Global investors now have a viable alternative to simply parking their savings in the US.
Has the US accelerated its own decline by chasing global supremacy?
A series of policy decisions – from semiconductor sanctions to tariff hikes – were designed to entrench US dominance.
Instead, they may have triggered a wave of innovation and investment elsewhere. For the first time in recent memory, global capital is reconsidering its default destination.
Until recently, the US was the only major economy to return to its pre-COVID-19 growth trend, supported by its young population, deep capital markets, and Chapter 11 Bankruptcy Laws, which allow companies to operate while repaying creditors.
Landmark policies such as the Infrastructure Investment and Jobs Act, CHIPS and Science Act, and Inflation Reduction Act have further boosted the economy and attracted an outsized share of global capital flows.
Over the past 15 years, the US has stood as the unrivalled magnet for foreign capital. Nearly 45 per cent of global savings held abroad are parked in US financial assets – from stocks to bonds and beyond.
Ironically, US efforts to prolong its supremacy may have forced the rest of the world to lift its game.
“Liberation day”, when the US imposed sweeping reciprocal tariffs on global trade partners, culminated in a near 20 per cent decline in the S&P500 – a natural market reaction to what effectively amounted to a larger-than-expected tax on consumers.
This time, there was no flight to the US dollar. In fact, the US dollar fell by 5 per cent, making the first instance this century where a major equity market sell-off was not accompanied by a rally in the US dollar.
Historically, the US dollar has rallied an average of 8 per cent during the six major corrections this century.
Another unusual aspect of this equity market sell-off has been the relative resilience of equity markets outside the US. Since the February 19 peak, equities outside the US have outperformed US equities by 6 percentage points. Typically, they underperform the US by an average of 2.5 per cent during similar major draw-downs.
So, why are US assets no longer acting as the defensive stabilisers investors have come to expect?
The shift can be traced back to October 2022, when the US introduced new export controls targeting China’s access to advanced computing and semiconductor manufacturing items.
While intended to stunt China’s tech ascent, these measures may have sparked a counter-reaction with lasting consequences.
The Centre for Strategic and International Studies noted that these restrictions also spurred China into “an all-out, government-backed effort to improve the country’s self-sufficiency in all aspects of semiconductor design and production, an effort that has already resulted in a number of startling achievements”.
That effort has already yielded real breakthroughs.
First, DeepSeek unveiled an open-source large language model that seemingly matched the capabilities of its US counterparts – at a fraction of the cost.
Second, leading listed Chinese EV manufacturer BYD announced that its latest batteries charge fast enough to add 400 kilometres of range in only five minutes.
China is also targeting breakthroughs in new materials to enhance semiconductor chip performance and developing its own Extreme Ultraviolet lithography machines, a critical component of advanced chip manufacturing.
In trying to box China into a corner, the US may have inadvertently triggered a new wave of innovation that now threatens its technological supremacy.
The second key development came last September when former Italian prime minister Mario Draghi released a 400-page report urging the EU to close the economic gap between Europe, the US, and China.
Dubbed “Whatever It Takes 2.0” – a nod to Draghi’s famous statement during the sovereign debt crisis – it advocates for a minimum annual investment of €750 billion ($1332 billion) to €800 billion (5 per cent of EU GDP) targeting sectors like defence, digital infrastructure, and green energy.
For comparison, the post-WWII Marshall Plan injected just 1 to 2 per cent of output annually to rebuild Europe.
Since then, EU Commission President Ursula von der Leyen has pledged €150 billion in defence loans and proposed excluding new defence spending from EU fiscal rules, allowing countries to use national budgets for up to €650 billion in defence spending over four years without triggering budgetary penalties.
Meanwhile, German Chancellor-elect Friedrich Merz announced a bold and unexpected plan to overhaul the country’s “debt brake” – a constitutional rule limiting federal structural deficits to 0.35 per cent of growth per year, potentially releasing even more fiscal capacity.
These developments could significantly shift global capital flows.
For more than a decade, the European Central Bank was the largest buyer of European bonds, pushing investors to look elsewhere – largely to US treasuries and corporate debt.
But with US tech dominance under threat, European fiscal easing supporting higher comparative yields, and a pro-investment policy narrowing the US-Europe growth gap, global investors now have a viable alternative to simply parking their savings in the US.
None of this suggests an imminent end to US exceptionalism. The US dollar remains the world’s reserve currency, and American capital markets are still the deepest and most liquid.
However, the assumption that US assets will remain the default safe haven and attract the lion’s share of global capital is being tested. Policy-induced uncertainty, particularly around tariffs, has made global investors more cautious.
In an ironic twist, America’s quest to prolong its dominance may have forced the rest of the world to up its game, opening the door to a more multipolar future for global capital flows.
Looking ahead, a useful next step is to keep a close eye on policy shifts and market reactions across the US, Europe and Asia. Tracking how tariffs, technology controls and fiscal initiatives unfold will be critical to understanding where capital is likely to flow – and where attractive risk premia may emerge.
