MW How an American sovereign wealth fund could challenge China's global influence

By Peter Morici

Direct investment in long-term development projects could provide for generations of Americans

The Biden administration is considering how to establish a U.S. sovereign wealth fund, an idea that former President Donald Trump also floated in a recent speech.

Generally, SWFs invest to benefit future generations with revenues from developing petroleum and mineral resources, but also may be financed from official foreign-exchange reserves accumulated through trade surpluses.

Norway has the largest SWF - Norway Government Pension Fund Global - with more than $1.7 trillion currently, according to data from the Sovereign Wealth Fund Institute. Norway's fund generated income of $138 billion in the first half of this year. The Abu Dhabi Investment Authority is the second-largest SWF, at $1.7 trillion, while China Investment Corporation ranks third, at $1.3 trillion.

SWFs are major players in private ventures that are too large, too long term or too risky to be easily pursued by private firms. These targeted ventures promise big potential payoffs or serve foreign-policy interests.

For the U.S. version of a SWF, the Biden administration, according to a recent Bloomberg report, is considering funding schemes that involve emerging technologies with high entry barriers, such as advanced shipbuilding, nuclear fusion and quantum cryptology.

The China model

The China Investment Corp. has helped fund China's Belt and Road Initiative, and the development of semiconductors, fintech and artificial intelligence. Its mandate is similar to China's state-owned enterprises when those invest at the behest of Beijing in riskier, long-horizon ventures in critical materials such as nickel and cobalt, or where China is seeking dominance in leading-edge technologies.

China has financed a network of ports across Asia and Africa with both commercial and military potential, and its broader investments have enabled Beijing to accomplish influence at U.S. expense. These relationships benefit both Chinese exporters and private investors in automobiles, technology and other manufacturing, mostly in the Global South, where China increasingly challenges Western multinationals for market share.

Funding Americans

A U.S. SWF wouldn't be new for many Americans. Already, 23 U.S. states offer SWFs. For example, Alaska pays annual dividends to residents, and Texas's fund supports public schools and universities.

Loans dispersed through the U.S. Chips and Science Act and Inflation Reduction Act for semiconductors, electric vehicles and green projects bear characteristics similar to national SWFs, but the latter generally seek at least some positive return to be self-sustaining.

Grants to establish semiconductor fabrication, where the U.S. suffers huge cost disadvantages, and tax incentives for consumers to buy EVs lack that attribute. Those are simply subsidies and, in chips, may require endless funding to sustain.

The U.S. Department of Energy's $400 billion Loan Program Office, established by former President George W. Bush, helped launch Tesla $(TSLA)$- but also the ill-fated Solyndra. It's currently tasked with supporting innovative energy projects that reduce carbon emissions - for example, three Ford Motor $(F)$ EV battery plants and a Nevada mining and processing project run by the Lithium Americas Corp. (LAC).

The LPO has a loan-loss ratio similar to commercial banks and has generated about $5 billion in interest income. As president, Trump targeted the LPO for extinction, but ultimately used it to finance nuclear reactors in Georgia. If Trump were elected again, conservatives advocate shutting the fund or shifting its focus more toward fossil fuels like methanol.

There's the rub about an American SWF. For a SWF to effectively foster long-term, higher-risk projects, it must have a consistent focus and not be jerked back and forth as the Oval Office changes party control.

Norway's fund works because the country is a small, relatively homogeneous society with a high level of consensus about public purposes. Meanwhile, autocratic governments and monarchies like China and Abu Dhabi don't suffer frequent shifts in the economic ideology and guiding policy purposes.

A SWF could work for the U.S. if a source of funding were identified, and consensus could be established about long-term national objectives. For example, an American SWF could develop supply-chain assets for critical minerals and infrastructure in the Global South to counter China's growing presence - but only if it was managed by an independent body. The U.S. SWF could fund its overseas objectives by issuing bonds without adding to U.S. inflation.

If given clear objectives similar to the bipartisan consensus that enabled the Chips Act, performance benchmarks similar to those for the Norwegian SWF, and management by an independent, nonpartisan commission similar to the U.S. International Trade Commission, a U.S. SWF could powerfully further America's international commercial and strategic interests.

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

More: Meet the London fund turning Norway's hydro sector into an investment

Also read: A U.S. sovereign-wealth fund? Please, no.

-Peter Morici

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October 22, 2024 07:05 ET (11:05 GMT)

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