The US is an unrivaled economic powerhouse. It accounts for 4% of the world’s population yet captures a whopping 24% of the world’s gross domestic product — the total value of goods and services produced by a country in one year.

When comparing America’s economic success to other major economies, the scale of its achievements becomes clear. For example, in 2008 the US and Eurozone, the 20 European Union countries that have adopted the euro as their currency, were nearly equal in size. Today, the American economy is twice as large, writes Michael Beckley, Senior Fellow at the American Enterprise Institute.

Much of this extraordinary performance stems from America’s traditional commitment to free markets and its ability to attract the world’s most brilliant and innovative minds. Yet due to policy shifts, America’s economic dominance faces mounting threats that could undermine its core competitive advantages and fundamentally weaken its economic position.

The results of these policy shifts include:

(1) the abandonment of the international trading system and alienation of our allies when they are needed most to counter China,

(2) the weakening of America’s innovation powerhouse by defunding research institutions and rejecting the world’s smartest students, and

(3) Worsening US labor shortages by deporting law-abiding immigrants.

Abandoning the international trading system will hurt America

The American economic engine, which thrives on economies of scale, is designed to produce solutions for the world’s 8 billion consumers, not just America’s 340 million. Exports are only part of the equation. Every year US multinationals operating abroad produce and sell two and a half times more in foreign markets than is exported from the homeland. This international engagement has benefited the US immensely, as detailed in my article “Why Trade Is Critical and Tariffs Fail.”

But trade is a two-way street. In 2024, the US average effective or weighted tariff rate on imports was 2.4%. Since then, President Trump’s 2025 tariff policies—involving universal tariffs, sector-specific tariffs, country-specific tariffs, reciprocal tariffs, and notably “Liberation Day” tariffs announced in April 2025—have put US tariffs at their highest levels since the 1930s. As a result of these actions, applied to our closest allies and adversaries alike, the administration has effectively withdrawn from the international trading system.

The uncertainty caused by the seemingly chaotic on-and-off again tariff approach and other policy decisions has driven the Economic Policy Uncertainty Index, which measures volatility, to its highest level in 40 years. It has also spiked the VIX index, also known as the CBOE Volatility Index, to levels only experienced a few times in American history.

Higher levels of uncertainty are associated with lower levels of business confidence, which in turn, delays or prevents business investment in new projects. Not surprisingly, the Federal Reserve’s June 2025 economic forecast anticipates US economic growth to decrease throughout 2025 and 2026, compared to its earlier March 2025 forecast. The Fed also expects US inflation to increase primarily due to rising prices due to tariffs.

The chain reaction doesn’t stop there. According to the World Bank’s June 2025 report, “Global Economic Prospects,” the substantial rise in trade barriers and the effects of policy uncertainty will cause global growth to slow to its lowest level since the 2008 Great Recession. And this could worsen, the World Bank says, if trade restrictions escalate or if policy uncertainty persists.

The economic trajectory resulting from the Trump administration’s withdrawal from the international trading system is similar in some ways to Brexit — the UK’s 2016 vote to withdraw from the European Union and its eventual exit in 2020. As written by Jonathan Haskel and Matthew Slaughter, “As the United Kingdom learned after Brexit, uncertainty produces grinding stagnation in capital investment and R&D by private companies. That, in turn, leads to plummeting productivity growth and stagnant real incomes. Instead of learning from this bleak recent history, Americans are now painfully absorbing this lesson by repeating it.”

Another lesson learned: if tariffs remain too long or become permanent, a lack of competition will result in expensive, poor-quality products. I witnessed this phenomenon firsthand in East Berlin during the fall of the Berlin Wall. The streets were littered with abandoned broken-down Trabants — Soviet-era vehicles manufactured in East Germany from 1957 to 1991. My East German friends described an absurd reality: these poorly constructed cars commanded premium prices, yet buyers endured eight-year waiting lists.

US allies are seeking other partners, including China

The negative tariff impact on American allies is only part of the problem. President Trump has also sparked resentment with two NATO members: Canada, by suggesting that it should become the 51st US state, and Denmark, by suggesting the US should annex its Greenland territory. This is compounded by President Trump’s questionable commitment to NATO and Ukraine in its war with Russia.

The tariff approach, threatening statements, and effective abandonment of the global international order has alienated our closest allies. In turn, they are scrambling to become less dependent on US markets and less likely to purchase American goods and services, including weapon systems that require future assistance and spare parts.

At a recent conference in Singapore, French President Emmanuel Macron said the unpredictability of Trump’s tariff approach constitutes a common threat to Europe and Asia. He also said European and Asian nations can combine forces to seek “a third way” and called for a new partnership, The Wall Street Journal reports.

China is exploiting this rift with some early successes. For example, two staunch American allies, Japan and South Korea, are currently negotiating a regional trade agreement with China. But that’s not all. China is positioning itself as the more dependable market to many top US trade partners as well as 150 developing countries in Latin America and around the world. 

Throughout the Cold War, the world experienced two dominant economic systems: American free market capitalism and Soviet communism. Today, the two dominant systems are free market capitalism and Chinese state capitalism.

Much of the US-China rivalry and tensions, which are unlikely to abate, stem from the two fundamentally different models. And the Chinese Communist Party is unlikely to dismantle its state-led model which grants it total control and engages in grossly unfair trade practices.

China’s economic system, which is struggling to maintain stability, produces approximately 30% of the world’s manufactured goods yet only accounts for about 13% of global consumption, according to the World Bank. Consequently, it’s highly unlikely that the US and China can forge a meaningful trade agreement that results in reducing China’s long-term dependence on subsidized exports or increasing its imports through limited household consumption. Therefore, China is likely to continue on its trajectory, which could put the two countries on a collision course.

A better strategy to rebalance trade

Many would argue that the global trade position of the US is weak, but reciprocal tariffs that incorporate trade deficit calculations are not the solution. Instead of higher tariffs, the US should propose lower ones based on badly needed new free trade agreements.

The US currently has 16 free trade agreements with 20 countries. Yet nearly half of all US exports are sold to these 20 FTA partners which represent just 6% of the world’s consumers. This demonstrates that when trade barriers are reduced, American businesses and workers can compete anywhere with great success.

But here’s the problem: there are 375 regional trade agreements in force worldwide and 361 without US participation, according to the World Trade Organization. What’s worse: there are a flurry of new ones on the horizon without US involvement. This gives foreign companies preferential treatment over US businesses.

For example, the 27-member European Union, with a population of 450 million, recently concluded the Mercosur-EU Trade Agreement which includes Brazil, Argentina, Uruguay, Paraguay. The EU is seeking to forge a new trade agreement with the 10-member Association of Southeast Asian Nations and has restarted EU-Australian trade negotiations. Additionally, the EU may join or associate with the 18-member Comprehensive and Progressive Trans-Pacific Partnership, which was established primarily by the US but rejected by President Trump in 2017.

As Europe and other countries continue to increase global engagement, the US should not resort to a policy of isolationism that effectively awards China the position of global leadership. What’s a better approach?

While selective tariffs against China for its violations of international trade norms makes sense, the first Trump administration’s experience demonstrated that tariffs alone cannot effectively modify Chinese behavior. A much more comprehensive approach is needed to counter China as well as strengthen America’s future.

This includes the following:

(1) rebuilding trust with our allies and international partners to present a united front against unfair Chinese practices,

(2) cooperating with global partners in order to become less dependent on China by jointly increasing output in goods and services that enhance national security, help maintain technological supremacy, and achieve access to critical minerals,

(3) establishing new trade agreements that will grant US companies secure access to the world’s consumers, and

(4) reinvigorate a US commitment to multilateral institutions like the United Nation and World Trade Organization, which establish and enforce international norms.

The Weakening of America’s Innovation Powerhouse

During the Cold War, US innovation swiftly outpaced that of the Soviet Union due to significant investments in research and development, often through American universities. The trillions of dollars spent has resulted in the US becoming the world’s innovation hub—a principal source of American economic growth, competitiveness, and military supremacy.

Although the Cold War with the former Soviet Union is over, the US and China today are competing for high-tech dominance in several fields, including aerospace, artificial intelligence, and biotechnology. This struggle could determine the future economic and military global leader.

Stated by L. Rafael Reif, President Emeritus at MIT, “Many of the most significant technologies of our day—including the Internet, the artificial neural networks that enable generative AI, quantum computing, nucleic acid sequencing, DNA amplification, CRISPR genome editing, mRNA vaccines and therapeutics, 3D printing, and checkpoint inhibitors for cancer treatment—arose from pioneering explorations in US university laboratories.” These innovations are possible due to both reliable long-term support from the federal government and the world’s sharpest minds.

The US is home to 22 American universities in the top 50 compared to four in China and two in Hong Kong, according to the Times Higher Education’s report, World University Ranks 2025. However, President Trump is drastically chopping American university budgets, including Harvard’s. Due to these research cuts, 75% of US researchers surveyed by Nature magazine say they are considering relocating to other countries.

Severely reducing research budgets couldn’t have come at a worse time. Beijing has been significantly boosting its investment research and development designed to achieve technological leadership under various initiatives, including its “Made in China 2025” and “Dual Circulation Strategy.”

To make matters worse, the Trump administration has revoked thousands of international student visas with little explanation, according to Inside Higher Ed. And the damage is mounting. The fear of additional visa cancellations and harassment by the US department of Immigration and Custom Enforcement (ICE) has the world’s best and brightest reconsidering whether to study in the US.

Foreign students provide invaluable contributions

In 2024, 1,126,690 foreign students attended American universities, making the US the top destination of international students. And the number one source was India, at nearly 30%, according to the Institute of International Education.

The contributions of international students in the US are jaw-dropping. For example, foreign students earn 64% of doctorates in computer and information sciences, 57% in engineering, and 54% in mathematics and statistics. And the overwhelming majority of international doctoral students educated in the US remain in the US after earning their degrees. But there’s more.

Research by the American Immigration Council finds that nearly half of the Fortune 500 companies were founded by either immigrants or the children of immigrants, including four of the top 12. The absence of the world’s most brilliant minds could put American innovation on death row.

Instead of slashing research budgets and closing the door to foreign students, the US should boost, not cut, funding for research institutions and maintain an open-door policy for the world’s smartest students. Importantly, it should establish an accelerated path to citizenship.

The US should also do more to expand attendance at community colleges. And providing publicly funded tuition would be a good start. When considering this, understand that the US was among the first countries in the early 20th century to adopt universal, mandatory, and publicly funded high school education. This was an essential factor that led to America’s dominance in productivity, innovation, and global economic leadership.

Immigrants of all skill levels offer what’s needed

Primarily due to shifting demographics in the US and most developed countries, fertility rates or births per woman have fallen below the 2.1 break-even figure needed to sustain a population. Over time, this results in fewer workers as well as consumers, taxpayers, and investors.

But this isn’t tomorrow’s problem, it exists today. Over the last year, the number of unfilled American job openings has fluctuated monthly from approximately 7 million to 9 million, according to the US Bureau of Labor Statistics. Several other issues have contributed to the worker availability problem, including the high retirement rate of baby boomers, and the growing number of Americans on disability, pain medications, and opioids. The bottom line: the US workers shortage is projected to worsen making it more difficult for employers to obtain and retain workers.

Thus far, immigrants at all skill levels have helped stem the American worker shortage by accounting for most workforce growth. Plus, immigrants pay more taxes than they receive in government benefits, according to Alex Nowrasteh. Additionally, compared to native born Americans, Nowrasteh says, immigrants are twice as likely to start a business, 50% more likely to obtain a patent, less likely to be incarcerated, and have higher worker participation levels.

Surprising to many, immigrants don’t take jobs from native born Americans, they help fill them. This is especially true in the construction, food service, leisure and hospitality, and agricultural sectors — with immigrants often working from sunup until sundown in 110-degree heat. Identifying American-born laborers to do these jobs—or finding workers to make goods that were previously imported due to tariffs—is extremely difficult. And pulling them from more productive sectors will only drive prices up, hurting consumers and industry.

The US labor shortage is made worse by deporting law-abiding immigrants

When speaking at events, I often ask my audiences to raise their hand if they experience difficulty obtaining and retaining workers. Most attendees raise their hands. It’s understood that if companies can’t find workers, they can’t grow their businesses, ultimately resulting in less economic growth and falling living standards. 

Although tremendous ongoing efforts are made to automate tasks and functions, more workers—not fewer—are required. With this in mind, it’s difficult to understand why the administration is deporting hard-working law-abiding immigrants, including undocumented ones, who do the back-breaking work native-born Americans won’t do. Note that as immigrants are deported, employers will need to increase wages to attract a smaller pool of employees, thereby pushing inflation higher.

Undocumented immigrants account for 4.4% of the US workforce, with the share much higher in certain sectors. For example, these workers account for 19% in landscaping services, 17% in crop production, 16% in animal slaughtering and processing and 13% in construction. No one disagrees that undocumented workers that break the law should be deported. However, a better system that offers to law-abiding immigrants work permits and an accelerated path to citizenship would be a win-win.

The crossroads: choosing America’s economic future

America stands at a critical juncture. The policies outlined in this analysis—trade isolationism, research funding cuts, immigration restrictions, and the alienation of allies—represent a fundamental departure from the strategies that built American economic supremacy. These missteps are not merely policy disagreements; they are strategic blunders that threaten to unravel decades of carefully constructed competitive advantages.

The evidence is clear: economic uncertainty has reached 40-year highs, our closest allies are seeking alternative partnerships, our innovation pipeline is being strangled, and our workforce is shrinking precisely when we need it most. Meanwhile, China is capitalizing on America’s retreat from global leadership, positioning itself as the reliable partner to nations we are pushing away.

The path forward requires immediate course correction. We must rebuild trust with our allies through renewed multilateral engagement, not alienate them with threats and tariffs. We must invest in our innovation ecosystem by increasing research funding and welcoming the world’s brightest minds, not cutting budgets and closing doors. We must address our labor shortage by embracing comprehensive immigration reform that provides pathways to legal status, not through mass deportations that damage our economy.

History will judge whether America chose to defend its position as the world’s economic leader or surrendered it through self-inflicted wounds. The choice is ours, but time is running out. Every day we continue down this destructive path, we hand China and other competitors another advantage they may never relinquish.

America’s economic supremacy was built on openness, innovation, and global engagement. Only by returning to these core principles can we ensure that the 21st century remains an American century. The alternative—continued isolation and self-sabotage—leads to a future where America becomes a second-tier economy in a world it once led. That outcome is neither inevitable nor acceptable. It’s time to choose a different path.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.