The Precarious State of ‘American Exceptionalism’ and a Shaken Dollar Hegemony

With the meteoric rise of Nvidia, the dominant force in the data center GPU market, and the AI hegemony led by U.S. big tech companies such as Alphabet, Meta Platforms, and Microsoft, along with startups like OpenAI, the concept of "American Exceptionalism" has been revived. Despite global recessionary pressures, this has reinforced the belief that the United States possesses a transcendent competitive edge unlike any other country, drawing in investment from around the world and driving the dollar’s value sharply higher.

However, newly inaugurated President Donald Trump has used so-called unfair trade as a pretext to exert heavy pressure on key Asian and European trade partners over defense, tariffs, and direct investment into the U.S., while simultaneously pushing policies to cut taxes and increase fiscal spending, thereby fueling uncertainty. As a result, the dollar index, which reflects the relative strength of the U.S. dollar, has fallen by about 10% compared with the start of the year. Given that the S&P 500 index is up 13.97% this year, foreign investors have essentially just broken even on the U.S. market.

The attached chart shows that the recent decline has begun to stabilize, but we can also observe a gradual erosion of confidence among foreign investors who had previously committed substantial sums to U.S. Treasuries.

The chart below shows the convenience yield, calculated as the interest rate differential between a "synthetic U.S. Treasury"—constructed by using German government bonds (bunds) as the underlying asset and adding a financial swap to track the price and yield of U.S. Treasuries—and a direct investment in actual U.S. Treasuries. Convenience yield refers to the return that investors forgo when they choose to invest directly in the physical asset (U.S. Treasuries). From an investor’s perspective, if the goal is simply to track U.S. Treasury yields, buying U.S. Treasuries outright is more straightforward and secure than buying a “synthetic U.S. Treasury” created by combining bunds with a swap. That means the synthetic U.S. Treasury must offer a higher yield than real Treasuries to attract investors.

Since 2022, the convenience yield spread for medium- and long-term Treasuries has actually turned negative, and the magnitude of that negative spread has been widening. As noted above, because it is simpler and more direct for investors to buy U.S. Treasuries, it is normally the case that a synthetic U.S. Treasury simulated via bunds and swaps should offer a higher yield (that is, trade at a discount relative to actual U.S. Treasuries). The fact that, excluding short-term maturities, yields on medium- and long-term synthetic U.S. Treasuries are actually lower than those on "real" Treasuries is evidence that foreign investors perceive significantly higher risk in holding medium- and long-term U.S. government debt.

America’s greatest strength is that it is, without question, a black hole for global talent. Even after factoring in the high cost of living in major U.S. cities like Silicon Valley and Manhattan, the upside potential for top-tier talent working at leading U.S. tech companies is higher than in any other country. A new graduate at a big tech firm might earn a base salary of around $130,000, which in terms of day-to-day living is not dramatically different from earning 50–60 million won a year in Seoul. But as experience and tenure accumulate, the total compensation, and later the capital one can raise by founding a startup based on that career and network, can be 10 to 100 times greater than in Korea. In my view, the only country that offers top-tier talent an upside potential even remotely comparable to the United States is, somewhat unexpectedly, China. Once you factor in quality of life, political freedom, and discrimination based on nationality, however, the United States is overwhelmingly the preferred destination for top talent. Anyone who denies this simply does not understand how the world works. If you visit a big tech campus in Silicon Valley, the most visible groups are Asians and Indians. This is not a joke: for the very best engineering students in India, the dream is almost uniformly “escape India (get a job or immigrate to the U.S.)”.

President Trump recently made a bombshell statement that he would raise the application fee for H-1B visas—work visas granted to people with specialized skills and knowledge—to $100,000, more than 100 times the current level, making it extremely difficult for new foreign talent to enter the country, even though they are the ones driving the front lines of America’s technological and industrial innovation. For example, Jensen Huang, the founder of Nvidia, currently the world’s most valuable company by market cap, is himself an immigrant. It is certainly true that some Indian IT consulting firms have exploited loopholes in the H-1B system, but scrapping the system in effect because it has flaws is a response that creates far greater side effects. Trump’s stated rationale is that “by making it more expensive to hire foreigners, companies will hire more Americans”, but this is nothing more than sophistry from someone who has no grasp of reality. Pushing out top foreign talent does not mean Americans can simply step in and fill their shoes. At MIT, widely regarded as the world’s leading engineering school, 40% of graduate students are foreign nationals. In their 10-K annual reports, U.S. big tech companies consistently cite “disruptions to the supply of top-tier talent” as a key risk factor.

We should acknowledge that President Trump’s America First (MAGA) philosophy has been a major force propelling him to the White House twice. That said, his negotiating style to date has been difficult to understand, inconsistent, and virtually impossible to predict. As a result, America’s key trading partners, including Korea, are responding to Washington’s increasingly radical trade barriers by cutting exports to the U.S. and seeking alternative markets.

An economist at Meiji Yasuda Research Institute in Japan recently commented as follows in an interview with Bloomberg about the ongoing decline in industrial production in Japan and China:

The United States is currently the world’s largest importer, and over the past several decades it has offshored or relocated much of its manufacturing base to China, sharply reducing the share of manufacturing in its economy. Before the 1985 Plaza Accord, this role was largely played by Japan, and then, after a brief stopover in Korea, the center of global manufacturing shifted to China. Japan has since restructured its economy around ultra–high value-added manufacturing such as electronic materials, specialty chemicals, and precision machinery, while Korea is in the process of shifting toward high value-added component industries such as semiconductors and OLED displays that rely heavily on Japanese materials and precision equipment. At this point, neither Korea nor Japan can realistically compete with China on price or quality in generic manufacturing. Apple CEO Tim Cook also explained in an interview last year why Apple continues to depend on Chinese manufacturers:

The perception that America’s manufacturing infrastructure has been hollowed out by trade with China since the 1980s seems to stem from this context. However, the main driver of U.S. economic growth since the 2000s—and of the rise of companies now worth more than $1 trillion—has been the advanced technology and software industries that the U.S. was able to invest in intensively after shifting manufacturing to China. While China’s economy has grown rapidly, this has also allowed the U.S. to keep inflationary pressures in check and benefit from rising global demand for dollars as China expanded.

In his second term, President Trump is erecting trade barriers in a far more aggressive and inconsistent manner than in his first term (when his focus was largely on targeting China), forcing America’s key allied trading partners to rethink their long-term strategies. As trade volumes with the U.S. decline, these countries have less reason to accumulate dollar reserves. If this trend continues, the dollar’s influence will gradually diminish. And as the dollar’s influence wanes, U.S. companies will face higher funding costs.

In my view, the rebirth of “American Exceptionalism,” as the U.S. alone sidestepped a global recession and led the AI revolution, has been powered by two forces: the influx of top-tier talent and low capital costs underpinned by a dominant dollar. Because the very best people have continued to flock to the United States, the output generated per unit of investment (input) has been world-class, and with capital costs also low, the scale of investment has been overwhelming.

The problem is that the United States is, at least in policy terms and albeit still in the early stages, dismantling the two main forces that enabled American exceptionalism. It will take more time before we can fully grasp the impact of these ongoing changes, but the steadily falling dollar index throughout this year and the inversion of the convenience yield on medium- to long-term U.S. Treasuries already lay bare the anxiety investors are feeling.