Bayesian Investor Blog

A conflict is brewing between China and the West.

Beijing is determined to reassert control over Taiwan. The US, and likely most of NATO, seem likely to respond by, among other things, boycotting China.

We should, of course, worry that this will lead to war between China and the US. I don’t have much insight into that risk. I’ll focus in this post on risks about which I have some insight, without meaning to imply that they’re the most important risks.

Such a boycott would be more costly than the current boycott of Russia, and the benefits would likely be smaller.

How can I predict whether the reaction to China’s action against Taiwan will be a rerun of the response to the recent Russian attack on Ukraine?

I’ll start by trying to guess the main forces that led to the boycott of Russia.

Morality Police

The main force appears to be moral outrage, following rules that are designed to deter acts of aggression.

There has been a serious effort over the past century to outlaw war, but the world is still struggling to find the best way to enforce that prohibition.

A Chinese attack on Taiwan would be about as clearly an act of aggression as the Russian attack on Ukraine. A key difference is that Ukraine is widely recognized as a nation, while Taiwan is considered by most nations to either have an ambiguous status or to be part of China.

The belief in the sanctity of national boundaries is strong enough that the lack of a clear national boundary will likely cause some influential decision-makers to treat any such conflict as an internal matter. Maybe that will make an important difference in whether pundits incite war. But there still seems to be a good deal of moral pressure coming from the average voter (and the average Twitter mob?), which seems more focused on good and evil, not upholding what passes for international law.

So I expect popular pressure for a full Western boycott of China to be almost as strong as it was with Russia.

This pressure will likely pay little attention to consequentialist arguments. The U.S. will likely even ignore rules such as Scott Alexander’s under-appreciated post Be Nice, At Least Until You Can Coordinate Meanness. I.e. it will confuse majority opinion within one powerful nation with a world consensus. The U.S. has often acted as if it were a world government without having acquired the necessary legitimacy. Few people are asking whether that will create an international rule of law, or a world where the meanness is part of a conflict in which several billion people unite against the U.S.

Special Interests

It’s easy to tell a story that the West was manipulated into conflict with Russia. I don’t see much evidence either for or against this. So I’ll make a low-confidence guess that this was somewhere around one quarter of the pressure behind the boycott of Russia.

The boycott certainly provided a convenient way to transfer a good deal of wealth to oil and coal companies. I don’t know much about the impact of the broader boycott on Russia, but the oil part of the boycott looks like it’s probably helping Russia, by increasing oil prices enough to offset Russia’s reduced sales volume.

There’s a wider variety of relevant interest groups who are likely to influence a decision to boycott China.

Companies who are likely to resist a boycott: Apple, Walmart, and maybe much of the semiconductor industry.

Companies with some reason to support a boycott: General Motors, First Solar, and coal companies (who fear Chinese solar).

So I see special interests being much more divided about a China boycott than about the boycott of Russia. If I’ve underestimated the role of special interests, that could tip the balance against a boycott.

Politicians

The West has become democratic enough that few politicians will resist public demands for a boycott. In the prior cold war, political parties had enough power to guide policies toward long-term goals. Now that party leaders are chosen via primaries rather than by party bosses, successful politicians focus almost entirely on polls.

Politicians are still willing to resist popular opinion when popular policies would produce quick, verifiable results that the public would regret, e.g. the no-fly zone proposal for Ukraine. But the harm from boycotts is likely to be too illegible to deter politicians from adopting them.

Maybe it’s a bit different with a key senator from a state that gets much revenue from fossil fuel production. There’s a modest chance that he has been exerting unusual pressure for boycotts that drive up energy prices. I have little intuition for how much this would change if one party gets clearer control over the senate.

Scenarios

I can imagine alternatives to conflict, but none of them seem likely:

• AGI could make this all irrelevant.
• Beijing might continually procrastinate any action until something happens to convince it that it would lose any conflict.
• China undergoes a large cultural change which causes the Beijing government to lose interest in Taiwan.
• The U.S. might elect a leader who cares more about the long-term effects of policy decisions than about near-term public reaction.

Could Beijing accomplish its goals without acts that the West would feel compelled to treat as war? I imagine that they’ll start by blockading Taiwan. Maybe that could be done in a way that provokes the West to only impose much milder sanctions than it has imposed on Russia. But I don’t quite see how that gets Beijing enough control over Taiwan for Beijing to be satisfied.

Consequences

It looks like the default outcome is that, sometime within the next decade, international trade will be drastically disrupted.

That will mean that many industries that currently function as one global system will become fragmented. Most people underestimate the benefits we get from economies of scale in production. Much of technological progress will likely be set back by a couple of years.

I’m particularly interested in the semiconductor and solar industries. China will have trouble replicating ASML’s expertise, and the West will have trouble replacing China’s polysilicon factories.

Much of a China boycott would hurt China more than it hurts the West, because there’s a wide variety of technology on which China has less expertise.

However, boycotting Chinese polysilicon would lead (for a few years) to high polysilicon prices in the West, meaning higher energy prices. That effect might be big enough to equalize the harm done to each side.

Investment Ideas

I’ve been cutting back on my holdings of stocks that trade on the Hong Kong exchange. There are plenty of neglected companies there trading at large discounts to book value, and high dividend yields. I’d be bullish on them if I lived in China, but I’m concerned that I might become unable to sell them while living in the U.S.

Thin film solar would be a big beneficiary if the West stops buying Chinese polysilicon. I’ve been buying stock in SCIA as a way to play this (it makes equipment used in thin film solar).

If the West boycotts Taiwan’s semiconductor factories, lots of business would presumably shift to Samsung (LSE:SMSN; if you can’t buy it there, Korean ETFs EWY and FLKR are tolerable substitutes). ASML would also benefit from non-Taiwanese companies buying lots of equipment to expand their foundries.