For years, the Bush administration discounted, even pooh-poohed, the vast amount of U.S. paper held by China. It's about $750 billion of the $1.3 trillion in the central banks of Asian countries (mostly China, Japan and Taiwan). The fact America's critics abroad were saying and writing Washington has to borrow $3 billion a day to keep up its standard of living while fighting costly wars in the Middle East and Afghanistan was dismissed as cheap shots. Bush administration experts said China would only be hurting itself if it decided to suddenly redeem U.S. paper or buy euros instead. At 1.40 to the dollar, the euro looks pretty sexy to central bankers holding mountains of dollars.

Overlooked in Washington's comforting assumptions was the new phenomenon of "Sovereign Wealth Funds." These are a growing but little-understood trend of foreign governments converting their U.S. debt holdings into SWF, or SIF, for "sovereign investment funds." These have been set up to take advantage of investment opportunities in the United States and other countries -- e.g., a 10 percent chunk of Blackstone bought by China for $3 billion.

Many countries that now control an estimated $2.5 trillion in investment funds are emulating the example. The Dubai Ports fiasco -- $6.8 billion for the management of six major U.S. ports that was withdrawn because of congressional opposition -- grabbed the headlines, but scores of other investments by SWFs are taking place below the radar. There is, understandably, the natural fear these funds are quietly buying national assets. Some 800 U.S.-owned companies, from Samsonite to GE Plastics, were subject to foreign buyouts in 2007.

Morgan Stanley, in a widely quoted study, projects SWFs ballooning to a mind-numbing $17.5 trillion in 10 years, or one-third of today's world economy. With foreign governments now holding stocks and bonds, and not just Treasury securities, the question poses itself: Will SWFs be a stabilizing or destabilizing force? Probably both -- but at different times.

The value of global mergers and acquisitions so far this year has reached $3.85 trillion, up from $2.81 trillion at the corresponding point last year, according to data from Dealogic.

Outside of Asia, most of the other funds get their money from oil exports. Gulf oil states have been quietly doing their thing since the 1973-74 oil embargo. But of late, with oil prices soaring again, so have their foreign investments in Europe, Asia and North and South America. About $1 trillion is currently liquid in petro dollars.

As of this week, some $300 billion is looking for a parking space while $600 billion is still circling the globe on recon missions. That's almost $1 trillion right now looking for a safe haven.

We still tend to think in terms of goods and services. But these are dwarfed by a capital tsunami. Trade is phenomenal, but the driver is capital. And trade bureaucrats are measuring national wealth with outmoded yardsticks.

This week, "Retooling U.S. International Economic Policy for a Global Age" was the topic at a roundtable of experts organized by the Center for Strategic & International Studies. The alleged primacy of goods and services as the true test of a nation's wealth is the kind of thinking that anchors the United States to obsolete international organizations, said Tim Adams, managing director of the Lindsey Group and a former undersecretary of treasury for international affairs. The World Bank, the International Monetary Fund, the General Agreement on Tariffs and Trade, and the World Trade Organization were all spawned by the Bretton Woods system in the post-World War II era, when 1 percent of voting rights for the developing world was considered fair and normal. But this bears little, if any, relationship to the world of the 21st century.

There is now talk of merging the World Bank (10,000 employees) and the International Monetary Fund (5,000), a change that would at the same time reflect the new balance of power in the world. China, Russia, India, South Africa and Brazil are now major players on a redesigned world stage. The fundamental problem of underdevelopment is no longer a lack of capital. "We no longer have the luxury of dividing international trade and finance into separate realms, either for analysis or for policymaking," said a CSIS working paper. "In this global age they have become inextricably linked."

Most speakers at the CSIS roundtable agreed the Doha Round was "moribund." That's the round of multilateral trade negotiations in the WTO that began in January 2002, named after the capital city of Qatar. Countries that impose controls on capital are now the problem. And lowering those barriers should be the objective to enhance the transparency and predictability of financial flows in the global system.

The question for national debate is whether global financial liberalization should become the new target of U.S. trade policy. The aim should be a broader opening of global markets for financial services -- which would then boost goods and services.

The ongoing controversy over China's exchange rate, said the CSIS paper, "and the distortions that flow to the U.S. economy through our trading relationship with China begin with the lack of a functioning capital market. As a result, risks cannot be priced accurately and capital allocated efficiently while "China's misallocation of capital begins to shape the allocation of capital in the U.S. as well."

Before being seduced by the siren song of protectionism, presidential candidates should study the new paradigm. Barriers to transnational financial flows are harmful -- and the next president should take the lead in advocating their dismantlement.

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