I too have long been troubled by the designation "foreign". In my experience,
the usage is largely American and refers to films made in a language other
than English. English and Australian films, for example, are rarely referred
to as "foreign" although they certainly fit  that category. I suspect that
the term is a simplification of "foreign-language" films, at least since the
advent of the sound era. In the silent film literature, there are many
references to "foreign" films, although, curiously not so often to films
produced in English language countries. Of course, in the silent era, it was
rather difficult to tell, as the primary clue to origin was the inter-titles,
which were invariably rendered into English on-screen. The whiff of
xenophobia is all over this odd usage.
Gene Stavis - School of Visual Arts - NYC