Despite the much-hyped US “pivot to Asia,” the second Obama Administration clearly still regards the Middle East as a major sphere of American influence. And in an increasingly volatile neighborhood, Washington still sees an Israeli-Palestinian accommodation as key to the promotion of American regional interests.Of course no one expected President Barack Obama to achieve a breakthrough when he visited the area in late March. The parties are too far apart on core issues, there is deep mutual distrust, and America has had its fingers burned before in grandiose but halfbaked peacemaking initiatives.Obama, however, did all he could to create a new atmosphere of hope. He painted a picture of future prosperity and security predicated on a two-state solution underwritten by America. And whether they shared his vision or just didn’t want to be blamed for scuttling it, both sides agreed to give peacemaking another chance.The new American mediator, the highpowered Secretary of State John Kerry, has a clear and coherent plan of action: • First, to restore trust and set the stage for renewed negotiations, both sides make a string of goodwill gestures.• In parallel, for the next two or three months, Kerry shuttles between the parties sounding them out on core issues like borders, security, Jerusalem and refugees.• Then, when he is ready, he submits a plan for reengagement – probably based on talks on borders and security first, with the more emotion-laden issues of Jerusalem and refugees deferred for later. Both sides have already made substantial goodwill moves. In late March, Israel agreed to transfer tax money it collects for the Palestinian Authority – around $150 million a month – withheld in retaliation for the PA’s successful appeal to the UN last November for non-member observer status.For their part, the Palestinians agreed in early April to suspend further unilateral moves to UN bodies for two to three months to give US peacemaking efforts a chance.For example, they deferred applying for the right to sign the 1998 Rome Statute, which, if granted, would enable individual Palestinians to seek legal redress against Israeli officials or soldiers at the International Criminal Court in The Hague.Israel is also considering freeing Palestinian prisoners, especially 120 held before the 1993 Oslo peace process. The Palestinians claim former prime minister Ehud Olmert promised to release 1,200 more, and say a substantial prisoner release could pave the way for a meeting between Prime Minister Benjamin Netanyahu and Palestinian Authority President Mahmud Abbas.Israel is also being pressed to restrict construction in Jewish West Bank settlements to those in the large settlement blocs, as a signal that it is ready for significant territorial compromise. In response, the Palestinians are being urged to end incitement against Israel and to prepare the Palestinian public for a deal by talking up the merits of peace, something the Palestinian leadership has never done before.In return, further down the road, Israel could make goodwill gestures in areas A, B and C of the West Bank: End IDF incursions into A which is nominally under Palestinian security control, grant the PA security control over area B and economic access to area C.If all this leads to new Israeli-Palestinian peace talks, Kerry hopes to buttress the peacemaking framework by bringing in moderate Arab states on the basis of the March 2002 Arab Peace Initiative. He hopes including the Arab states will give the Palestinians the backing they need for concessions on issues of wider Arab concern, like Jerusalem, and Israel the added incentive of possible accommodation with the entire Arab world.After the breakdown of peace talks four years ago, the Palestinians embarked on a unilateralist policy, aimed at establishing a state with or without Israel’s approval. The idea was to build a well-functioning state and get the international community to endorse it. The Palestinians argued that they had been forced into taking this course because Israel did not really want a two-state solution; the Israelis countered that the Palestinians were trying to get their state without having to make the necessary concessions to Israel.Now the Palestinians are saying that in order to enable them to gauge Israel’s seriousness, Netanyahu should present a map showing his position on the future borders of Palestine.He is most unlikely to comply because he believes the Palestinians will simply take any offer he makes as a starting point for further arm-twisting.Nevertheless, in preliminary talks in Amman in January and February, Netanyahu’s special envoy, Attorney Yitzhak Molcho, outlined general principles on the border issue. For example, Israel will want to annex the large settlement blocs but will be ready to relinquish sovereignty over the Jordan Valley in return for a long-term military presence there.Netanyahu, however, will have to go further. To get the skeptical Palestinians to reengage, he will probably have do something he has studiously refrained from doing up till now and over which he clashed bitterly with Obama last year: Declare that the new borders will be based on the 1967 lines with land swaps, a formula accepted by the Americans, the Palestinians and previous Israeli governments.The Palestinians will also want to renegotiate the 1994 Paris Protocol, which governs economic relations between Israel and the PA. They argue that the protocol is no longer relevant and is holding back their economic development. It established a joint customs union under which all imports into the West Bank first go through Israel, which, the Palestinians say, has a number of deleterious effects: • Israel collects customs’ duties which make up more than half the PA budget, but transfers or withholds the money as it pleases.• The Palestinians cannot import cheaper goods into the West Bank, which means the cost of living there is more or less the same as that in Israel, while the median wage in Israel is over three times higher.• Partly because of Israeli control through the Paris Protocol, the PA has limited funds for development and correspondingly high unemployment (over 25 percent). According to Palestinian estimates of the 220,000 unemployed, around two-thirds are university graduates. Therefore the unemployment problem cannot be solved by simply allowing more unskilled Palestinian laborers to work in Israel. There is, in the Palestinian view, a crying need for a new agreement to facilitate job creation for a more highly skilled labor force.But so far Israel has not shown any inclination to renegotiate the protocol. Kerry’s position here will be crucial.In the past, the Israeli approach has been based on putting all core issues on the table and the maxim that “nothing is agreed until all is agreed.” As a result, inability to resolve the thorny refugee and Jerusalem issues has meant that progress in other areas has fallen by the wayside. Therefore, going for borders and security first – with readiness to implement the outcome – makes a lot of sense.Indeed, some Israeli thinkers propose aiming for an armistice agreement – like those achieved between Israel and its neighbors after the 1948 War of Independence – rather than a full-fledged peace deal. In other words, Israel handing over less than all the land for less than full peace. This would enable the parties to take a huge leap forward while finessing the intractable refugee issue. There would be no end of conflict and no finality of claims. The Palestinians would be able to establish a state without formally giving way on the refugees’ right of return; Israel would get the promise of non-belligerency without having to absorb a single refugee. The parties would follow up the armistice agreement with state-to-state negotiations on all outstanding issues.There is a need for creative ideas and political will on both sides, because time for the two-state solution is running out. The Kerry mediation effort could be a last chance that Israelis and Palestinians, in their own best interests, should grab.