A good old prisoners dilemma. If you got more resources to spend on education, you don't want to sit in the same class as someone who can only contribute little to the course. Just like worse graduates will ruin the prestige of the school and thus value of your degree. Outcome-base exclusion can be fine, unless it ends up as proxy to select for socio-economic factors and thus make society offer less equal opportunity.
Just looking at "existential threat" -> "outcompeted" only works in a highly simplified world with no market failures and other issues.
> differential performance between countries is more about who is in those countries than how it is those countries educate
I'd like a source on that. I do understand culture will have a significant influence, especially on what value people place on education. But your statement seems to go a lot further into "school doesn't matter" territory. This directly contradicts with earlier statements and e.g. many chines studying in the US.