International trade legal environment in Kuwait Essay

Kuwait is a country with the small, but rich and relatively open economy. In terms of economic openness (Index of Economic freedom), Kuwait was for several years ahead of such countries as Norway, France, Spain, Malaysia and Argentina. The country proclaimed the equality of all citizens in the distribution of national wealth, while Kuwait supports state regulation of the economy (75% of GDP is created in the public sector).
According to various estimates, Kuwait’s foreign trade volume makes 38-40 billion dollars, including $ 13 billion of import, and $ 25 billion of export. The main export products include oil and processed products (Kuwait receives 95% of revenues from oil exports, which is 80% of the state’s annual income), and chemical fertilizers, sent to major partner countries, such as: Japan (20,5%) , South Korea (13,7%), USA (12,4%), Singapore (11,3%), Taiwan (9,9%), as well as the Netherlands, India, Pakistan and the UK. In its turn, Kuwait imports food, construction materials, machinery, and clothing; and its major import partners are the U.S. (12,9%), Germany (11,9%), Japan (7,9%), the UK, Saudi Arabia, France, Italy and India.
Further, we’ll focus our attention on the economic and legal environment of Kuwait market and analyze its perspectives for international cooperation.

Kuwait economic situation and legal environment
The most important role in the economy of Kuwait until today belongs to the state. Private capital in main sectors is involved in satellitic projects, though recently, the private sector has been expanding a little. The leading business organizations include Kuwait Chamber of Commerce and Industry, Kuwait Industrial Union, Kuwait Industrial Development Center created by both the state and business sector. The Center of developing industrial exports with the business community and state, the private Kuwait Commercial Markets Complex Company is also widely known.
Kuwait is a member of the OPEC since 1960, a member of the League of Arab States since 1961, a member of the UN and other international governmental and regional organizations since 1963, having ratified all the international trade agreements supported by them. Since 1962 the country has been providing financial assistance to developing states through the Kuwait Fund for Arab Economic Development (KFAED). The Government of Kuwait has declared positive neutralism policy and active cooperation with all Arab countries as the official foreign policy (Kleinberg & Fordham, 2010; Meyer, 2007).
Kuwait has also opened a special account, the so-called Fund for Future Generations, transferring to it 10% of oil revenues funds annually. Until 1990, these deposits reached $ 100 billion, but after 1990 the amount was reduced because Kuwait had to spend about $ 35 billion to recover its economy. Currently, the capital of the Fund for Future Generations is estimated at around $ 45-50 billion (Sabri, 2009).
On the other hand, the Kuwait Stock Exchange (KSE) is considered one of the main in the region with its market value estimated at $ 30 billion. Today, KSE cooperates with 74 local companies involved in insurance, banking operations, real estate, investments, industry, providing services and food products. Moreover, 9 foreign companies are represented at this stock exchange, as well as 4 joint funds foreigners can invest in. Kuwait’s currency is freely convertible and the government maintains its value (by conducting financial intervention) (Sabri, 2009).
Presently, privatization has become a cornerstone in the economic policy of the state, which has its shares in 62 companies, some of which are to be privatized on the recommendation of the World Bank. The government placed the most of its shares in these companies, trying to fix the financial situation of the creditors who suffered losses during the crisis that broke out in an informal exchange “Suq Al-Manah” in 1982. In September 1992, the Kuwait Investment Office started the implementation of a three-year privatization program aimed at the reconstruction of the economy and reduction of its dependence on oil revenue. The first phase finished in a great success: the market attracted new capital, new investment opportunities emerged, which contributed greatly to reconstruction of an important sector of national economy, 906 million Kuwaiti dinars ($ 2.9 billion), placed in the local companies that went bankrupt, were sold. The second and third phases of the program included the privatization of purely state-owned enterprises and service industries such as telecommunications, water and energy industries, the Petrochemical Industries Company, partially or completely the Kuwait Oil Tanker Company, and Kuwait Airways Corporation (Meyer, 2007).
Kuwaiti banks have full correspondent relations with major US banks, as well as with such banks as Deutsch Bank, Dresdner Bank, Lyonnaise, Gulf Bank International, Standard Chartered Bank, Hong Kong Shanghai Banking Group and others. The Central Bank of Kuwait manages and controls the financial sector consisting of the following seven commercial banks: National Bank of Kuwait (NBK), the largest in the country, Gulf Bank, Al-Ahly Bank of Kuwait, Commercial Bank of Kuwait, Bank of Kuwait and Middle East, Burgan Bank Kuwait, Bank of Bahrain and Kuwait (Kleinberg & Fordham, 2010).
Kuwait Free Trade Zone was officially opened in summer 1999. It is located in an area of 1.5 million square meters in the Western part of the main commercial port Shuveyh. National Real Estate Company (KSC) is a local private organization that manages the free trade zone and regulates issues of its development, getting 20% of its profit, the rest of which goes to the state. In addition, KSC will own 90% of profits from any financial and construction activities (Kleinberg & Fordham, 2010; Sabri, 2009).
The free customs zone includes warehouses occupying the area of 500 square meters, area for exhibitions, banking institutions, freight and insurance companies. In order to attract trade, industry and service companies, in the free trade zone these companies own 100% of landed property, not taxed, not limited in the choice of currency, and insurance premiums (Meyer, 2007).
In the past three decades, Kuwait’s economy has experienced several major crises, including a massive government financial intervention in the late 70’s. In 1982, securities crisis erupted in the market, in the mid-80’s there was a crisis of world oil prices, in 1990-1991 Kuwait for seven months was under Iraq occupation. Kuwait has lived on its foreign investment of $ 100 billion and revenues from the Kuwait International Oil Corporation, which controls the operation of Kuwait oil companies in Asia and Europe. After the occupation, Kuwait investments of $ 100 billion reduced to $ 40 billion. In 1993, the government of Kuwait adopted the law of complex debt, aimed at a much debt relief and the development of a mechanism for investors of Kuwait to cover their losses experienced during the Iraq invasion, as well as the crisis on Suq Al-Manah (Chemingui & Hajeeh, 2010).
After the dissolution of the National Assembly by Emir on May 4, 1999, the country experienced several economic reforms. During the parliamentary crisis (May 4 – July 3, 1999), the Council of Ministers issued a number of significant laws on economic liberalization. In the field of economic legislation the Council of Ministers decided to:
– allow 100% of foreign investment in key assets and technologies, as well as to release foreign companies from taxes for 10 years, which is the main part of the governmental privatization plan. Previously, foreign investors, who paid 55% of the profits, could only own 49% of companies registered in Kuwait. The Council of Ministers decided to cut the tax for foreign investors;
– modernize the 30-year-old law on commercial companies to make the commercial sector efficient and flexible;
– cancel double taxation with other countries including the US to strengthen bilateral relations and protect investments;
– allow foreigners to play on the Kuwait Stock Exchange and own equity in Kuwait holding companies (previously participation in the exchange was allowed to Kuwaiti citizens and citizens of the Gulf States. Foreigners could own the Kuwait capital only through mutual funds). Some of the 75 companies with market capitalization of about $ 20 billion are included in the Kuwait Stock Exchange;
– approve a comprehensive law on copyright and trade (company) brand with the simultaneous introduction of appendices to the Law on trade of 1980 and the Act on patents, tariffs and industrial designs. Copyright Act was enacted to eliminate the weaknesses in existing laws to prevent piracy in the movie and music production;
– privatize Kuwait Airways.
Iraq’s use of Kuwait as a springboard for the occupation forces and the postwar reconstruction of Iraq brings its huge economic benefits to Kuwait, and its necessity and participation in this process in the nearest years ensure steady economic growth.
Each initiative on privatization of state enterprises must be approved by parliament, where the opposition is very strong, so the future process of privatization might face conflict situations. Nevertheless, according to Deputy Prime Minister for Economic Affairs, Sheikh A. Al-Fahad Al-Sabah, the fact that the law is passed is a clear sign of progress. According to him, a new stage in the economic development of Kuwait has begun, which is characterized by increasing role of the private sector. Denationalization should provide additional funds for investment, which, combined with the influx of petrodollars and increased integration through the Cooperation Council for the Arab States of the Gulf, will help create a framework for strengthening the emirate.
A new legislative initiative has already led to some changes. Soon after its approval, the National Assembly approved the legislative act authorizing the establishment of private enterprises specializing in power generation and seawater conversion.
With regard to the member states of CCASG (which, apart from Kuwait, includes Saudi Arabia, UAE, Oman, Qatar and Bahrain), they are gradually moving towards closer cooperation in economic field and strengthening regional integration. Since the establishment of the Cooperation Council of Arab Gulf States in 1981, a number of important initiatives have been carried out to develop and deepen cooperation in this region. In 2008, a common market was created, which now contributes to the expansion of trade and economic ties among the countries of the Gulf. According to “NCB Capital Research”, the volume of trade between the CCASG countries has recently tripled – up to more than $60 billion, compared to 2002. It is projected that it should be further increasing by about 20% per year (Kleinberg & Fordham, 2010).
Positive information is also received on the process of forming a monetary union. In March 2010, a meeting of the Monetary Board discussed the technical problems associated with the forthcoming establishment of a regional central bank. Originally planned transition to a single currency “Khaleeji” in 2010 was moved to 2015 due to the insufficient degree of harmonization of national financial systems and uncoordinated crisis response deadline. Economists believe that the first Khaleeji will be tied to the dollar, but in future GCC countries will move to the formation of a more flexible exchange rate system (Kleinberg & Fordham, 2010; Meyer, 2007).
According to experts, the even more important aspect of cooperation is the creation of a common infrastructure. Proposals for joint projects in the railway and road construction started to be discussed in the 1970-ies, when the Arab Gulf states accumulated significant funds in petrodollars. However, the implementation of these plans was prevented by the deterioration in the global oil market in 1980-1990-ies. Currently, the development in these areas is mainly based on national projects. It is planned to unite the efforts and establish regional transport and logistics networks. Several countries have already begun the work on creating a unified electricity system.
In general, the national legislation of Kuwait has specificity, especially in part related to the activities of foreign companies, including in the energy sector. In all state organizations, the works in installation, replacement and repair of equipment are fulfilled by local private companies and only on the conditions of trading (the laws №37 of 1964 and №81 of 1977). The tender system is controlled by the Central Tender Committee (CTC) of the Council of Ministers o Kuwait. Foreign companies are allowed to carry out contract work in the oil industry only if the local agent is present (law №36 of 1964 and №68 of 1980, which determine the kinds of sales offices and agencies). Contract works are divided into categories, in each of which the organizations (customers) have the lists of pre-qualified companies and only they have the right to participate in tenders (Chemingui & Hajeeh, 2010; Kleinberg & Fordham, 2010).
The procedure of the foreign company-contractor prequalification involves the filing (via a local agent) of pre-qualification forms appropriately and sending them in the evaluation committees; the forms should contain information about the project, production, labor and financial (audit) capabilities with details on each section. The list of projects implemented must be attached.
Simultaneously, the oil companies support a similar system of prequalification of suppliers (manufacturers) of various equipment and industrial products. In addition to the above mentioned requirements, petroleum equipment must be certified by the standards of American Petroleum Institute, and the company must have ISO certificates. In the case of positive decision, the company is included in the appropriate list and receives the right to participate in advertised tenders, and its products are recommended for use by contracting companies. In this case, the relationship with the agent firm should be verified by an appropriate agreement, registered by the Ministry of Trade and Industry of Kuwait.
In August 2008, the Ministry of Finance of Kuwait announced a significant change of tax legislation, covering all the foreign companies. According to the new tax legislation, foreign companies leading their activities within the Gulf pay the income tax at a rate of 15%. In accordance with the laws on the Income Tax Act adopted in December 2007, the incomes of the companies received at Kuwait Stock Exchange are freed from taxes. According to Kuwait Sheikh Sabah Al-Ahmad Al-Sabah, the country does not need money; it needs experience and technology to attract foreign investors (Chemingui & Hajeeh, 2010).
Earlier, the progressive system of taxation operated in Kuwait: tax rates for higher incomes increased significantly more than in other states, and therefore it was unprofitable for companies to operate in Kuwait. Corporations were subject to 55% tax, while new legislation has had a tremendous impact on the economic situation in the country. Experts supporting of the new tax regime state the removal of one of the main obstacles for foreign investors. The previously existing tax system prevented the increase in foreign investment. In 2006, the amount of foreign investment in Kuwait was only 300 million dollars, while in neighboring Saudi Arabia it made 18 billion dollars. These changes can significantly improve the investment climate in the country by attracting foreign companies and creating a favorable tax system. The initiative is aimed at attracting foreign investment to diversify the economy of Kuwait, heavily dependent on oil revenues (Chemingui & Hajeeh, 2010). Over the next 10 years, it is planned to invest 100 billion dollars in oil and other sectors of the Kuwait economy.
Conclusion
The global economic slowdown has significantly increased the value of plans for the development of regional infrastructure, as it may help to promote the more efficient use of capacity available in the Gulf and Kuwait in particular. According to some economists, the strengthening of transport linkages in this part of the Arab world and the Middle East as a whole will not only boost intra-regional trade, but also increase the region’s importance in handling international cargo. Some experts predict that in 30 years, the degree of unification of transport and energy systems of the GCC will be released at a sufficiently high level for a parallel strengthening of cooperation with other Middle Eastern and European countries.
At the same time, Kuwait has a specific legislation in part related to the activities and taxation of foreign companies. However, the newly adopted laws of Kuwait have increased the level of investment attractiveness of the country and the index of openness of the economy of Kuwait. Despite the numerous challenges and difficulties that remain to be overcome by Kuwait, many economists and analysts believe that the dominant trend here is moving towards a more full-fledged and harmonious economic community. Forging close and comprehensive cooperation with the Arab Gulf countries and its major partners in the global market will certainly contribute to the solution of economic problems of Kuwait. However, in current conditions, the practical implementation of scheduled economic reforms, plans and projects for the coming five-year period is of paramount importance to the emirate.