The Kuwaitis laid the foundation stone to kick off the construction of Mubarak port, just over the border from the site of a new Iraqi port currently in construction, and close to Umm Qasr, Basra, Iraq's only deep water port last Tuesday.
The move has flared historic tensions between the two states.
Faleh Kadhim, an Iraqi ports expert, said the Kuwaiti port plans are in reaction to Iraq's attempts to compete with the Red Sea route currently used for most goods traveling from East Asia to Europe, the Middle East and North Africa, through the construction of Al Faw Grand Port, together with a new railway system.
The US$6 billion Iraqi project is part of a drive to modernize public infrastructure and kick-start Iraq's economy now that major new oil contracts have been signed. Goods would be able to reach Europe overland more quickly than ships might reach Egypt's Suez Canal, which connects the Mediterranean to the Red Sea.
Research carried out by Iraqi economist Riyadh Jawad indicated a 60 per cent drop in Umm Qasr traffic was likely and the viability of the new port challenged.
He said: "This will be devastating for Iraq's plans. The government has to sign a long-term agreement with Kuwait to jointly administer water routes between the two countries, in addition to implementing strategic water projects that would enhance the capacity of both countries without affecting each other."
Iraqi Prime Minister Nuri al-Maliki ordered the formation of an emergency committee to travel to Kuwait immediately to tackle the dispute between the two countries.
Member of the International Arab Maritime Organization (AMO) Yasin Abd al-Ilah said: "Mubarak Port... will steal Basra's main port's economic value as vessels will be blocked from entering into the deeps of the Khawr Abdullah (joint Iraqi-Kuwaiti waters).
"The Emergency Committee set up by the government needs to move quickly to overcome the crisis between the two countries. Iraq needs to open a new page with Kuwait in economic relations."
Mubarak port will be built on Boubyan Island in Kuwait, just a few kilometers away from the site of the Al Faw project, by Korean company Hyundai. It is projected to reach completion by 2016 at a cost of $1.1bn and will process 1.8m containers a year by 2015.
Iraq-Kuwait relations have just started to normalize after efforts to resolve Saddam-era conflicts.
Joint committees have recently been formed to address major issues currently blocking reconciliation, including the payment of reparations to Kuwait for the Gulf war, the disputed position of the border, Kuwaitis missing in Iraq since the conflict and the management of joint-owned oil fields.
The Ministry of Transportation claims that other countries in the region are lining up to voice their opposition to the plans due to the projected effect it will have on their economic interests and the traffic through their ports.
Iraq has five commercial ports and two oil ports, Umm Qasr is currently the only one capable of dealing with deep water vessels.
By Raber Y. Aziz and Patrick Smith