China and Abu Dhabi tested America’s tolerance for foreign control over some industries deemed off-limits by the US Congress — oil and ports — and came away badly bruised. In France, the mere rumour of a bid by PepsiCo for the yogurt maker Danone ran into emotional public opposition all the way up to the prime minister. In Germany and Britain, potential investments by Russia’s Gazprom in the energy grids were actively discouraged.

Yet all the while foreign exchange reserves continue to be accumulated by developing countries, especially those exporting oil. Sooner or later, they are bound to try to diversify their holdings; in some cases their need will be for domestic investments, such as new infrastructure, but much of the time it will be for more diversified foreign investments in lieu of the steadily weaker dollar and its low returns.

At present, between $2 and $3 trillion are reported to have been accumulated by emerging countries in sovereign funds. China will start a $200 billion fund in the near future, as will Russia. The Arab Emirates, with $875 billion, Kuwait, with $250 billion, and Saudi Arabia, with $300 billion, have all been active recently with investments in the London Stock Exchange and in the Nasdaq Stock Market in the US, as well as Barclay’s Bank in the United Kingdom and the US port management company of Dubai.

As opposed to the American savings vehicles, these foreign funds will be under the political control of their governments, so their investment policies can have a major social and economic impact in America and Europe. Ideally, these funds would act like domestic savings institutions, with a standard structure for corporate governance, and would abstain from attempts to exercise corporate control.

If over the next decade foreign funds aggregate $12 trillion to $15 trillion, which would approximate the market value of all shares on the New York Stock Exchange today, they could well prompt strong protectionist political pressures whose objective would be to balance national interests with those of the foreign investors.

Even though foreign investment is usually seen as positive, not all foreign investment is necessarily benign. The nationality of capital is a factor that will be increasingly taken into account, and its objectives should be clearly disclosed. If those objectives include control, a board such as the US Treasury Department’s Committee on Foreign Investment in the US should have the right to disapprove if it concludes that the investment is not in the US’ interest. When potential large-scale shifts in control are a possibility, capital will be judged not only by its quality but also by its nationality.

That may not be a desirable outcome, but it is what politics is most likely to dictate. And the issue is certain to become ever more acute as imbalances increase. It is important to start thinking now about how the Americans will deal with it.

(The writer is an investment banker and a former US ambassador to France)

IHT