedly refused to allow the presence of Palestinian custom agents.

It is through these economic arrangements that import taxes owed to the Palestinian Authority go through Israel before ending up in Palestinian hands…or not.

Dire as these economic measures sound, it is Israel’s political agenda that drives its economic agenda with the Palestinians. More specifically, Israel’s interest in interim borders lies at the heart of all its arrangements, including trade and fiscal, with the Palestinian economy.

In fact, the major benefit of the customs union to its Israeli architects has been the postponement of the border issue ad infinitum and keeping borders interim. All other trade arrangements would have required either the delineation of borders between Israel and Palestine - or their elimination altogether. The former arrangement would translate into a sovereign Palestinian state, the latter into an integrated bi-national state.

Clearly, both these political scenarios undermine Israel’s strategic interests. Therefore, regardless of the economics of the matter, all trade arrangements are off the table, except for the one that requires neither borders nor integration: the customs union.

Similarly, Israel’s control over Palestinian trade taxes is the concrete outcome of Israel’s refusal to agree to sovereign Palestinian borders (the so-called two-state solution), which is a prerequisite for independent fiscal tax collection. It is also evidence of Israel’s unwillingness to consider equal rights for Palestinians and Jews throughout Israel and the territories under its control (the one-state solution), which would integrate public spending and eliminate the need for separate tax revenues.

In short, both the customs union and the related tax collection practices are a logical outcome of Israel’s interest in keeping Palestinians and their economy neither sovereign nor integrated.

This is the application, in effect, of a most cynical no-state solution for the occupied Palestinians, one that has become increasingly acceptable within Israel. Israeli Minister of Economy Naftali Bennett recently penned an op-ed hailing a no-state framework for the Palestinians as a plan for peace.

The U.S. and the European Union have criticized Israel’s decision to freeze taxes. However, they would do better to challenge the grander Israeli strategy instead of focusing on the symptoms of the problem and losing sight of the forest for the trees.

Ahmad is a policy member of Al-Shabaka: The Palestinian Policy Network.