Escalation of US-China Military Exercises in the South
In early 2026, the United States and China conducted large-scale military exercises simultaneously in the South China Sea, bringing about the most dangerous military confrontation since the Cold War. This tension is not merely a risk of accidental collision; it represents a structural turning point that fundamentally shakes the security order across the Indo-Pacific and the global economic supply chain.
── Understand in 3 points ─────────
- • The U.S. Navy deployed two carrier strike groups to the South China Sea from January to March 2026, conducting joint exercises "Freedom Edge 2026" with the Philippines and Japan.
- • The Chinese People's Liberation Army Navy (PLAN) conducted its largest-ever live-fire exercise across the South China Sea, with an estimated participation of over 80 vessels.
- • China accelerated the construction of new artificial structures around Scarborough Shoal (Huangyan Dao), drawing strong protests from the Philippines.
── NOW PATTERN ─────────
The dominant pattern is a "spiral of conflict" where both the U.S. and China are driven by domestic politics and military logic to engage in mutual escalation. This is intertwined with "alliance strain," symbolized by the division within ASEAN, and "overextension of power" due to China's excessive maritime expansion, accelerating the complexification of the crisis.
── Probability and Response ──────
• Base case 55% — Resumption of military dialogue between the U.S. and China, swift diplomatic resolution after dangerous close encounters, adoption of a joint statement at the ASEAN Foreign Ministers' Meeting, and a gradual increase in insurance premiums.
• Bull case 15% — Official announcement of a U.S.-China summit, advance reports on military confidence-building measures, concrete progress in COC negotiations between ASEAN and China, and a halt to new military construction by China on artificial islands.
• Bear case 30% — Reports of physical clashes at Second Thomas Shoal, remarks by U.S. government officials regarding the U.S.-Philippines Mutual Defense Treaty, China's establishment of an ADIZ (Air Defense Identification Zone) in the South China Sea, and changes in U.S. military DEFCON levels.
📡 THE SIGNAL — What Happened
Why it matters: In early 2026, the United States and China conducted large-scale military exercises simultaneously in the South China Sea, bringing about the most dangerous military confrontation since the Cold War. This tension is not merely a risk of accidental collision; it represents a structural turning point that fundamentally shakes the security order across the Indo-Pacific and the global economic supply chain.
- Military Developments — The U.S. Navy deployed two carrier strike groups to the South China Sea from January to March 2026, conducting joint exercises "Freedom Edge 2026" with the Philippines and Japan.
- Military Developments — The Chinese People's Liberation Army Navy (PLAN) conducted its largest-ever live-fire exercise across the South China Sea, with an estimated participation of over 80 vessels.
- Territorial Issues — China accelerated the construction of new artificial structures around Scarborough Shoal (Huangyan Dao), drawing strong protests from the Philippines.
- Diplomacy — The U.S.-China summit at the APEC Leaders' Meeting in November 2025 failed to reach substantial agreement on the South China Sea issue, once again exposing the depth of the rift between the two nations.
- Alliance Relations — Japan increased its 2026 defense budget to over 1.5% of GDP and is accelerating the deployment of long-range missiles to the Nansei Islands.
- ASEAN Developments — Negotiations among ASEAN nations for the "Code of Conduct (COC) in the South China Sea" failed to conclude in 2025, leading to a deepening division within the region.
- Economic Impact — The annual trade value passing through the South China Sea reaches approximately $5.3 trillion, with about 30% of global trade relying on this maritime area.
- International Law — The 2016 South China Sea arbitration ruling (Philippines v. China) rejected China's nine-dash line claim, but China has consistently ignored the ruling.
- Technology and Armaments — China deployed anti-ship cruise missiles HJ-12 and YJ-62 to its artificial islands in the South China Sea, strengthening its A2/AD (Anti-Access/Area Denial) posture.
- U.S. Domestic Politics — Ahead of the 2026 U.S. midterm elections, a hardline stance against China has become a bipartisan consensus, leaving virtually no room for diplomatic compromise for the administration.
- Resources — The South China Sea is estimated to hold 11 billion barrels of oil and 190 trillion cubic feet of natural gas.
- Accident Risk — At least 12 dangerous close encounters between U.S. and Chinese vessels/aircraft were reported in the second half of 2025 alone.
The U.S.-China confrontation in the South China Sea did not suddenly emerge in 2026. Its roots trace back to the reorganization of the East Asian order after the Cold War, China's rapid naval buildup, and the U.S. Indo-Pacific "rebalance" strategy. To understand the structural background of this conflict, at least three historical contexts must be grasped.
First, there is the history of China's "nine-dash line" claim and its maritime expansion. China announced the "eleven-dash line" in 1947 (later revised to the nine-dash line), claiming historical rights over almost the entire South China Sea. However, it was only after the 2010s that this claim began to be backed by effective military power. Since 2013, the Xi Jinping administration has promoted "island fortification," involving large-scale reclamation of reefs and atolls in the South China Sea and the construction of military facilities. Runways of 3,000 meters were built on Fiery Cross Reef, Subi Reef, and Mischief Reef, effectively turning them into unsinkable aircraft carriers. This move is part of China's long-term strategy to establish the waters inside the "first island chain" as its exclusive sphere of influence, with the military calculation of securing strategic depth in preparation for a Taiwan contingency.
Second, there is the evolution of U.S. Asia policy. The Obama administration's "Asia Pivot" (2011) aimed to shift strategic focus from excessive involvement in the Middle East to the Asia-Pacific, but actual resource allocation was limited. The first Trump administration launched the "Free and Open Indo-Pacific (FOIP)" concept, clearly positioning China as a "strategic competitor." The Biden administration continued and deepened this approach, strengthening AUKUS (Australia-United Kingdom-United States security pact) and QUAD (Quadrilateral Security Dialogue involving Japan, the U.S., Australia, and India). U.S. administrations after 2025 also prioritize strengthening deterrence against China, with "Freedom of Navigation Operations (FONOPs)" in the South China Sea being conducted at a pace exceeding 10 times annually.
Third, there is the institutional fragility of the regional order. ASEAN has been working on resolving disputes in the South China Sea since the 1990s, but forming a consensus within the region has been extremely difficult. The divide is deep between countries under China's economic influence, such as Cambodia and Laos, and those with direct territorial disputes, such as the Philippines and Vietnam. The 2002 "Declaration on the Conduct of Parties in the South China Sea (DOC)" lacked legal binding force, and subsequent "Code of Conduct (COC)" negotiations have been effectively stalled for over two decades. This institutional vacuum creates structural conditions that enable unilateral changes to the status quo by force.
Why "now"? Several direct factors contributed to the rapid escalation of tensions in early 2026. First, China's third aircraft carrier, the "Fujian," was commissioned at the end of 2025, significantly enhancing its deployment capabilities in the South China Sea. Second, the Marcos Jr. administration in the Philippines substantially strengthened the U.S.-Philippines alliance, granting new base access to the U.S. military under the Enhanced Defense Cooperation Agreement (EDCA). Third, there is the linkage with the Taiwan Strait situation. China intends to restrict U.S. military intervention routes from the south during a Taiwan contingency by strengthening its military presence in the South China Sea.
At a deeper level, domestic political dynamics in both the U.S. and China are fueling their hardline external stances. In the U.S., ahead of the 2026 midterm elections, any administration is extremely wary of being criticized for being "soft on China." In China, prior to the 21st National Congress of the Communist Party of China in 2027, Xi Jinping is expected to deliver concrete achievements for the "great rejuvenation of the Chinese nation," making concessions on territorial and sovereignty issues politically impossible. The convergence of these structural factors is making the South China Sea in 2026 the stage for the most dangerous military confrontation since the Cold War.
The delta: The South China Sea crisis in early 2026 is not merely an exchange of military exercises but the result of U.S. and Chinese domestic politics, military strategies, and technological arms races simultaneously reaching a critical point. The commissioning of China's third aircraft carrier and the completion of its A2/AD posture, the strengthening of the U.S. alliance network and increased FONOP frequency, and domestic political pressures in both countries are rapidly narrowing the room for escalation management. A qualitative shift is occurring from traditional "gray zone" tactics to direct confrontation involving live-fire exercises.
🔍 BETWEEN THE LINES — What the News Isn't Saying
Behind this crisis, officially framed as a conflict between "freedom of navigation" and "territorial sovereignty," lies a massive opportunity for budget acquisition for the military-industrial complexes of both nations. The U.S. Indo-Pacific Command secures additional congressional funding based on South China Sea tensions, while Chinese defense companies benefit from expanded modernization budgets for the People's Liberation Army. Furthermore, it is noteworthy that China may be intentionally maintaining military tensions in the South China Sea at a "managed crisis" level to use it as a strategic distraction, diverting international attention from the Taiwan Strait. The timing of the large-scale exercises in early 2026, coinciding with new diplomatic initiatives by Taiwan's Lai Ching-te administration, is likely not a coincidence.
NOW PATTERN
Spiral of Conflict × Alliance Strain × Overextension of Power
The dominant pattern is a "spiral of conflict" where both the U.S. and China are driven by domestic politics and military logic to engage in mutual escalation. This is intertwined with "alliance strain," symbolized by the division within ASEAN, and "overextension of power" due to China's excessive maritime expansion, accelerating the complexification of the crisis.
Intersection of Dynamics
The three structural dynamics—spiral of conflict, alliance strain, and overextension of power—are interacting in the South China Sea in a mutually reinforcing manner, accelerating the complexification of the crisis.
First, the spiral of conflict is widening alliance strain. As escalation between the U.S. and China progresses, neighboring countries are forced to choose "whose side they are on," and this pressure exposes existing fissures within ASEAN and the U.S. alliance network. If the Philippines deepens military cooperation with the U.S., Cambodia will move even closer to China, making a unified response from ASEAN as a whole increasingly difficult.
Next, alliance strain is diminishing the ability to control the spiral of conflict. Crisis management mechanisms typically function through coordination among allies and multilateral institutions, but ASEAN's division and differing levels of commitment within the U.S. alliance network are weakening the institutional foundation for escalation management. As a result, the risk of direct military confrontation between the U.S. and China proceeding in an "unveiled" manner is increasing.
Furthermore, the overextension of power makes it difficult for both countries to disengage from the spiral. As both the U.S. and China are expanding their commitments on multiple fronts, an "honorable retreat" in the South China Sea could be interpreted as a signal of weakness on other fronts. If China makes concessions in the South China Sea, its deterrence in the Taiwan issue would weaken; if the U.S. retreats, Japan's and the Philippines' trust in the U.S. would be shaken—this fear is locking both sides onto an escalation trajectory.
At the intersection of these three dynamics lies the risk of accidental escalation. The spiral of conflict increases the frequency of military contact, alliance strain degrades crisis management channels, and overextension makes political retreat impossible for both sides—this triple structure is elevating the risk of a small accidental incident transforming into uncontrollable escalation to historical levels.
📚 PATTERN HISTORY
1914: Anglo-German Naval Arms Race Before World War I
The naval arms race between the existing hegemon and the rising power escalated into an uncontrollable great war through the rigidification of alliance systems and a chain of accidental incidents (Sarajevo incident).
Structural similarities with the present: A naval arms race alone does not cause war, but when combined with rigid alliance structures and the absence of crisis management mechanisms, a small spark can turn into a conflagration.
1962: Cuban Missile Crisis
The U.S. and Soviet Union confronted each other over the forward deployment of nuclear forces, reaching the brink of nuclear war. It was ultimately averted through a compromise via secret diplomatic channels (Robert Kennedy-Dobrynin channel).
Structural similarities with the present: When a spiral of conflict reaches a critical point, the existence of informal diplomatic channels can be a matter of life and death. It is unclear whether such a level of trusted backchannel exists between the U.S. and China today.
1995-96: Taiwan Strait Crisis (Third Taiwan Strait Crisis)
China reacted to Taiwanese President Lee Teng-hui's visit to the U.S. by conducting missile exercises around Taiwan. The U.S. responded by dispatching two aircraft carriers. Military conflict was ultimately averted.
Structural similarities with the present: An exchange of military demonstrations carries escalation risks, but it can be controlled if both sides have a clear understanding of "red lines." The problem is that in the current South China Sea, both sides' red lines are unclear.
2001: Hainan Island Incident (EP-3 Incident)
A U.S. Navy reconnaissance aircraft EP-3 and a Chinese military fighter jet J-8 collided in the airspace over the South China Sea. The Chinese pilot died, and the U.S. aircraft made an emergency landing on Hainan Island, leading to an 11-day diplomatic crisis.
Structural similarities with the present: A precedent for routine military activities in the South China Sea escalating into a serious diplomatic crisis through an accidental incident. The density of military activities is significantly higher now than in 2001, greatly increasing the probability of a similar accident.
2012: Scarborough Shoal Standoff
The Philippine Navy and the Chinese Coast Guard (海警) confronted each other at Scarborough Shoal in the South China Sea for two months. Ultimately, China successfully established effective control over Scarborough Shoal, creating a fait accompli.
Structural similarities with the present: "Gray zone" tactics (gradual changes to the status quo using the Coast Guard or maritime militia rather than the military) skillfully operate below the threshold of military response from the opposing country to create territorial faits accomplis. China has repeatedly applied this method across the South China Sea.
Patterns Revealed by History
The common patterns revealed by historical precedents can be summarized in three points. First, competition between a maritime hegemon and a rising great power enters its most dangerous phase when advancements in military technology coincide with shifts in alliance structures. The current South China Sea situation sees the convergence of the introduction period for innovative military technologies like AI, drones, and hypersonic missiles, and a period of alliance realignment in the Indo-Pacific, creating historically high-risk conditions. Second, accidental incidents act as crisis triggers when the spiral of conflict has sufficiently progressed. While the 2001 EP-3 incident occurred during a relatively stable period in U.S.-China relations and was diplomatically manageable, a similar incident at current tension levels could lead to far more severe consequences. Third, retreat from a crisis is achieved only through a "brinkmanship experience" (Cuban Missile Crisis type) or the clear establishment of one side's superiority. In current U.S.-China relations, neither scenario is likely in the short term, making it probable that the spiral of conflict will continue for the foreseeable future. The most crucial lesson is that in none of these historical cases was there a basis for certainty that "this will not lead to war" during the height of the crisis.
🔮 NEXT SCENARIOS
Both the U.S. and China will continue to maintain and strengthen their military presence in the South China Sea, but direct military conflict will be avoided. Several dangerous close encounters will occur in 2026, but all will be diplomatically managed and remain minor incidents. ASEAN-led Code of Conduct (COC) negotiations will formally continue but without substantial progress. Between the U.S. and China, limited military confidence-building measures (such as the resumption of military hotlines and agreements on codes of conduct to avoid accidental collisions) will be explored after the 2026 midterm elections, but these will be far from resolving the South China Sea territorial disputes themselves. This state of "cold peace" will mean sustained security stress for claimant states like the Philippines and Vietnam, and overall strategic uncertainty for ASEAN will remain high. Economically, insurance premiums for safe navigation in the South China Sea will rise, and supply chain diversification will progress, but large-scale disruptions to maritime traffic will not occur. Neighboring countries, including Japan, will pursue a "dual-hedge" strategy (balancing strengthened alliances with the U.S. and maintaining economic ties with China), but maintaining this balance will become increasingly difficult. This scenario is an "escalated version of the status quo," where structural risks continue to accumulate, but a decisive breakdown will not occur within 2026.
Investment/Action Implications: Resumption of military dialogue between the U.S. and China, swift diplomatic resolution after dangerous close encounters, adoption of a joint statement at the ASEAN Foreign Ministers' Meeting, and a gradual increase in insurance premiums.
A scenario where an unexpected diplomatic breakthrough opens up, significantly easing tensions in the South China Sea. A potential trigger could be the formation of some provisional agreement on limiting military activities in the South China Sea during a possible U.S.-China summit scheduled for mid-2026. For example, scenarios include the U.S. and China agreeing on a prior notification system for military exercises in certain areas of the South China Sea, or reaching consensus on specific measures to enhance the effectiveness of the Code for Unplanned Encounters at Sea (CUES). Such agreements could be realized through "quiet diplomacy" utilizing the political vacuum after the 2026 U.S. midterm elections. Furthermore, on the ASEAN side, COC negotiations might partially advance through Indonesia's mediation, potentially leading to provisional arrangements regarding fishing and resource development in at least some maritime areas. If this scenario materializes, the geopolitical risk premium in the South China Sea would decrease, benefiting the entire regional economy. However, the probability of this scenario is low because domestic political dynamics in both the U.S. and China make compromise extremely difficult. Any agreement carries the risk of being criticized as a "concession," requiring significant motivation (such as an external shock like an economic crisis) for leaders to accept such costs.
Investment/Action Implications: Official announcement of a U.S.-China summit, advance reports on military confidence-building measures, concrete progress in COC negotiations between ASEAN and China, and a halt to new military construction by China on artificial islands.
A scenario where a limited military conflict occurs between the U.S. and China due to an accidental incident or intentional escalation. The most probable trigger is an escalation of clashes between the Chinese Coast Guard and the Philippine military around Second Thomas Shoal (Ren'ai Jiao), leading to consideration of invoking the U.S.-Philippines Mutual Defense Treaty. Alternatively, an accidental collision between U.S. and Chinese vessels or aircraft (a repeat of the 2001 EP-3 incident) could escalate uncontrollably under the current high tension levels. If a clash occurs, the first 48-72 hours will be critically important, and whether the leadership of both countries can de-escalate will heavily depend on the political environment and accuracy of information at that time. The economic impact of a limited conflict would be immense. If maritime traffic in the South China Sea is disrupted even temporarily, a shock would immediately propagate through global supply chains. Crude oil prices would surge, and East Asian manufacturing supply chains, including semiconductors, would fall into severe disarray. The Japanese stock market would plummet, and the yen would surge as a safe-haven asset, while the Japanese economy itself would suffer significant damage due to its high trade dependence. In this scenario, the risk of nuclear weapon use is extremely low, but a barrage of cyberattacks and a chain of economic sanctions could occur, potentially turning the "new Cold War" into a "hot phase."
Investment/Action Implications: Reports of physical clashes at Second Thomas Shoal, remarks by U.S. government officials regarding the U.S.-Philippines Mutual Defense Treaty, China's establishment of an ADIZ (Air Defense Identification Zone) in the South China Sea, and changes in U.S. military DEFCON levels.
Key Triggers to Watch
- Physical clash between Philippine military resupply vessel and Chinese Coast Guard at Second Thomas Shoal (Ren'ai Jiao): April-June 2026 ("fair weather season" before monsoon)
- Declaration of South China Sea ADIZ (Air Defense Identification Zone) by China: Second half of 2026 (during Party Congress preparation period)
- Resumption of U.S.-China military dialogue (or confirmation of failure to resume): After 2026 midterm elections (November-December 2026)
- Feasibility of adopting a joint statement on the South China Sea at the ASEAN Foreign Ministers' Meeting: July 2026 (ASEAN Foreign Ministers' Meeting)
- First deployment of Chinese aircraft carrier "Fujian" to the South China Sea: First half of 2026
🔄 TRACKING LOOP
Next Trigger: Philippine military resupply operation to Second Thomas Shoal (scheduled April-May 2026) — The Chinese Coast Guard's response level will be the most critical event determining the direction of the escalation trajectory.
Continuation of this pattern: Tracking Theme: Escalation Management of U.S.-China Military Confrontation in the South China Sea — The next milestones are the feasibility of adopting a joint statement at the ASEAN Foreign Ministers' Meeting in July 2026, and the first deployment of the Chinese aircraft carrier "Fujian" to the South China Sea in the second half of 2026.
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