Military Pressure in the Taiwan Strait — The Critical Point of
In early 2026, China conducted its largest-ever military exercises around Taiwan, and coupled with the counter-posture of the US-Japan alliance, tensions in the Taiwan Strait have reached their most dangerous level since 1996. Military escalation over Taiwan, the heart of the semiconductor supply chain, poses a structural risk that could shake the foundations of the global economy and security order.
── Understand in 3 points ─────────
- • The Chinese People's Liberation Army (PLA) conducted large-scale integrated military exercises, dubbed "Joint Sword-2026," around Taiwan from January to March 2026. The Navy, Air Force, Rocket Force, and Strategic Support Force participated, with the number of incursions into Taiwan's Air Defense Identification Zone (ADIZ) reaching an all-time high.
- • During the exercise period, PLA aircraft incursions into Taiwan's ADIZ reached an average of 30-50 aircraft per day, a significant increase from the 2024 average of 10-15 aircraft. Formations including J-16D electronic warfare aircraft and H-6K bombers were confirmed.
- • The successor to Lloyd Austin as US Secretary of Defense chose the Indo-Pacific region for their first overseas trip, visiting Japan, the Philippines, and Australia. The US-Japan joint statement re-emphasized the importance of peace and stability in the Taiwan Strait.
── NOW PATTERN ─────────
Tensions in the Taiwan Strait exhibit a structural pattern where the "security dilemma" of both the US and China creates a spiral of conflict, and the failure of international cooperation to act as a brake allows an uncontrollable escalation to approach a critical point.
── Probability and Response ──────
• Base case 55% — China's military exercise frequency stabilizes at 2-3 times per year, maintenance of US-China military hotlines, gradual recovery of Chinese economic indicators, steady implementation of arms provisions to Taiwan
• Bull case 15% — Realization of a US-China summit and joint statement, clear reduction in the scale of China's military exercises, resumption of US-China military exchanges, establishment of an accidental incident prevention mechanism in the Taiwan Strait
• Bear case 30% — Chinese military live-fire exercises conducted near Taiwan, blockade-like actions around Taiwan's outlying islands, large-scale cyberattacks, dramatic increase in China's pressure on Taiwan's diplomatic allies to sever ties
📡 THE SIGNAL — What Happened
Why it matters: In early 2026, China conducted its largest-ever military exercises around Taiwan, and coupled with the counter-posture of the US-Japan alliance, tensions in the Taiwan Strait have reached their most dangerous level since 1996. Military escalation over Taiwan, the heart of the semiconductor supply chain, poses a structural risk that could shake the foundations of the global economy and security order.
- Military — The Chinese People's Liberation Army (PLA) conducted large-scale integrated military exercises, dubbed "Joint Sword-2026," around Taiwan from January to March 2026. The Navy, Air Force, Rocket Force, and Strategic Support Force participated, with the number of incursions into Taiwan's Air Defense Identification Zone (ADIZ) reaching an all-time high.
- Military — During the exercise period, PLA aircraft incursions into Taiwan's ADIZ reached an average of 30-50 aircraft per day, a significant increase from the 2024 average of 10-15 aircraft. Formations including J-16D electronic warfare aircraft and H-6K bombers were confirmed.
- Diplomacy — The successor to Lloyd Austin as US Secretary of Defense chose the Indo-Pacific region for their first overseas trip, visiting Japan, the Philippines, and Australia. The US-Japan joint statement re-emphasized the importance of peace and stability in the Taiwan Strait.
- Diplomacy — Japan increased its 2026 defense budget to over 2.0% of GDP, its largest ever, and accelerated the deployment of long-range missiles to the Nansei Islands. The frequency of US-Japan joint exercises in the Sakishima Islands was tripled compared to the previous year.
- Economy — In response to Taiwan Strait risks, TSMC announced the accelerated construction of its third phase factory in Arizona, USA. The operational start date for its second Kumamoto factory in Japan was also moved up to the end of 2026.
- International — EU foreign ministers issued an independent EU statement on the Taiwan Strait, but differences in attitudes towards China among member states prevented concrete military commitments.
- Economy — The New Taiwan Dollar depreciated by approximately 5% against the US dollar in Q1 2026. The Taiwan Weighted Index (TAIEX) recorded a sharp drop of over 8% within one week of the exercises' commencement.
- International — ASEAN nations failed to issue a unified statement, with Cambodia and Laos maintaining pro-China stances, while the Philippines and Vietnam implicitly criticized China.
- Military — The US Navy deployed carrier strike groups "Nimitz" and "Carl Vinson" to the Philippine Sea. This simultaneous deployment of two carrier strike groups is the first since 2022.
- Politics — Taiwan's President Lai Ching-te convened a special national defense conference, instructing preparations for phased mobilization of reservists and strengthening civilian defense systems. 72% of Taiwanese citizens responded that "China's military threat is increasing" (Taiwan Foundation for Democracy survey, February 2026).
- Technology — China conducted live-fire drills of precision-guided missiles utilizing the BeiDou navigation system in waters east of Taiwan, demonstrating projection capabilities beyond the First Island Chain.
- Energy — Taiwan's LNG reserves dropped to approximately 11 days' supply. Estimates from Taiwan's Ministry of Economic Affairs indicated that in a Taiwan Strait blockade scenario, the island would face a severe energy crisis within 30 days.
To understand the current tensions in the Taiwan Strait, one must go back to the founding of the People's Republic of China in 1949 and the Kuomintang's retreat to Taiwan. For over 75 years since then, the Taiwan Strait has remained the most dangerous geopolitical fault line in East Asia.
During the Cold War, two "Taiwan Strait Crises" occurred in 1954 and 1958, triggered by shelling from mainland China. During this period, the United States signed a mutual defense treaty with Taiwan (Republic of China) and dispatched the Seventh Fleet to deter China's armed unification. However, in 1979, extending the Nixon-Kissinger line, the US normalized diplomatic relations with the People's Republic of China and severed official diplomatic ties with Taiwan. Instead, it enacted the "Taiwan Relations Act," establishing a unique policy framework of "strategic ambiguity" regarding Taiwan's security.
This "strategic ambiguity" has been the foundation supporting stability in the Taiwan Strait for the past 45 years. The United States has maintained a delicate balance, neither officially supporting Taiwan's independence nor condoning China's armed unification. However, this balance has begun to structurally collapse since 2016.
The first factor is China's military rise under the Xi Jinping administration. Since assuming supreme leadership in 2012, Xi Jinping has championed the "great rejuvenation of the Chinese nation," positioning Taiwan's unification as a core element. The PLA's modernization has progressed rapidly, with the total number of Chinese naval vessels surpassing that of the US Navy by 2025, making it the world's largest navy. The maturation of the A2/AD (Anti-Access/Area Denial) strategy has significantly constrained the freedom of action for US forces around the Taiwan Strait.
The second factor is democratization and the transformation of identity in Taiwan. Since democratization in the 1990s, "Taiwanese identity" has rapidly permeated, with the percentage of people identifying as "Chinese" falling to the 2% range. The victory of the Democratic Progressive Party's (DPP) Lai Ching-te in the January 2024 presidential election, securing a third consecutive DPP administration, signaled to Beijing that the window for "peaceful unification" was closing.
The third factor is geoeconomic competition over semiconductors. Taiwan, centered around TSMC, produces over 90% of the world's advanced semiconductors, and this "silicon shield" has dramatically increased Taiwan's strategic value. Concurrently, US export restrictions on semiconductors to China (the CHIPS Act in October 2022, and additional regulations in 2023 and 2024) have directly hindered the development of China's high-tech industry, amplifying Beijing's impatience.
The fourth factor is the multipolarization of the international order and the normalization of "gray zone tactics." Russia's invasion of Ukraine (2022) demonstrated that changing the status quo by force remains a realistic option in the 21st century. China, closely observing this lesson, has normalized gray zone operations against Taiwan, combining military exercises, cyberattacks, economic coercion, and information warfare. The large-scale military exercises following US House Speaker Pelosi's visit to Taiwan in August 2022 marked a turning point.
The military exercises in early 2026 are the result of the convergence of these structural factors. For Xi Jinping, the 100th anniversary of the PLA's founding in 2027 is a symbolic deadline for a "historic resolution" to the Taiwan issue, and military preparations and political signaling towards this goal are accelerating. Concurrently, the US Indo-Pacific strategy is advancing the construction of deterrence against China through strengthening alliance networks (AUKUS, Quad, US-Japan-Philippines trilateral cooperation), which China perceives as "containment" and is reacting to with increased defiance.
History shows that such security dilemmas—where one party's defensive measures appear offensive to the other—carry the risk of uncontrollable escalation. The current situation in the Taiwan Strait harbors structural dangers similar to Europe in 1914 or the Cuban Missile Crisis in 1962. The crucial differences are the existence of nuclear weapons and a much higher degree of global economic interdependence, which astronomically increases the cost of conflict while also complicating the reliability of deterrence.
The delta: China's large-scale military exercises in early 2026 significantly surpassed previous exercises both quantitatively and qualitatively, indicating a qualitative shift from "periodic intimidation" to "demonstration of combat readiness." Tensions in the Taiwan Strait have reached levels not seen since the Third Taiwan Strait Crisis in 1996, with the boundary between "gray zone" and "contingency" becoming blurred.
🔍 BETWEEN THE LINES — What the News Isn't Saying
The most crucial dynamic not conveyed by official reports is that the fundamental motivation for China's military escalation lies not in Taiwan's unification itself, but in domestic politics. With the deepening real estate crisis and persistently high youth unemployment, the Xi Jinping administration is compelled to redirect social discontent towards external threats. Furthermore, on the US side, it is noteworthy that tensions in the Taiwan Strait function as a "convenient crisis" that justifies massive government subsidies for both the defense and semiconductor industries. In other words, both countries, while ostensibly seeking "peace and stability," have structural incentives to maintain a certain level of tension, and this alignment of interests creates a "managed persistence" of tension.
NOW PATTERN
Spiral of Conflict × Overextension of Power × Alliance Strain × Failure of Cooperation
Tensions in the Taiwan Strait exhibit a structural pattern where the "security dilemma" of both the US and China creates a spiral of conflict, and the failure of international cooperation to act as a brake allows an uncontrollable escalation to approach a critical point.
Intersection of Dynamics
The three dynamics of "Spiral of Conflict," "Overextension of Power," and "Alliance Strain" are not independent phenomena but form a dangerous feedback loop that mutually reinforces each other.
As the spiral of conflict accelerates the pace of escalation, the overextension of power erodes the rational judgment capabilities of each party. China attempts to compensate for economic difficulties with military displays, while the US, preoccupied with multi-front commitments, sees its attention and resource allocation to the Taiwan Strait dispersed. In this situation, alliance strain undermines the credibility of deterrence.
Particularly dangerous is the mechanism by which alliance strain accelerates the spiral of conflict. If China judges that "the international community is divided, and the costs of hardline measures are limited," it will have an incentive to further raise the level of military intimidation. If the US and Japan respond with additional deterrent measures, the spiral will escalate another notch. However, if these deterrent measures do not receive the full support of allies, the credibility of deterrence will decline, leading to a vicious cycle that invites further Chinese escalation.
The overextension of power further destabilizes this structure. As each party approaches the limits of its capabilities, the room for crisis management shrinks, increasing the risk of accidental incidents developing into uncontrollable escalation. Historically, conflicts between great powers have often begun not with planned war initiation, but with a chain of miscalculations and contingencies. The Taiwan Strait in 2026 is precisely at a juncture where these structural conditions are aligning.
📚 PATTERN HISTORY
1914: Outbreak of World War I
The chain of alliances and the security dilemma expanded an accidental trigger, the Sarajevo incident, into an uncontrollable great war.
Structural similarities with the present: The chain of mutual defense obligations and the rigidity of each nation's mobilization plans deprived diplomatic solutions of time. The alliance structure itself carries the risk of automating escalation.
1962: Cuban Missile Crisis
The spiral of conflict over nuclear capabilities between the US and Soviet Union brought about the 13 days closest to nuclear war in human history.
Structural similarities with the present: Although ultimately averted by back-channel diplomacy and mutual concessions (Soviet missile withdrawal and US secret agreement to withdraw missiles from Turkey), the risk of accidental nuclear use was extremely high. As indicated by the establishment of a hotline after the crisis, crisis management mechanisms should be built in advance.
1995-96: Third Taiwan Strait Crisis
China's missile exercises in response to Taiwanese President Lee Teng-hui's visit to the US, and the confrontation caused by the deployment of two US aircraft carriers to the Taiwan Strait.
Structural similarities with the present: In an era where US military superiority was clear, it was possible to resolve crises through a "show of force" like carrier deployment. However, this successful experience motivated China to build A2/AD capabilities, leading to a reversal of the military balance 30 years later.
2014: Russia's Annexation of Crimea
Change of status quo through the creation of military faits accomplis. The international community's slow and divided response led to an underestimation of the cost of invasion.
Structural similarities with the present: Sanctions and diplomatic condemnation alone cannot deter changing the status quo by force. Deterrence will not function without a system to clearly define the costs of invasion in advance and implement them immediately.
2022: US House Speaker Pelosi's Visit to Taiwan and China's Military Exercises
Large-scale Chinese military exercises triggered by a high-ranking official's visit to Taiwan. A Taiwan-encircling exercise pattern was executed for the first time, becoming a "new normal."
Structural similarities with the present: China conducted a rehearsal of a Taiwan blockade through the exercises and gauged the international community's reaction. The lack of strong backlash set a precedent that justified subsequent escalation of exercises.
Patterns Revealed by History
Historical patterns consistently show that the security dilemma between great powers follows a law where one party's "defensive" measures provoke the other, leading to a spiral of escalation. The chain of alliances in 1914, the missile deployment race in 1962, the confrontation of aircraft carriers versus missiles in 1996, the creation of faits accomplis in 2014, and the normalization of military exercises in 2022—common to all of these is the security paradox where "actions intended for deterrence are perceived as provocation."
A further crucial lesson is that the "failure of cooperation" by the international community neutralizes the brakes on escalation. Just as the EU's economic interests delayed unified sanctions against Russia in Crimea in 2014, the economic dependence of the EU and ASEAN on China makes a unified deterrent posture difficult in the current Taiwan Strait situation. Moreover, past crises include cases where war was successfully averted (Cuban Missile Crisis, Third Taiwan Strait Crisis) and cases where it failed (World War I, annexation of Crimea), with the branching point being the "existence of back-channel diplomacy" and the "provision of an exit that allows both sides to save face." The extent to which these conditions are met in current US-China relations will determine future developments.
🔮 NEXT SCENARIOS
A scenario where military tensions remain high but do not escalate into direct military conflict, continuing a "managed confrontation." China conducts large-scale military exercises 2-3 times a year and normalizes incursions into Taiwan's ADIZ but refrains from actual use of force. There are three reasons for this. First, the calculation of economic costs. A military conflict in the Taiwan Strait would deal a fatal blow to the Chinese economy, threatening the legitimacy of the Xi Jinping administration. Second, military uncertainty. While the PLA has modernized, it has almost no combat experience, and the success of an unprecedented amphibious invasion of Taiwan is not guaranteed. Third, the risk of international isolation. Russia's experience after the invasion of Ukraine demonstrates the long-term costs of changing the status quo by force to China. The US expands joint exercises with allies and arms sales, strengthening its deterrence posture, but avoids actions that cross China's red lines, such as formal recognition of Taiwan's independence or permanent stationing of US troops in Taiwan. The Taiwanese economy slows amidst uncertainty, but TSMC's accelerated overseas expansion functions as a risk hedge. Japan steadily strengthens its defense posture in the Nansei Islands, improving its contingency response capabilities. This "cold peace" is unstable but persists as long as both sides maintain rational cost calculations.
Implications for Investment/Action: China's military exercise frequency stabilizes at 2-3 times per year, maintenance of US-China military hotlines, gradual recovery of Chinese economic indicators, steady implementation of arms provisions to Taiwan
A scenario where tensions in the Taiwan Strait are substantially eased through a diplomatic breakthrough. The most likely trigger is the issuance of a "Joint Statement on Taiwan Strait Stabilization" at a US-China summit. China's deepening economic difficulties may lead the Xi Jinping administration to soften its external posture to attract foreign investment and restore international trust. In particular, if the prolonged real estate crisis and declining exports coincide, the cost of military adventurism would further increase, making a return to "strategic patience" a rational choice. In this scenario, some informal agreement on limiting military activities in the Taiwan Strait would be reached between the US and China, with China reducing the scale and frequency of military exercises, and the US adjusting the pace of arms sales to Taiwan. Taiwan maintains its international space for activity within the framework of "status quo." Japan resumes dialogue between its leaders and China, aiming to stabilize economic relations. However, even if this optimistic scenario materializes, fundamental structural conflicts would not be resolved, and the easing of tensions would likely remain temporary. Xi Jinping's commitment to "Taiwan unification" would remain unchanged, not signifying an abandonment of military options.
Implications for Investment/Action: Realization of a US-China summit and joint statement, clear reduction in the scale of China's military exercises, resumption of US-China military exchanges, establishment of an accidental incident prevention mechanism in the Taiwan Strait
A scenario where a limited military conflict occurs in the Taiwan Strait due to an accidental incident or planned escalation. There are three most dangerous pathways. The first is an accidental collision, where the close approach of Chinese and Taiwanese military aircraft escalates into a shooting incident. As ADIZ incursions dramatically increase, the risk of pilot fatigue and judgment errors is certainly rising. The second is limited military action against Taiwan's outlying islands (Kinmen, Matsu). This carries far lower risk than an invasion of Taiwan proper and allows China to simultaneously "demonstrate resolve" and "gauge international reaction." The third is a case where China judges Taiwan's political changes—for example, moves towards independence—as a "breach of the red line" and takes military action. In any pathway, there is a risk that a limited conflict could escalate into a full-scale war. If military conflict occurs, Taiwan's economy would immediately be paralyzed, and global semiconductor supply would suffer catastrophic damage. If TSMC's Taiwan factories cease operations, the global technology industry would face a severe supply shortage for at least 1-2 years. The impact on the global economy would far exceed the Lehman Shock, with estimated losses of 5-10% of GDP. Japan would be forced to make its biggest political decision since the war regarding the exercise of collective self-defense.
Implications for Investment/Action: Chinese military live-fire exercises conducted near Taiwan, blockade-like actions around Taiwan's outlying islands, large-scale cyberattacks, dramatic increase in China's pressure on Taiwan's diplomatic allies to sever ties
Notable Triggers
- Expanded Meeting of the Central Military Commission of the Communist Party of China (determining PLA's next year's operational policy): April-May 2026
- US Congressional deliberation and voting on Taiwan-related bills (Taiwan Policy Act amendment): June-September 2026
- Military exercises around the 99th anniversary of the PLA's founding (symbolic meaning as the year before the 100th anniversary): July-August 2026
- Taiwan's local elections (November 2026 unified local elections) and political dynamics: September-November 2026
- Feasibility of a US-China summit at the APEC Leaders' Meeting: November 2026
🔄 TRACKING LOOP
Next Trigger: The scale and nature of military exercises around the 99th anniversary of the PLA's founding (August 1, 2026) — the intensity of the "signal of resolve" towards the 100th anniversary will be a leading indicator for the risk of a Taiwan contingency in 2027.
Continuation of this Pattern: Tracking Theme: Taiwan Strait Military Escalation — The next milestones are the PLA Founding Day exercises in August 2026, followed by China's actions during Taiwan's unified local elections in November 2026.
🎯 ORACLE DECLARATION
Prediction Question: Will a military conflict resulting in fatalities occur between Chinese forces and Taiwanese forces (or US forces) in the Taiwan Strait by December 31, 2026?
Judgment Deadline: 2026-12-31 | Judgment Criteria: To be determined based on reports from major international media (Reuters, AP, AFP) and official announcements from relevant governments, whether a military conflict involving the use of live ammunition resulting in one or more fatalities occurred between the Chinese People's Liberation Army and Taiwanese forces or US forces in the Taiwan Strait and its surrounding sea and air space (including within Taiwan's territorial waters, airspace, and ADIZ) by December 31, 2026. Accidents during military exercises or unintentional contact are not included.
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