Wealth and Diplomacy: The Foreign Policy Dimensions of a U.S. Sovereign Wealth Fund
The United States Treasury Department Building, Northside
By Salar Ghahramani
Introduction
The concept of a U.S. Sovereign Wealth Fund (SWF) has garnered increasing attention in recent years as discussions about national financial stability and global influence intersect. While the United States currently does not operate a SWF like those seen in countries such as Norway, Singapore, or China, the creation of such a fund offers intriguing potential. Beyond its economic implications, a U.S. SWF could serve as a formidable instrument in advancing the country’s foreign policy objectives. This paper examines how a U.S. SWF might function as a tool for enhancing diplomatic relations, supporting geopolitical goals, and influencing global markets. By comparing existing SWFs and analyzing the unique political and economic landscape of the United States, this paper argues that a U.S. SWF could offer strategic advantages in foreign policy, despite significant challenges related to its governance and implementation.
I. Sovereign Wealth Funds: A Brief Overview
SWFs are government-owned investment entities that share three defining characteristics: they are owned by the state, lack direct obligations to pensioners, and are managed separately from the state's foreign exchange reserves. [1] The International Monetary Fund identifies several distinct types of SWFs:
● Stabilization funds, designed to protect resource-rich countries from commodity price fluctuations;
● Savings funds, established to distribute wealth across future generations;
● Reserve investment corporations, aimed at achieving higher returns than traditional reserve assets;
● Development funds, focused on socioeconomic and infrastructure development; and
● Pension reserve funds, which serve as contingency reserves for addressing future pension liabilities. [2]
Regardless of the category to which a SWF is classified, its investment approaches and strategies exhibit considerable variation. [3] SWFs allocate capital across a range of traditional asset classes, such as currencies, government and corporate bonds, real estate, equities, natural resources, commodities, and precious metals. [4] Moreover, many SWFs extend their portfolios into more complex, non-traditional assets, including collateralized debt obligations, options, futures, structured financial products, and exotic derivatives. [5]
From a foreign policy perspective, SWFs can serve multiple functions. They provide economic leverage through strategic investments and can strengthen diplomatic ties by aligning financial interests with those of other nations. For instance, China’s SWF has made significant investments in Africa, aligning with the country’s broader foreign policy goals of expanding its influence in developing regions. [6] Similarly, Norway’s SWF, while primarily focused on financial returns, has adopted ethical guidelines that influence its investment decisions, thereby reflecting the country’s foreign policy emphasis on human rights and sustainability. [7] Scholars have also argued that sovereign wealth funds bear a responsibility under international law to safeguard the natural environment for the benefit of future generations. [8]
Against this backdrop and given the growing prominence of SWFs in global markets, the potential creation of a U.S. SWF raises important questions about how such a fund could be designed to serve not only economic interests but also broader foreign policy, geopolitical, and human rights objectives.
II. The U.S. Foreign Policy Landscape: Opportunities for a Sovereign Wealth Fund
The United States has historically relied on a mix of military strength, diplomatic initiatives, and economic policies to advance its influence on the global stage. [9] However, in an increasingly interconnected world, financial power has become a critical tool in shaping international relations. [10] Global economic and political shifts present an opportunity for the United States to expand its foreign policy toolkit through financial mechanisms.
In this evolving landscape, where financial flows can strengthen diplomatic ties and economic partnerships, a U.S. SWF offers potential benefits beyond mere economic returns. By leveraging a SWF, the United States could foster deeper economic engagement with both allies and developing nations, aligning investments with strategic geopolitical objectives. Moreover, such a fund could be instrumental in projecting U.S. values and soft power, particularly in regions where competition with other global powers—most notably China—is intensifying.
China’s Belt and Road Initiative (BRI) has exemplified how financial investments can be used as a vehicle for expanding geopolitical influence. [11] Through large-scale infrastructure investments in Africa, Southeast Asia, and Europe, China has successfully positioned itself as a key economic partner for many developing nations, often securing political goodwill in return. [12] As the United States seeks to maintain its leadership in the global order, a SWF could serve as an alternative means to compete with initiatives like BRI, enabling the United States to bolster its diplomatic reach and advance its long-term strategic interests. To that end, this section explores key opportunities for a U.S. SWF to enhance economic diplomacy and project soft power.
1. Economic Diplomacy and Strategic Investments
A U.S. SWF would offer a powerful instrument for economic diplomacy, allowing the country to forge deeper economic ties with strategic partners while promoting development in key regions. By making targeted investments in sectors critical to both U.S. foreign policy objectives and global economic stability, the SWF could act as a catalyst for growth, peace, and stronger alliances. [13] This financial diplomacy would provide a softer yet effective alternative to more traditional forms of influence, such as military aid or sanctions.
Strategic investments through a U.S. SWF could take multiple forms, such as funding infrastructure projects, promoting technological innovation, or supporting clean energy initiatives. [14] For example, the SWF could prioritize investments in renewable energy and green technologies in developing nations, thereby addressing global climate challenges while simultaneously creating long-term economic partnerships. Investing in solar energy projects in Africa or wind farms in Southeast Asia would contribute to global sustainability efforts and enhance the United States’ role as a leader in climate diplomacy. [15] These actions would build goodwill with recipient countries and support the broader goal of reducing dependency on fossil fuels—a key issue in U.S. foreign policy. [16]
Moreover, a U.S. SWF could be used to strategically counter China’s growing influence, particularly in regions that have become central to its Belt and Road Initiative. BRI has made significant inroads in regions such as Africa, South Asia, and Eastern Europe by financing critical infrastructure projects, often under conditions that foster political and economic dependence on China. [17] While China has used these investments to enhance its geopolitical influence, it has also faced criticism for the opaque terms of many of its projects and concerns over “debt-trap diplomacy.” [18] A U.S. SWF, offering more transparent and sustainable alternatives, could serve as a competitive financial tool to provide partner nations with options that are aligned with democratic governance and transparency. The United States could ultimately differentiate itself from China’s more controversial investment practices, positioning the SWF as a preferred alternative for countries seeking long-term partnerships without compromising their sovereignty. Such investments would reinforce U.S. economic engagement, encourage market liberalization, and create interdependencies that enhance diplomatic ties. [19]
2. Soft Power and Global Influence
Beyond economic diplomacy, a U.S. SWF could significantly enhance the nation’s soft power—its ability to influence global opinion and align international behaviors through attraction rather than coercion. Soft power has long been a critical component of U.S. foreign policy, from the promotion of democratic values to cultural influence. [21] In an era where economic stability and sustainability are key global concerns, the United States. could deploy its SWF to project leadership in areas such as environmental protection, ethical governance, and sustainable development, all of which should align with broader U.S. foreign policy goals.
A U.S. SWF could adopt a framework of ethical investing that prioritizes global sustainability, human rights, and good governance. Similar to the ethical guidelines of Norway’s SWF, which excludes investments in industries linked to human rights violations or environmental harm, [22] a U.S. SWF could serve as a model for responsible investment. This focus would allow the United States to strengthen its reputation as a global leader in sustainability and governance while promoting these values abroad. Furthermore, such an approach would resonate with countries and regions where governance and transparency are critical issues, thereby further extending U.S. soft power.
For instance, the U.S. SWF could actively invest in development-oriented projects that contribute to the United Nations Sustainable Development Goals (SDGs), focusing on poverty reduction, clean energy, and education. [23] By investing in healthcare infrastructure in Africa, educational programs in South Asia, or clean water initiatives in Latin America, the United States would enhance its soft power by improving the quality of life in developing regions. These investments would not only bolster local economies but also create long-lasting goodwill towards the United States, reinforcing diplomatic ties and trust.
In regions where U.S. foreign policy has historically been viewed with skepticism, a well-managed SWF could repair relationships through development-focused investments. For example, by focusing on clean energy and sustainable development in the Middle East or Central Asia—regions often impacted by geopolitical instability—the United States could promote stability and development in line with its broader foreign policy goals. Such actions would allow the United States. to reframe its role in these regions, from a military or interventionist power to a partner in sustainable progress.
III. The Governance Challenge: Ensuring Alignment with Foreign Policy Goals
While the potential benefits of a U.S. SWF are significant, its success will depend heavily on how it is governed. The creation of a governance framework that balances the fund’s economic objectives with the nation’s foreign policy goals poses a substantial challenge. In many countries, SWFs are managed by state-owned entities or independent investment boards that operate with varying levels of government oversight. [24] The United States, given its complex political landscape and the necessity to align its financial strategies with diplomatic priorities, would require a governance structure that accommodates both economic expertise and foreign policy considerations. This will likely involve a governing body comprised of representatives from key institutions such as the Department of the Treasury, the State Department, and independent financial experts.
However, designing this governance model raises key questions about how much independence the SWF should have and how much government oversight is needed to align the SWF’s activities with U.S. strategic priorities. Striking this balance is crucial for ensuring the fund can function efficiently while advancing national interests. The governance structure must provide enough autonomy to allow financial experts to make sound investment decisions, but it also needs safeguards to ensure these decisions reflect the country’s foreign policy and economic goals.
1. Balancing Independence and Government Oversight
One of the most significant governance challenges for a U.S. SWF is determining the appropriate level of independence from political influence. On the one hand, too much governmental control could hinder the SWF’s ability to make objective, financially sound decisions. [25] A fund that is overly susceptible to short-term political pressures might prioritize projects based on political expediency rather than on economic rationale, potentially leading to suboptimal investment outcomes. [26] Moreover, excessive political involvement could deter potential international partners who may view the fund as an extension of U.S. foreign policy, rather than as an independent investor focused on mutual economic benefit.
On the other hand, if the SWF is granted too much independence, it risks straying from U.S. foreign policy objectives, potentially making investments that conflict with the country’s broader geopolitical goals. For instance, a highly autonomous SWF might engage in investments that benefit rival nations or regions where U.S. interests are at odds, inadvertently supporting the economic growth of strategic competitors. This misalignment could undermine U.S. diplomatic efforts and weaken its influence in key regions.
To avoid these pitfalls, the United States would need to carefully craft a governance framework that provides the SWF with the autonomy needed to make financially prudent investments while ensuring that these decisions are aligned with national interests. One possible approach could be establishing an oversight committee with representatives from the State Department, the Treasury, and external economic experts. This committee would have the authority to review and approve investment strategies, ensuring that they meet both financial and foreign policy objectives. Such a model could help insulate the SWF from direct political influence while maintaining accountability to U.S. strategic goals.
Furthermore, the United States could draw lessons from the governance structures of other successful SWFs, such as Norway’s Government Pension Fund Global (GPFG). Norway’s SWF is managed by Norges Bank Investment Management, which operates independently from the Norwegian government, yet is subject to ethical guidelines and oversight by the Norwegian Parliament. [28] These guidelines ensure that the fund's investments reflect Norway's values and long-term interests, thereby preventing the fund from engaging in ventures that could undermine the country's foreign policy or ethical standards. A similar model could be adopted in the United States, where the SWF operates with a degree of independence but adheres to clear ethical and strategic guidelines set by Congress or an independent body.
Additionally, transparent reporting mechanisms would be essential to maintaining accountability. Regular reporting to Congress, coupled with external audits, could ensure that the SWF's activities remain consistent with U.S. interests while also safeguarding the fund’s long-term financial sustainability. By fostering transparency and maintaining a careful balance between independence and oversight, the United States could establish a governance model that allows the SWF to operate effectively in both financial markets and the international political arena.
2. Political and Ethical Considerations
The inherently political nature of U.S. governance presents another significant challenge to the establishment and management of a SWF. Unlike countries such as Norway and Singapore, where SWFs enjoy a high degree of political insulation and operate largely based on long-term financial objectives, the U.S. political landscape is more complex and contentious. The deeply entrenched partisan divisions in the United States could lead to considerable disagreements over the management, priorities, and even the existence of the SWF. These political tensions, coupled with the ethical considerations that inevitably arise with large-scale investments, add another layer of complexity to the governance of a U.S. SWF.
In countries like Norway, where there is broad political consensus on the role and operation of the SWF, the governance framework is relatively stable and insulated from short-term political pressures. [29] In the United States, however, the highly polarized political environment could result in significant challenges regarding how the SWF should be managed. Different political parties and stakeholders may have competing visions for the fund’s objectives and priorities, with some advocating for maximizing financial returns and others emphasizing the need for investments that reflect specific ethical, social, or geopolitical goals.
For example, one political faction may prioritize investments in sectors that promote national security, such as defense technologies, while another may push for investments in green energy and sustainability, reflecting broader efforts to combat climate change. These competing interests could lead to policy gridlock, undermining the SWF’s ability to act decisively and pursue long-term strategies. Moreover, shifts in political power could lead to sudden changes in the SWF’s governance and investment priorities, potentially destabilizing the fund and making it difficult to establish consistent policies that ensure its financial and geopolitical success.
To address this challenge, the U.S. SWF would need to be governed by a bipartisan framework that ensures stability and continuity, regardless of changes in political leadership. One potential solution is the establishment of an independent board of trustees, or a governing body composed of experts from both political parties, along with financial and foreign policy specialists, who would be responsible for guiding the fund’s strategic decisions. This governance structure could help insulate the SWF from political interference while still ensuring that it remains accountable to Congress and other governmental oversight bodies.
Additionally, implementing long-term mandates and investment guidelines that transcend party politics could be key to ensuring that the SWF maintains its focus on sustainable financial and foreign policy objectives. These mandates should be codified in law, making it difficult for any one political faction to drastically alter the SWF’s course without broad-based consensus.
The establishment of a U.S. SWF raises significant ethical considerations about the industries and regions in which it would invest, as financial profitability must be balanced against alignment with U.S. values and foreign policy goals. For example, investments in defense or fossil fuels might support national security and yield high returns but could provoke public and political backlash due to their environmental or geopolitical implications. Similarly, emerging technologies such as artificial intelligence and biotechnology, while promising substantial growth, raise concerns about privacy, human rights, and potential misuse by authoritarian regimes. These tensions echo growing calls for pension funds and university endowments to divest from fossil fuels and other ethically questionable industries, highlighting the need for a governance framework that ensures alignment with democratic principles and sustainable priorities. [30]
The SWF could also adopt environmental, social, and governance (ESG) criteria to further guide its investment decisions, ensuring that it promotes sustainability, human rights, and good governance practices across the globe. By incorporating ESG standards, the U.S. SWF could position itself as a leader in responsible investing.
To address this risk, the U.S. SWF would need to establish transparent reporting mechanisms that provide regular updates on its investment activities, financial performance, and adherence to ethical guidelines. Public reporting, independent audits, and Congressional oversight would be essential to maintaining trust in the fund’s operations. These transparency measures would not only ensure accountability but also help mitigate the risk of political and public backlash.
Summary: The Potential and Pitfalls of a U.S. Sovereign Wealth Fund
The creation of a U.S. SWF presents both significant opportunities and formidable challenges. As a tool of foreign policy, a well-managed SWF could enhance U.S. influence abroad, foster stronger diplomatic relationships, and provide a platform for ethical global investment. However, the fund’s success would depend on careful governance, strategic investment choices, and the ability to balance financial independence with alignment to U.S. foreign policy objectives.
While the path to establishing a U.S. SWF is fraught with political and logistical hurdles, the potential benefits to the nation’s global standing and foreign policy objectives are worth serious consideration. In an era of economic interdependence, a U.S. SWF could emerge as a vital instrument for navigating the complex challenges of 21st century geopolitics.
About the author
Salar Ghahramani is an associate professor of business law and international law & policy and the academic director of the Brandeis Global Engagement and Leadership Program at Pennsylvania State University, Abington. Previously, he founded Global Policy Advisors LLC, providing advisory services at the intersection of law, public policy, and finance to asset managers and corporations. A musician and a xenophile, he also served on the board of directors of the World Music Institute in New York. His research is on the intersection of law and the business environment, corporate governance, the law of fiduciary duties, and the impact of domestic and international investment laws and policies on sovereign wealth funds.
Endnotes
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Factors driving variations in sovereign wealth funds highlight how a country's governance characteristics, including the type and quality of government and the origin of wealth, shape the transparency and strategic behavior of a SWF. See generally Cuervo-Cazurra, Alvaro, Grosman, Anna, and Wood, Geoggrey T., “Cross-Country Variations in Sovereign Wealth Funds’ Transparency,” Journal of International Business Policy 6, March 2023, pp. 306-329.
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Ibid.
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Ibid.
Ibid.
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Disclaimer
The views expressed in this paper are solely those of the author and do not reflect the opinions of the editors or the journal.