Last week, the European Council unilaterally declared that all its agreements with Israel end at the Green Line. The media analysis of this announcement missed the main point: this new policy goes beyond labelling settlement products, and limits the application of free trade agreements between Israel, Palestine, and the European Union.

This policy has dark undertones of bigotry and discrimination, as rules are applied to Israel and no other country. It is neither helpful nor constructive for long-term coexistence between Israelis and Palestinians in the West Bank. It tacitly urges Israel to cede territory to Bashar Assad’s forces. But above all, it’s just a bad piece of policy.

A telltale sign of a bad policy is its uneven application. This decision singles out disputed territories under Israeli control and runs counter to European policy in any other contested area around the globe. I’m not just talking about the lack of labelling demands for products made in Kashmir, Tibet, Nagorno Karabakh, or other disputed territories. Rather, this runs counter to the European Union’s own advocacy and legal statements in recent court cases challenging its trade policy with Morocco.

In 2007, the E.U. paid Morocco over €144 million for offshore fishing rights that included Morocco’s claims in Western Sahara. Western Sahara, a former Spanish colony, has been occupied by Morocco since 1975, amid calls for independence and a lack of international recognition. When asked to weigh-in on the legality of this agreement, the E.U. parliament’s legal services concluded that since it was Morocco’s responsibility to adhere to international law, it was up to Rabat to decide whether the agreement includes or excludes occupied territories under its control.

Last month, after the European Court of Justice ruled that the agreement must be annulled, the European Commission filed an appeal stating that since no other state existed in the area prior to Morocco’s take-over, Western Sahara should be considered a disputed, rather than an occupied territory. This week, it argued the exact opposite in relation to the West Bank. In a true twist of cognitive dissonance, the politician leading the appeal efforts is Sweden’s Foreign Minister, Margot Wallström, taking a break from her regular criticism of Israeli policies in the West Bank.

The new policy is doubly mystifying, as it disregards the E.U.’s free-trade agreement with Palestine. Even if one assumes settlements are located outside Israel proper, in a partially-recognised Palestine, they are still subject to the European-Palestinian free trade agreement on products made in the Palestinian territories. However, for that agreement to apply to settlements, companies must be registered with the Palestinian Authority. Since Jews cannot legally or safely register their companies with the PA authorities (while Israel’s Arab citizens can), the E.U. decision effectively sets an ethnic test for free trade with companies in the West Bank. I doubt this is the sort of policy the E.U. founders had in mind, when trying to establish a community of peace through trade.

Worse yet, the new E.U. policy extends to the Golan Heights, an area Israel captured from Syria in 1967. In 1981, its Druze residents were granted citizenship and full rights. Should Israel answer the European demands and relinquish the Golan Heights, it would be delivering 30,000 of its citizens to the killing fields of the Syrian civil war. With a failed-state in Syria, and no alternative to Israeli rule, is it truly moral to penalise Jewish and Druze farmers?

If the E.U. truly views settlements as part of a future Palestine, it should demand the Palestinian Authority register companies owned by Jews in the West Bank, and market their produce under the Europe-PA free trade agreement. After all, that was its policy in Transnistria, a break-away Moldovan territory which the E.U. included in a 2014 free-trade agreement with Moldova, with the express goal of empowering Moldova’s government vis-a-vis Russian-backed separatists.

But such a move would require confronting the racist Palestinian refusal to recognise Jews as neighbours and stakeholders in the future of the West Bank. Instead of encouraging cooperation between Israelis and Palestinians, the E.U. limits trade with the very businesses where the two communities work together. Compounding a bad policy with a lost opportunity to act with conviction, rather than spite.