When I was a senior in college, my alma mater's mechanical engineering department was offering undergrads with GPA as low as 2.8 a free ride on tuition plus a stipend - if they were US citizens. It turns out many of their research grants were for defense contractors and the US government, and they required graduate students with US citizenship.
Most undergrads were US citizens (those that weren't had permanent residence; no one in my class came here just to go to school). Virtually all our graduate students were from India, China, and Turkey. I have nothing against most of the foreign grad students. Two of the Indian grad students who I was friendly with are newly-minted professors at other universities and are pursuing citizenship. However that was the exception rather than the rule! Most of the foreign students were there on the dime of their government or wealthy family members, and planned to return to their country of origin.
I, like many of my classmates, elected to enter the workforce before starting graduate school. For US citizens there are no visa issues for employers to deal with. A number of my classmates work for various defense contractors on projects requiring security clearances. H1Bs won't cut it for those. ;-) Considering that I had a job offer a full 6 months before graduation, with an employer who pays every penny of my educational expenses, I had little motivation to spend another few years as a poor graduate student. It was far more appealing to enter the workforce knowing that within 4 years I'd have my master's degree anyways, would gain real world engineering experience, and would be earning a good salary in the meantime.
So I'd agree - to a large extent our universities are educating foreign graduate students in engineering because they usually are self-supporting and don't require funding from the university. It was only when my school needed US citizens that they started offering tuition plus stipend to the majority of American undergrads.
"It seems that many/most American graduate students need tuition assistance, teaching assistantships, and/or government loans."
Largely due to the fact that so much money is taxed and given to the useless and unambitious. I'll admit I've said it a million times, but it is true.
"I don't have the data to make an informed judgment about our relative numbers, but if we are falling behind, I tend to believe that it is primarily because of the policies of our own government (state and federal)."
I agree. Our culture also degrades people who seek to better themselves through education and due to societal dysfunction many, many kids are unable to concentrate on academics.
"Let there be no mistake, we are in economic competition with China, India, and the EU. And many of our state-sponsored universities are educating the competition."
I agree with you there. And we're wasting most of our learning on uselesss things that will NOT help. Studying lesbianism, black culture, etc. will not teach us the practical things we as a nation need. Furthermore, the corporations are single handedly sending our manufacturing jobs, therefore creating our economic competition.