Foreign trade has always dominated Kuwait's economy. Before the discovery of oil, merchants developed large transshipment and reexport businesses that, along with the sale of pearls to foreign dealers, yielded a substantial part of the population's income. The discovery of large quantities of oil proviÍÍÍÍded a new and increasingly important export because Kuwait needed only small amounts of oil products domestically. Nonetheless, even after the discovery of oil, Kuwait's merchants continued to develop transshipment and reexport businesses with neighboring countries. During the Iran-Iraq War, goods for Iraq passed through Kuwaiti ports. Oil, however, overwhelmingly dominated Kuwait's exports (see table 8, Appendix).

Kuwait's significant foreign-exchange earnings from oil exports and investment income largely removed any constraints on imports in the pre-invasion period. Almost any commodity could be imported, and most import duties were modest. Imports for Kuwait's high-income economy were mainly finished products because of the small domestic manufacturing sector (see table 9, Appendix). These imports came predominantly from Asian countries, followed by those from European countries. Imports of all kinds came primarily from Japan and the United States. After the Persian Gulf War, imports from the United States increased dramatically (see table 10, Appendix). Huge oil revenues, paid in foreign currencies, freed Kuwait for the most part from balance of payments worries (see table 11, Appendix). The government accumulated surplus funds that were invested abroad. A large part of these reserve investments abroad, however, were cashed in during the Iraqi occupation and the liberation period that followed in order to pay the expenses of Kuwait and the allied coalition.

Historically, Kuwait also invested part of its revenues in foreign aid, primarily to Arab states. This foreign aid increased substantially as oil revenues rose in the 1970s. It took many forms, such as loans, joint financing, equity participation, and direct grants, particularly in support of Arab causes. In the 1960s, the government began placing funds in the Kuwait Fund for Arab Economic Development (KFAED), established in 1961. The best known of Kuwait's investment organizations and one that was used as a model by other oil exporters, KFAED functioned as both an investment and an aid agency, providing loans for specific projects, often on concessionary terms. KFAED's charter was changed in 1974, when capitalization was increased to KD1 billion (for value of the Kuwaiti dinar--see Glossary), and the fund began expanding its provision of funds to developing countries worldwide. Most KFAED aid went to development projects, especially in agriculture, to provide basic services such as electricity, water, and transportation and to develop human resources through educ 432ation anand health care. A large amount of aid went directly from the government to other states. In per capita terms, Kuwait's aid program was one of the most generous in the world. In the early 1980s, when oil prices were high, nearly 4 percent of Kuwait's gross national product (GNP--see Glossary) went to the aid program. But in the late 1980s, the levels of aid declined along with declining revenues. After the Iran-Iraq War started, in 1980, Kuwait increasingly directed its aid toward Iraq. During the 1980s, Kuwait lent Iraq an estimated US$13 billion. Kuwait's foreign aid slowed considerably after the Iraqi invasion in August 1990 and is expected to remain limited as Kuwait deals with the costs of reconstruction.

Data as of January 1993