Euro-Gulf Information Centre
UK-Kuwait Trade: Celebrating and Taking Forward a Long-Standing Relationship
By Keith Boyfield*
Kuwait enjoys a close relationship with the United Kingdom (UK), dating back to the Anglo-Kuwaiti Agreement at the turn of the twentieth century, which established the Gulf country as a British Protectorate to combat any potential aggressive moves by the Ottoman Empire to the north. This long-standing relationship, underpinned by commercial relations forged during Britain’s colonial rule in India, has been superseded by a far more balanced relationship, characterised on the one hand by Kuwait’s substantial direct investment in the UK through its sovereign wealth fund, and, on the other, by valuable trading ties owing much to the UK’s provision of financial and professional services to Kuwait. This year in June Kuwait celebrated its 61st year of full independence from the UK (1961).
Although it is not one of the largest countries in the Gulf, Kuwait stands out as one of the jewels in the region, not least because of its immense hydrocarbon wealth. While it is a comparatively small country with a total land area of 17,818 km2 — making it slightly smaller than Slovenia — Kuwait has prospered on account of its natural resource wealth. It is estimated to have the world’s seventh largest reserves of oil with crude oil reserves of around 102 billion barrels.[i] According to the World Bank, Kuwait is the fifth richest country in the world, measured by gross national income per capita.
A Historical Perspective
In August 1990, the Iraqi leader, Saddam Hussein, ordered his armed forces to invade the country, which led to a period of immense instability and considerable damage to Kuwait’s oil facilities — more than 600 oil wells were destroyed by Iraq’s troops when an Allied invasion drove out the Iraqi forces. This led to months of highly damaging fires which cost $1.5 billion to extinguish. The Iraqis also flooded the neighbouring Gulf coastline with massive oil spills that caused considerable environmental havoc. Half the country’s population fled the country during the seven month occupation that led to such a regrettable loss of life.[ii]
Fortunately, the horrors of the Kuwait Iraq conflict are now well behind us and the country has managed to recover from this colossal hit to its infrastructure and oil production capability. Kuwait now allows 100% direct foreign investment in most of its non oil and gas economic sectors. Recently, it has initiated a new push to attract inward foreign investment. The most important economic sectors besides oil and gas are real estate, shipping, construction, water desalination and financial services.
In 2020, Kuwait ranked as OPEC’s (Organisation of the Petroleum Exporting Countries) fourth largest oil producer. Annual gross domestic product (GDP) reached $132 billion in 2021 — a significant sum for a country with a population of only 4.4 million. Two fifths of GDP is generated directly by oil. With an eye to the future, Kuwait has channelled a sizeable slice of government revenue levied on oil production into Kuwait’s sovereign wealth fund, which has built up over $700 billion in assets, and now ranks as the world’s third biggest sovereign wealth fund.
Kuwait is ranked seventh among 14 countries across the Middle East and North Africa in terms of its economic dynamism, according to the Heritage Foundation’s Index of Economic Freedom 2022. It scores well in terms of trade freedoms and its low corporate tax regime. However, Kuwait still has to make a concerted effort to diversify its economy and promote its private sector: too many of its citizens occupy undemanding jobs in the wide-ranging public sector. In fact, three quarters of its citizens work for the government and, in return, receive a plethora of subsidies and grants. This is unsustainable; a reality that the country’s political leaders increasingly recognise, although implementing remedial action is often challenging. As the International Monetary Fund (IMF) noted in its latest Staff Report on Kuwait, published in March 2022: ‘The authorities have been preparing a comprehensive reform plan which, if adopted by parliament, would pave the way to address the structural and fiscal imbalances in the economy and promote sustainable and inclusive growth.’ Comprehensive structural reforms, including a review of social benefits, the labour market, land allocation, and the business environment, are urgently required to promote new job opportunities in the non-oil private sector growth, thereby in the process addressing pressing fiscal constraints.
Trade Balance with the UK
Total trade between Kuwait and the UK is substantial. In the four quarters to the end of June 2022, it is estimated that total trade amounted to £3.3 billion (approximately $4 billion), a 38.6% increase compared to the previous corresponding period. The lower 2020/2021 total reflects the damage to trade attributable to the Covid pandemic, but it is encouraging to note the rapid recovery of trade in the last eighteen months.
UK exports to Kuwait tend to be understated in the official data, because many British goods are shipped to the country through the United Arab Emirates. According to the published statistics, total UK exports to Kuwait amounted to £2 billion (approximately $2.4 billion) in the year to 1 July 2022. This makes Kuwait the UK’s 49th most important trading partner on the basis of national rankings. As can be seen from the accompanying table below, British exports to Kuwait — in terms of goods — were dominated by iron and steel products along with motor vehicles. Kuwait remains a vibrant market for luxury British cars, such as the prestigious marques Rolls Royce and Bentley. Machinery, aircraft and electrical equipment also feature among the UK’s leading exports to Kuwait. Pharmaceuticals are another important export sector together with fashion and apparel clothing.
Yet goods exported to Kuwait represent only a quarter of total exports. Nearly three quarters (73.6%) of all UK exports to Kuwait were in services. Britain earns substantial revenues from its services sector, principally in the form of banking and financial services, along with legal, accounting and management consultancy services. In the year to 1 July 2022, the revenue from the export of services totalled £1.5 billion (approximately $1.8 billion).[iii]
Figure 1: Top Twelve UK Exports (Goods) to Kuwait in 2021
In contrast, more than 95% of UK imports from Kuwait were goods with just £59 million (approximately $71.4 million), or 4.8%, accounted for by services. By far the most significant import into the UK was refined oil. This added up to £1.1 billion (approximately $1.3 billion) or 96.4% of all UK goods imported from Kuwait. The second largest category of imports from Kuwait in the four quarters to 1 July 2022 related to plastics and this totalled £18.6 million (approximately $22.5 million) or 1.6% of all goods imported into the UK. The table below does not show the total for refined oil but breaks down the other top twelve imports for the year to 31 December 2020.
Figure 2: Top Twelve Kuwaiti Exports (Goods) to the UK in 2020
The alluring opportunity for trade relations between the two countries is the prospect of a free trade agreement (FTA) arranged through the Gulf Cooperation Council (GCC). At present, the trade weighted average tariff rate is 4.7% and a total of 57 non-tariff are currently in force in Kuwait. The signing of a FTA would assist in providing greater legal certainty and would help to remove a range of restrictions that hold back investment, including equity caps, licensing restrictions and limitations on corporate structure. A FTA could also liberalise market sectors currently unable to benefit from foreign investment — for instance, as things stand, Kuwait effectively prevents overseas entities from investing in its oil and gas industry.
More than half (56%) of the UK’s services exports to the GCC countries are now digitally delivered, so including an ambitious digital chapter to a future FTA could boost opportunities for key priority sectors. In this context, lessons could be learnt from the UK–Singapore Digital Economy Agreement (DEA) e-commerce provisions which allows consumers to benefit from open digital markets, including guaranteed tariff-free flow of digital content. Ideally, the UK would like to agree with GCC partners, such as Kuwait, the removal of existing data localisation requirements coupled with commitments on the non-disclosure of source codes and algorithms.[iv]
The High Profile Visit to Kuwait by London’s Lord Mayor in October 2022
Vincent Keaveny, the Lord Mayor of London, visited Kuwait in October 2022. He led a high-powered delegation from London’s financial community. Kuwait is a valuable client for a range of London-centred professional firms. Furthermore, Kuwait’s sovereign wealth fund set up a headquarters office in London in 1953, and it is looking forward to celebrating its 70th anniversary next year. Paying tribute to this established relationship, the Lord Mayor said UK relations with Kuwait are ‘long-standing’ through cooperation that dates over such a long period of time, particularly with respect to the economic, financial and investment-related spectrums.[v]
Focusing on a potential FTA with the UK, Lord Keaveny emphasised there was considerable scope to raise trade volumes through joint action. Indeed, the very fact that he paid a visit to Kuwait this autumn with such a high-powered group reflects the country’s importance to London in its role as a global financial centre. While visiting Kuwait, the Lord Mayor’s delegation met with representatives of several Kuwaiti banks, who were particularly interested in exploring engagement on financial technology services (FinTech), digital infrastructure and electronic banking services located in London.
One other issue that attracted considerable attention on this official visit was the opportunity to cooperate on mitigating the impact of climate change and, specifically, initiatives that can be adopted to reduce fossil fuel emissions. Lord Keaveny stressed this was a key area where both the UK and Kuwait could cooperate to each other’s mutual benefit.
Clearly, there is immense potential to be realised in the trading relationship, already firmly established between the UK and Kuwait. The prospect of a FTA signed between the UK and the Gulf Cooperation Council countries makes this prospect even more attractive.
30 November 2022
*Keith Boyfield is a Senior Fellow of the Euro Gulf Information Centre.