State Intervention and the New Geopolitics of Trade
New research highlights how government policy is actively shaping global trade surpluses, maritime infrastructure, and the stability of digital assets.
Governments are increasingly capable of manipulating trade balances through direct policy intervention. Current account surpluses can be bought by states, a finding based on models explaining nearly half of historical imbalances across 1,000 observations. This state-led approach extends to physical infrastructure, where Chinese state-owned port terminal operators are capturing larger shares of global shipping volumes. While these operators have improved overall port operations, the resulting efficiency gains primarily benefit Chinese vessels.
Technological shifts in maritime transport have reinforced a hub-and-spoke concentration that creates localized welfare gains but also generates market power and congestion. This concentration heightens the geopolitical importance of critical transport nodes and the entities that control them. Parallel shifts are occurring in the digital realm, where tokenized US Treasuries are emerging as digital safe havens during cross-asset stress. These instruments attract large inflows during risk-off events, though they introduce new fragilities via the interaction of on-chain composability and off-chain stablecoin balance sheets.
Fiscal policy is also being recalibrated to address systemic frictions and technological disruption. Eliminating financial frictions could reduce firm exit from 9.3% to 5.0%, yielding a 3.6% gain in consumption-equivalent welfare. Such interventions are most critical during financial crises, whereas standard productivity recessions see little change in the welfare costs of these frictions. Meanwhile, the rise of artificial intelligence is prompting the analysis of long-term fiscal scenarios involving job displacement and higher capital shares of income to determine robust policy responses.
Trade policy is further complicated by the intersection of fiscal tools and tariffs. Full expensing under the One Big Beautiful Bill Act does not neutralize the tariff burden on imported goods. This suggests a tension in the use of trade taxes, which some frameworks now view through a Pigouvian lens to unify rationales ranging from carbon emissions to geopolitics.
Environmental and climate risks are creating new fiscal pressures. In the US, the shift toward actuarially fair flood insurance premiums has created a fiscal spillover onto FEMA disaster aid as coverage declines. The benefits of protecting against reclassification risk and fiscal spillovers outweigh moral hazard costs, suggesting an optimal insurance subsidy of 52%. Similarly, the push for critical minerals for the energy transition has raised the prospect of deep-sea mining. Because this activity is likely to augment rather than displace terrestrial mining in the short term, it may create adverse distributional consequences for mining-dependent communities.