My question is why USA deserves the second spot more than a higher ranking team from a smaller federation deserves that spot.
Spots are awarded based on a country's total team performance at the previous Worlds, not on the ranking of specific pairs. The U.S. team met the qualifying points standard for two spots of 28 (10 for Knierims and 18 for D/F), but there is no requirement that they be the ones entered to fill those two spots for Worlds or that the Knierims (as the higher-ranked U.S. team at Worlds) be the pair entered for Olympics.
As for Olympics, only 20 total entries are allowed, with a maximum of 16 team spots coming from Worlds and a minimum of 4 team spots from Nebelhorn.
It should be noted that in the ISU table that lists countries and entries for Olympics, the 1 for the U.S. is listed as 1**; the asterisks indicate that this is a special case from a standard 1 and adds a footnote to explain:
** As indicated in Rule 400, paragraph 3, the last ISU Member to reach the qualifying limit would not
be permitted to enter a Couple that
would cause the limit to be exceeded.
Note that this doesn't say that the U.S. didn't QUALIFY for two spots; it says the U.S. won't be PERMITTED to enter a second pair, because that
would cause the limit to be exceeded, with 17 spots from Worlds instead of 16.
HOWEVER, it gets murky after that. The rules state that teams have until 9/15/17 to confirm whether they will use their full quota; any entries not used will be allocated at Nebelhorn, with a stand-by list created if there are any pullouts after that.
The rules do not in any way address a case of a federation such as U.S. that met the standard for a certain number of entries but is not being permitted to use them. If there is a one-spot reduction by France, the U.S. in actuality would have the 15th- and 16th-qualified spots. But as it stands, that 16th-qualified spot would go to a federation that did not earn one at Worlds.
Sorry, that's just nuts.