Eroding US exceptionalism will impact world economy

GLOBAL investors have long grown wealthy by following the maxim of never betting against the US economy. Yet, there are growing signs that key foundations of this “US financial exceptionalism” are eroding in what could be an era-defining moment.

Unchecked, the impact could be a dramatically different global financial system for years to come – not only with lower volumes of international trade, but also smaller capital flows, fewer economies of scale for businesses, and slower growth in productivity and living standards worldwide.

Longstanding pillars of US financial exceptionalism include institutional integrity, the rule of law, predictable and stable economic policies, central bank independence, deep capital markets, and a core government belief in private enterprise. Underpinning these foundations are the strengths of the US university research system, excellence in science and medicine, traditions of venture capital and entrepreneurship, supportive regulatory and tax structures, and transparent government procurement processes.

Global investors also have benefited greatly from US openness to foreign students. Indeed, in recent decades, a very significant portion of all US companies that have gone public with a market capitalisation of more than US$1 billion (so-called “unicorns”) were founded by foreigners who studied at US universities and stayed afterward to become leading entrepreneurs.

Over the past decade, this has helped fuel US productivity growth which has increased at more than double Europe’s rates. US per capita income is now more than one third higher than European levels, and US equity markets today represent more than half of total global equity valuations.

Yet, US financial exceptionalism is today potentially facing its biggest challenge in at least a generation.

President Donald Trump’s attempts to boost domestic manufacturing through imposition of large-scale tariffs is causing major disruption. It is true that some countries engage in “beggar-thy-neighbour” trade policies that have harmed many workers in industrial countries, including lost manufacturing jobs. However, launching a global trade war is misguided.

Instead, policies should promote high value-add US manufacturing jobs, like in transportation equipment, capital equipment, semiconductors, clean energy and chemicals. Tariffs on many low value-add products, including on agricultural products that the US does not grow, make little sense.

Meanwhile, vilification of US universities and foreign students in an attempt to undo diversity, equity and inclusion policies, and because of an anti-foreigner philosophy, are misguided. Billions of dollars of government research grants are being cut, and many foreign student visa applications are being blocked.

In the immediate future, consequences include sharp losses of important service exports. For example, the US exports roughly US$60 billion each year in education services to foreign students attending US universities – more than corn, wheat and soybeans exports combined.

Longer term, there will be fewer discoveries, fewer startup companies formed, and a smaller US financial base. There also are concerns about a reverse brain drain, where highly skilled US-based researchers choose to relocate to their home countries or to other nations offering more favourable conditions for academic and professional growth.

The US will always get back up

Of course, Trump administration officials predict a golden economic era ahead of renewed, even outsized, US exceptionalism. US Treasury Secretary Scott Bessent, for instance, recently said that “throw whatever you will at our capital markets – the Great Depression, two World Wars, 9/11, a global recession, the Covid pandemic, or the last few years of sky-high inflation. Each time the American economy gets knocked down, it gets back up again. And it gets back up even stronger than it was before”.

This narrative is powerful, and many investors still share it. The US economy has multiple formidable advantages, including high levels of household wealth, a secure supply of energy, and a powerful science and technology base.

Nevertheless, global investor scrutiny of US exceptionalism is becoming a significant headwind as the financial foundations of US soft power erode. Not only is US economic growth slowing, but business investment is weakening and key industries, such as energy and sustainable infrastructure, are scaling back projects amidst budget cutbacks and trade uncertainty.

Even the oil and gas sector, traditionally a beneficiary of Republican deregulatory policies, is moving sideways with its investment plans. This appears to be largely driven by tariffs whose impact includes increasing costs of new drilling equipment due to higher metal prices.

Although US equity markets have rebounded since April, and indeed the Nasdaq and S&P 500 have reached record highs again recently, this recovery may reflect more short-term optimism rather than a fundamental improvement in economic conditions. Many investors may still be underestimating potential risks of heightened policy uncertainty, rising inflation expectations, and weakening consumer confidence.

Particularly concerning is the sharp decline in the value of the dollar, which had its worst first half performance in 2025 in around half a century. Many global institutional investors are now reassessing US financial exceptionalism with a view to redeploying more capital back to home markets, including in Europe.

The future direction of trade negotiations and tariff deals is still uncertain, but there are strong clues. Only two countries so far, the UK and Vietnam, have secured final agreements with the US.

While it is likely that additional deals will be secured, the US Commerce Department is actively researching support for potential Section 232 sector-by-sector tariffs that could be imposed on top of previously announced “retaliatory” tariffs, which are currently facing court challenges. It seems likely that the president will reach for these tariff tools next.

The consequences of reduced US financial exceptionalism include smaller foreign capital flows to the United States and slower US investment spending. Innovative US companies will grow less quickly, and the pace of global productivity growth is likely to slow.

Moreover, world living standards are likely to post smaller gains. More capital will flow to other markets, including the UK, EU, Japan and South Korea, and there will be a lower cost of funds in these places. This should spark more innovation and growth in these markets.

However, it is not yet clear how potential benefits will net out for these countries, because they also will experience downside effects from a less dynamic US economy. This is not a zero-sum game. Less trade, less confidence in global markets, less innovation, fewer economies of scale, and softer demand from the world’s largest economy are likely to reduce prosperity not just in the US, but much of the rest of the world too.

Dr Robert Wescott served during the Bill Clinton administration as special assistant to the president for economic policy and as chief economist in his Council of Economic Advisers. Andrew Hammond is a former UK special adviser in the government of Tony Blair.