Paul Sarbanes and Michael Oxley, renowned authors of the 2002 Sarbanes-Oxley corporate governance reform legislation, have become America’s favorite whipping boys for the emigration of foreign equity listings to London from New York. But it was the earlier efforts of another congressman, one who now has far more influence over the competitiveness of the U.S. capital markets, which in fact sparked the exodus by deliberately mixing domestic market regulation with foreign policy.

In 1999, two commissions reported to Congress on Chinese military links to commercial and financial activities in the U.S. The reports grabbed headlines with their focus on the purported role of the U.S. capital markets in financing Chinese weapons development and proliferation. The first of these commissions was chaired by Rep. Christopher Cox, now chairman of the Securities and Exchange Commission.

Mr. Cox’s report created a political stir with the statement that there were “more than 3,000 [Chinese] corporations in the United States, some with links to the [People’s Liberation Army], a state intelligence service, or with technology-targeting and acquisition roles.” Previous estimates from the State Department and expert testimony before his committee had put the number of PLA-affiliated companies at less than 1% of this figure.

The report of a second commission, chaired by the former CIA director, John Deutch, focused on the conclusion of the Cox report that China “is using U.S. capital markets both as a source of central government funding for military and commercial development” and that the SEC failed to collect enough information for effective monitoring. The Deutch commission concluded, “it is essential that we begin to treat this ‘economic warfare’ with the same level of sophistication and planning we devote to military options.” It also concluded that the U.S. should “assess options for denying proliferators access to U.S. capital markets.”

This call to economic arms escalated through several draft congressional bills, demanding capital market sanctions against foreign companies doing business with targeted countries. National security hawks, human rights advocates, Christian fundamentalist groups, environmental activists, and labor groups all called for Clinton administration action to bar specific foreign companies, particularly Chinese and Russian, from listing on a U.S. exchange or raising capital in the U.S.

When these efforts failed, the homeland securities campaign shifted to the SEC. Rep. Frank Wolf, heading the House committee controlling the SEC’s budget, strong-armed the SEC into creating an Office of Global Security Risk to investigate the activities of foreign companies listing in the U.S. The initiative prompted a warning to the SEC from the Securities Industry Association that such an office risked “politicizing the U.S. capital markets.”

The SEC’s pas de deux with Mr. Wolf led to the Russian oil company, Lukoil, transferring its planned New York Stock Exchange listing to London, citing the “political risk” of a U.S. listing. The effect of the move was to exempt Lukoil from U.S. regulations, not to curtail its access to U.S. capital. The Canadian oil company Talisman reacted to congressional efforts to force it out of Sudan or off the NYSE by choosing London for its largest ever debt issue.

There is a dangerous level of ignorance about the global capital markets in parts of the U.S. defense and intelligence establishment, which have been turning to foolish forms of domestic market regulation as a substitute for real foreign policy. Many of these individuals are associated with the William J. Casey Institute, which has published fantastical accounts of “successful” sanctions campaigns against PetroChina and the Russian oil giant, Gazprom.

When studying PetroChina’s Sudanese oil business in 2004, I found that its largest non-state shareholder was Warren Buffett, controlling 14% of the public shares. He chose to buy 95% of them in Hong Kong, rather than in New York, highlighting the irrelevance of the sanctions campaign, which had no influence on the behavior of either PetroChina or Sudan. Yet it was the relentless capital markets sanctions campaigns of the late 1990s that first signaled to the world that the U.S. would use its regulatory power over foreigners for political purposes.

Christopher Cox thus became the most important founding father of the capital markets sanctions movement, a movement earning pride of place in the pantheon of diplomatic dopiness.

Mr. Steil is the director of international economics at the Council on Foreign Relations and co-author of “Financial Statecraft.” This article first appeared in the Financial Times.