Escalation of U.S.-China Military
In early 2026, the United States and China simultaneously conducted large-scale military exercises in the South China Sea, raising the risk of accidental clashes to its highest level since the Cold War. This spiral of conflict could fundamentally alter the security environment for Japan and ASEAN nations, becoming a turning point that forces a reordering of the entire Indo-Pacific.
── Understand in 3 points ─────────
- • From January to March 2026, the U.S. Navy deployed two carrier strike groups to the South China Sea and conducted "Balikatan 2026," a joint exercise with the Philippine military, on an unprecedented scale.
- • In February 2026, the Chinese People's Liberation Army conducted large-scale exercises, including live-fire drills, around the Paracel and Spratly Islands in the South China Sea, establishing warning zones for civilian navigation.
- • In February 2026, the Philippine government announced its intention to re-file a case with the International Arbitral Tribunal regarding the China Coast Guard's obstruction of resupply missions to Second Thomas Shoal (Ayungin Shoal).
── NOW PATTERN ─────────
The United States and China are trapped in a "spiral of conflict" in the South China Sea, where mutual escalation is self-reinforcing and accelerating. This is compounded by the U.S.'s risk of "imperial overstretch" and "alliance strain" within ASEAN, leading to a breakdown in crisis management mechanisms.
── Probability and Response ──────
• Base case 55% — Resumption of regular operation of the US-China military hotline, adoption of a joint statement on the South China Sea at the ASEAN Foreign Ministers' Meeting, frequency of abnormal close encounters remaining flat or slightly decreasing.
• Bull case 15% — Increased frequency of direct dialogue between US and Chinese leaders, decreased frequency of obstruction by the China Coast Guard, reports of substantial progress in COC negotiations, resumption of US-China joint maritime safety consultations.
• Bear case 30% — Occurrence of physical clashes at Second Thomas Shoal, fire control radar lock-on between US and Chinese warships, China's declaration of a no-sail zone in specific areas of the South China Sea, request by the Philippines to invoke the Mutual Defense Treaty.
📡 THE SIGNAL — What Happened
Why it matters: In early 2026, the United States and China simultaneously conducted large-scale military exercises in the South China Sea, raising the risk of accidental clashes to its highest level since the Cold War. This spiral of conflict could fundamentally alter the security environment for Japan and ASEAN nations, becoming a turning point that forces a reordering of the entire Indo-Pacific.
- Military — From January to March 2026, the U.S. Navy deployed two carrier strike groups to the South China Sea and conducted "Balikatan 2026," a joint exercise with the Philippine military, on an unprecedented scale.
- Military — In February 2026, the Chinese People's Liberation Army conducted large-scale exercises, including live-fire drills, around the Paracel and Spratly Islands in the South China Sea, establishing warning zones for civilian navigation.
- Diplomacy — In February 2026, the Philippine government announced its intention to re-file a case with the International Arbitral Tribunal regarding the China Coast Guard's obstruction of resupply missions to Second Thomas Shoal (Ayungin Shoal).
- Alliance — In March 2026, Japan, the U.S., Australia, and the Philippines conducted their first joint maritime patrol in the South China Sea, which China condemned as "provocation by external forces."
- Economy — The annual trade volume passing through the South China Sea reaches approximately $5.3 trillion, with about one-third of global maritime trade transiting this area.
- International Law — The 2016 Permanent Court of Arbitration ruling on the South China Sea rejected China's "nine-dash line" claim, but China has consistently dismissed the ruling as "a piece of paper."
- Technology — China has deployed HQ-9 anti-aircraft missile systems and YJ-12B anti-ship cruise missiles on its artificial islands in the Spratly Islands, establishing a de facto A2/AD (Anti-Access/Area Denial) posture.
- Security — The Japanese government expanded its 2026 defense budget to a record 2.1% of GDP (approximately 8.5 trillion yen), prioritizing the strengthening of defense for the Nansei Islands.
- ASEAN — Negotiations for a Code of Conduct (COC) in the South China Sea have been stalled among ASEAN nations for over a decade, with prospects for an agreement in 2026 being extremely low.
- Accidental Risk — In 2025, abnormal close encounters between US and Chinese warships and military aircraft in the South China Sea reached 87 incidents, a 40% increase from the previous year.
- Public Opinion — Nationalist posts on Chinese social media, asserting "the South China Sea is a core interest of China," have surged, creating pressure on the Xi Jinping administration to maintain a hardline stance.
- Energy — The South China Sea is estimated to hold 11 billion barrels of oil and 190 trillion cubic feet of natural gas, with resource security also underlying the conflict.
The US-China rivalry in the South China Sea is not a crisis that suddenly emerged in 2026. Its roots are the result of structural geopolitical shifts spanning at least several decades, and the current tension indicates that this accumulation is approaching a critical point.
Historically, the South China Sea territorial dispute dates back to 1947 when the Republic of China (later succeeded by the People's Republic of China) drew the "eleven-dash line" (later revised to the nine-dash line) on its maps. However, this issue became a modern security focal point after the Cold War, particularly since the 2000s, with China's rapid economic growth and military modernization.
The 2012 Scarborough Shoal incident was a turning point where China fully adopted a fait accompli strategy in its confrontation with the Philippines. After a standoff between the Philippine Navy and China Marine Surveillance, China effectively took control of Scarborough Shoal, establishing this "gray zone" tactic as the basic model for its subsequent South China Sea strategy. In the same year, China for the first time blocked the adoption of a joint statement at the ASEAN Foreign Ministers' Meeting, exposing the limits of problem-solving through multilateral frameworks.
Since 2013, China has embarked on unprecedented large-scale artificial island construction in the Spratly Islands. It reclaimed over 3,200 acres on features such as Fiery Cross Reef, Subi Reef, and Mischief Reef, building runways, radar facilities, and missile emplacements. President Xi Jinping promised President Obama in a 2015 summit that China would "not militarize the artificial islands," but this promise was completely broken. This clearly demonstrates a structural pattern where China's perception of its "core interests" takes precedence over diplomatic commitments.
The U.S. response has also escalated incrementally. The Obama administration launched "Freedom of Navigation Operations" (FONOPs) in 2015, establishing a policy of regularly dispatching naval vessels to areas claimed by China. The first Trump administration declared China's claims in the South China Sea "completely unlawful," and the Biden administration strengthened the encirclement of China through alliances like AUKUS (Australia, UK, US) and enhanced defense cooperation with the Philippines. The second Trump administration, inaugurated in 2025, has further expanded its military presence in the Indo-Pacific and increased the frequency and scale of joint exercises with allies.
Why are tensions reaching a critical point now? The answer is multifaceted. First, China's military capabilities, both qualitatively and quantitatively, are approaching those of the U.S. military, and particularly in the confined operational environment of the South China Sea, its A2/AD capabilities have reached a level that significantly restricts the U.S. military's freedom of action. Second, Xi Jinping's third term and the narrative of the "great rejuvenation of the Chinese nation" make compromise on territorial issues politically impossible. Third, the Philippine Marcos Jr. administration has clearly shifted from the previous Duterte administration's conciliatory approach toward China, adopting a policy of strengthening its alliance with the U.S., which is causing China's "divide and conquer" strategy to falter. Fourth, in the context of preparing for a Taiwan Strait contingency, military control of the South China Sea has been redefined as a strategically indispensable element for China.
The direct impact on Japan cannot be overlooked either. The South China Sea is a lifeline for Japan's sea lanes (maritime traffic routes), with approximately 80% of its crude oil imports from the Middle East passing through this area. Furthermore, China's patterns of behavior in the South China Sea are linked to its actions around the East China Sea and the Senkaku Islands; if China succeeds in creating a fait accompli in the South China Sea, there is a high probability that similar tactics will be applied in the East China Sea. The achievement of over 2% of GDP for the 2026 defense budget and the strengthening of Nansei Islands defense are manifestations of Japan's awareness of this interconnected crisis.
Thus, the 2026 South China Sea crisis is not a sudden event but the culmination of structural changes spanning decades. In a situation where both the U.S. and China define "concession = weakness," the mechanisms for controlling the spiral of conflict have been significantly weakened.
The delta: The decisive change in early 2026 is the qualitative shift in US-China military exercises from "demonstrative actions" to the "normalization of combat readiness." The simultaneous deployment of two U.S. aircraft carriers and the initiation of multilateral patrols involving the Philippines, Japan, and Australia, along with China's live-fire exercises and the establishment of warning zones for civilian navigation, all indicate military escalation beyond the traditional "gray zone." The threshold for accidental clashes has structurally lowered, and the current dysfunction of military hotlines between the two countries further amplifies this risk.
🔍 BETWEEN THE LINES — What the News Isn't Saying
The core truth that official statements don't reveal is that this military tension is actually perceived by both sides as a "rehearsal" for a Taiwan contingency. The true purpose of the U.S. expanding multilateral patrols in the South China Sea is to pre-test the operational capabilities and political will of its allies in a Taiwan Strait contingency, and China's strengthening of its A2/AD posture is designed not for the South China Sea alone, but as part of its strategy to deter U.S. intervention in a Taiwan unification scenario. Furthermore, as China's economic slowdown deepens, the Xi Jinping administration is using external security tensions as a device to divert public attention from domestic economic discontent—a facet never officially discussed.
NOW PATTERN
Spiral of Conflict × Imperial Overstretch × Alliance Strain
The United States and China are trapped in a "spiral of conflict" in the South China Sea, where mutual escalation is self-reinforcing and accelerating. This is compounded by the U.S.'s risk of "imperial overstretch" and "alliance strain" within ASEAN, leading to a breakdown in crisis management mechanisms.
Intersection of Dynamics
The three dynamics of "spiral of conflict," "imperial overstretch," and "alliance strain" mutually reinforce each other in the South China Sea, making the crisis structure even more severe.
The more the spiral of conflict accelerates, the more both the U.S. and China are compelled to commit greater military resources to the South China Sea, increasing the risk of imperial overstretch. The burden on the U.S. to expand its commitments in the Indo-Pacific simultaneously with Europe and the Middle East raises the question of long-term sustainability. China, too, faces domestic costs of continued military expansion amidst an economic slowdown. This pressure of overstretch could lead to further escalation in the short term, as both nations are trapped by the perception that "backing down would show weakness," creating an incentive to press forward despite increasing costs.
Concurrently, alliance strain further complicates the control of the spiral of conflict. ASEAN's inability to function as a unified mediator signifies the absence of a mechanism to buffer the bipolar rivalry between the U.S. and China. Ideally, multilateral frameworks for confidence-building measures and the formulation of codes of conduct should manage escalation, but internal divisions within ASEAN render this impossible. Furthermore, the individual moves by the Philippines and Vietnam to strengthen security cooperation with the U.S. paradoxically reinforce China's perception of "encirclement," thereby further accelerating the spiral of conflict.
The most dangerous scenario where these three dynamics intersect is a compound crisis: one side's impaired judgment due to imperial overstretch triggers an accidental clash within the spiral of conflict, and alliance strain paralyzes crisis management. Historically, the outbreak of World War I was precisely the result of these three dynamics acting simultaneously. While it is unlikely that the modern South China Sea will escalate to a crisis of that magnitude, the structural similarities should not be ignored.
📚 PATTERN HISTORY
1914: The Balkan Crisis and Great Power Rivalry Before World War I
The rigidification of alliance systems and a spiral of conflict escalated the accidental event of the Sarajevo assassination into a world war.
Structural similarities with the present: When great power rivalry becomes structured and alliance obligations become automatic escalation mechanisms, small accidental events can lead to uncontrollable expansion. Maintaining crisis management channels and flexibility is essential.
1962: Cuban Missile Crisis
The U.S. and Soviet Union spiraled to the brink of nuclear war, but the existence of secret diplomatic channels ultimately enabled crisis avoidance.
Structural similarities with the present: Even when a spiral of conflict reaches its extreme, catastrophe can be averted if secret diplomatic channels exist for both sides to "retreat while saving face." The focus is on whether such channels are sufficiently functional between the U.S. and China today.
1995-96: Third Taiwan Strait Crisis
In response to China's missile launch exercises, the U.S. deployed two aircraft carriers for deterrence. The exchange of military displays temporarily heightened the crisis, but it subsided because both sides had the intention to avoid conflict.
Structural similarities with the present: Exchanges of military displays can heighten tensions in the short term, but they can function as deterrence if both sides share an understanding of "red lines." The question is whether red lines are clearly shared in the current South China Sea.
2001: Hainan Island Incident (EP-3 Collision Incident)
An accidental mid-air collision between a U.S. reconnaissance plane and a Chinese fighter jet escalated into a diplomatic crisis. The Chinese pilot died, and 24 U.S. crew members were detained for 11 days.
Structural similarities with the present: Accidental military incidents can stimulate nationalist sentiment, creating pressure on both governments to adopt hardline stances. The post-incident political dynamics, rather than the accident itself, can be the primary cause of escalation.
2012: Scarborough Shoal Standoff Incident
In the maritime standoff between China and the Philippines, China successfully created a fait accompli by leveraging its economic and military asymmetry. The U.S. did not directly intervene, and the Philippines was effectively excluded.
Structural similarities with the present: Creating a fait accompli through gray zone tactics is an effective means of achieving territorial changes below the threshold of military conflict. Countering this requires immediate and coordinated responses from allies, but achieving this is politically difficult.
Patterns Revealed by History
The most important lesson revealed by historical patterns is that "accidental clashes" are a statistical inevitability in great power rivalries. With 87 abnormal close encounters between the U.S. and China annually, the probability of some incident occurring increases over time. The problem is not the occurrence of an accident itself, but the ability to manage escalation after an accident.
The 1962 Cuban Missile Crisis and the 2001 Hainan Island Incident demonstrate that if secret diplomatic channels and crisis management mechanisms are functional, the escalation of accidental events can be prevented. However, the 1914 Balkan Crisis warns that alliance rigidity and domestic political pressures can nullify these mechanisms.
Current U.S.-China relations are structurally more dangerous than during the 2001 Hainan Island Incident. At that time, there was a common interest in deepening economic interdependence between the U.S. and China, and China, immediately after joining the WTO, had an incentive to repair relations. As of 2026, with ongoing decoupling and intensifying technological hegemony competition, the incentive for repairing relations has significantly decreased. History repeatedly shows that without the political will and institutional mechanisms to brake the spiral of conflict, structural tensions will eventually lead to catastrophic outcomes.
🔮 NEXT SCENARIOS
Throughout 2026, military tensions between the U.S. and China will remain high but will not escalate into direct armed conflict. Accidental close encounters and minor frictions (water cannon use, laser illumination, dangerous maneuvers) will continue to occur, but both sides recognize the costs of full-scale military conflict, and crisis management through diplomatic channels will ultimately function.
Specifically, the U.S. and Chinese military presence in the South China Sea will normalize at current levels, becoming a "new normal." Tensions surrounding the Philippines' Second Thomas Shoal will persist, but China will not escalate to the point of completely blocking Philippine military resupply activities. The South China Sea issue will be discussed at ASEAN Foreign Ministers' Meetings and the UN General Assembly, but no substantial progress will be seen.
Japan will continue to strengthen its defense of the Nansei Islands and advance the formulation of joint U.S.-Japan integrated operational plans, but its direct military involvement in the South China Sea will remain limited. Economically, freedom of navigation in the South China Sea will be largely maintained, with no significant disruption to maritime trade. However, rising insurance premiums and the costs of rerouting will affect some trade.
The premise of this scenario is that the leaderships of both the U.S. and China implicitly intend to maintain a framework of "managed competition" and exercise restraint to avoid crossing the red line into direct conflict, despite domestic political pressures. Ahead of the U.S. midterm elections in November 2026, the Trump administration is expected to maintain a hardline stance against China while calculating that an actual military conflict is undesirable.
Implications for Investment/Action: Resumption of regular operation of the US-China military hotline, adoption of a joint statement on the South China Sea at the ASEAN Foreign Ministers' Meeting, frequency of abnormal close encounters remaining flat or slightly decreasing.
Tensions in the South China Sea are significantly eased by an unexpected diplomatic breakthrough. Potential catalysts for this scenario include an agreement on comprehensive maritime guidelines at a U.S.-China summit, or substantial progress in negotiations for a Code of Conduct (COC) in the South China Sea.
Specifically, a U.S.-China summit could materialize in mid-2026, perhaps on the occasion of the G20 Summit or the UN General Assembly, leading to an agreement on mutual notification systems for military activities and the establishment of crisis avoidance mechanisms in the South China Sea. The backdrop for this could be China's economic slowdown providing an incentive for the Xi Jinping administration to stabilize relations with the U.S., and the Trump administration's motivation to demonstrate diplomatic achievements before the midterm elections.
Furthermore, there is a non-zero possibility that a provisional framework agreement for the South China Sea Code of Conduct could be reached under the leadership of the ASEAN chair (Malaysia in 2026). In this case, even with limited legal enforceability, practical measures such as voluntary restrictions on military activities and joint management of fishery resources could contribute to easing tensions.
However, the feasibility of this scenario is low. The domestic political environments in both the U.S. and China make a shift towards reconciliation difficult; building Xi Jinping's third-term legacy and deviating from Trump's hardline stance against China carry high political risks. Moreover, due to the nature of the South China Sea issue as a territorial dispute, the room for compromise is structurally limited.
Implications for Investment/Action: Increased frequency of direct dialogue between US and Chinese leaders, decreased frequency of obstruction by the China Coast Guard, reports of substantial progress in COC negotiations, resumption of US-China joint maritime safety consultations.
An accidental military clash actually occurs, and the situation in the South China Sea rapidly escalates. The most probable scenario is a physical clash with the China Coast Guard over a Philippine resupply mission, or the use of force due to miscalculation or communication failure during a close encounter between U.S. and Chinese warships or military aircraft.
Specifically, a collision or casualties occurring during the China Coast Guard's attempt to physically block a Philippine Navy resupply vessel is the most likely event. If the Philippines requests the invocation of Article 5 of the U.S.-Philippines Mutual Defense Treaty, and the U.S. takes some military action, the situation would escalate rapidly. China could retaliate by activating missile systems from its artificial islands, conducting larger-scale naval exercises, or even declaring restrictions on civilian vessel navigation in specific areas.
The economic impact would be immense. If navigation in the South China Sea is even partially restricted, global supply chains would immediately be disrupted, and oil prices would surge. Japan would face the challenge of securing its crude oil import routes from the Middle East, and sea lane defense would emerge as a real issue. The impact would also ripple through semiconductor supply chains, with the risk of spillover into the Taiwan Strait raising concerns about a global semiconductor shortage.
In the worst-case scenario, armed conflict in the South China Sea could spill over into the Taiwan Strait and the East China Sea, fundamentally transforming the security environment across the entire Indo-Pacific. In this event, Japan would be compelled to make critical policy decisions, including providing rear-area support under the U.S.-Japan Security Treaty and applying the Act on Measures to Ensure the Peace and Security of Japan in Situations in Areas Surrounding Japan. International financial markets would shift to risk-off, potentially leading to a sharp decline in Asian currencies and capital outflow.
Implications for Investment/Action: Occurrence of physical clashes at Second Thomas Shoal, fire control radar lock-on between US and Chinese warships, China's declaration of a no-sail zone in specific areas of the South China Sea, request by the Philippines to invoke the Mutual Defense Treaty.
Key Triggers to Watch
- China Coast Guard's physical obstruction of Philippine resupply missions to Second Thomas Shoal (occurrence of physical clashes): April-June 2026 (resupply frequency increases during the stable sea conditions in the South China Sea)
- Realization or failure of a U.S.-China summit (triggered by the G20 Summit or UN General Assembly): September-November 2026
- 2026 U.S. Midterm Elections and their impact on China policy: November 2026
- Attempts by ASEAN Chair Malaysia to accelerate COC negotiations: Throughout 2026 (especially at the ASEAN Foreign Ministers' Meeting in July)
- China's large-scale military exercises in the Taiwan Strait (linked to the South China Sea situation): May 2026 (around the second anniversary of Taiwan President Lai Ching-te's inauguration)
🔄 TRACKING LOOP
Next Trigger: Second Thomas Shoal Philippine Resupply Mission April-May 2026 — The China Coast Guard's response during this period, when sea conditions are stable and resupply frequency increases, will serve as a barometer for South China Sea tensions throughout the year.
Continuation of this Pattern: Tracking Theme: South China Sea - US-China Military Escalation Path — The next milestones are the success or failure of the Second Thomas Shoal resupply mission in April-May 2026, followed by the progress of COC negotiations at the ASEAN Foreign Ministers' Meeting in July.
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