Military Tensions in the Taiwan Strait — US
In early 2026, both the United States and China conducted large-scale military exercises simultaneously in the Taiwan Strait, bringing the risk of accidental collision to its highest level since the Cold War. This tension represents a structural turning point that could fundamentally shake the security and economic order of the entire Indo-Pacific region, including Japan.
── Understand in 3 points ─────────
- • The Chinese People's Liberation Army (PLA) conducted its largest-ever integrated military exercise around the Taiwan Strait from January to March 2026. Three aircraft carrier strike groups, including the aircraft carrier "Fujian," participated.
- • The U.S. Navy, centered on the 7th Fleet, conducted large-scale exercises in the Philippine Sea and east of the Taiwan Strait, advocating for a "free and open Indo-Pacific." The USS George Washington Carrier Strike Group was deployed.
- • China's Ministry of Foreign Affairs condemned the U.S. military exercises as a "grave infringement of sovereignty" and hinted at retaliatory measures against arms sales to Taiwan.
── NOW PATTERN ─────────
The "spiral of conflict," where both the U.S. and China repeatedly escalate tensions in the Taiwan Strait, is the dominant dynamic, making de-escalation structurally difficult due to domestic political pressures and military logic on both sides.
── Probability and Response ──────
• Base case 55% — Maintenance and regular use of the US-China military hotline, continuation of crisis management dialogues at the diplomatic level, rapid de-escalation after accidental incidents, gradual implementation of arms sales to Taiwan (avoiding large-scale packages)
• Bull case 15% — Realization of direct US-China summit talks and issuance of a joint statement, voluntary reduction in the scale and frequency of PLA military exercises, temporary suspension or slowdown of US arms sales to Taiwan, rapid deterioration of China's economic indicators
• Bear case 30% — Frequent abnormal close-proximity incidents involving US and Chinese military aircraft and vessels, breakdown of the military hotline, establishment of navigation and flight restricted zones around Taiwan by China, additional deployment of US aircraft carrier strike groups, intensification of Chinese cyberattacks
📡 THE SIGNAL — What Happened
Why it matters: In early 2026, both the United States and China conducted large-scale military exercises simultaneously in the Taiwan Strait, bringing the risk of accidental collision to its highest level since the Cold War. This tension represents a structural turning point that could fundamentally shake the security and economic order of the entire Indo-Pacific region, including Japan.
- Military — The Chinese People's Liberation Army (PLA) conducted its largest-ever integrated military exercise around the Taiwan Strait from January to March 2026. Three aircraft carrier strike groups, including the aircraft carrier "Fujian," participated.
- Military — The U.S. Navy, centered on the 7th Fleet, conducted large-scale exercises in the Philippine Sea and east of the Taiwan Strait, advocating for a "free and open Indo-Pacific." The USS George Washington Carrier Strike Group was deployed.
- Diplomacy — China's Ministry of Foreign Affairs condemned the U.S. military exercises as a "grave infringement of sovereignty" and hinted at retaliatory measures against arms sales to Taiwan.
- Diplomacy — The U.S. State Department reaffirmed its defense commitments under the Taiwan Relations Act, while asserting that its actions were within the framework of the "One China" policy.
- Defense — Japan's Ministry of Defense raised the Self-Defense Forces' alert and surveillance posture to the "enhanced intelligence gathering" level and reinforced units in the Nansei Islands.
- Economy — The escalation of tensions in the Taiwan Strait has led to an increase in navigation risk premiums for the strait, through which approximately 40% of global maritime trade passes. Maritime insurance rates have risen by 30-50% year-on-year.
- Semiconductors — The risk of supply disruption from Taiwan's semiconductor industry, including TSMC, has been re-recognized, accelerating supply chain diversification in various countries.
- Alliances — Japan, the U.S., Australia, and India (QUAD) held an emergency foreign ministers' meeting and confirmed the importance of peace and stability in the Taiwan Strait in a joint statement.
- Domestic Politics — Ahead of the U.S. midterm elections in November 2026, the Biden administration (or its successor) has extremely limited political leeway to soften its hardline stance against China.
- Military Technology — The deployment of China's DF-27 hypersonic missile has been confirmed, qualitatively enhancing its anti-access/area denial (A2/AD) capabilities against U.S. aircraft carrier strike groups.
- Information Warfare — China's cyberattacks and information operations (gray zone operations) have intensified against Taiwan and neighboring countries. Taiwan's Ministry of National Defense reports thousands of cyberattacks per month.
- Energy — In preparation for a Taiwan Strait blockade scenario, Japan is accelerating the buildup of LNG reserves and diversifying energy procurement sources.
The US-China confrontation over the Taiwan Strait did not suddenly emerge in 2026. Its roots trace back to the founding of the People's Republic of China in 1949 and the relocation of the Republic of China to Taiwan, representing an unresolved geopolitical fault line spanning over 70 years. During the Cold War, the U.S. supported Taiwan as an anti-communist stronghold, but severed formal diplomatic relations with the normalization of US-China ties in 1979, instead maintaining security commitments through the ambiguous legal framework of the Taiwan Relations Act. This "strategic ambiguity" has supported stability in the Taiwan Strait for nearly half a century, but its structure is now fundamentally shaken.
The turning point was China's rapid military modernization since the late 2010s. The Xi Jinping administration positioned Taiwan's unification as a core element of the "great rejuvenation of the Chinese nation," and effectively set a timeline for unification after the 19th Party Congress in 2017. The PLA's modernization is not merely a quantitative expansion but involves a qualitative leap. Through the development of aircraft carrier strike groups, the operational deployment of hypersonic missiles, and the advancement of integrated command systems, China is successfully relativizing the U.S. military's superiority in the Western Pacific.
Meanwhile, structural changes are also underway on the U.S. side. Since the Trump administration (first term), U.S. policy towards China has shifted to a "strategic competition" approach as a bipartisan consensus. The Biden administration inherited and strengthened this, activating AUKUS (Australia-UK-US security cooperation) and QUAD, and accelerating arms sales to Taiwan. Administrations since 2025 have not altered this fundamental stance; rather, domestic political pressures have pushed the hardline approach towards China in an irreversible direction.
Then-House Speaker Pelosi's visit to Taiwan in August 2022 was a decisive turning point that made this structural confrontation visibly clear. In response, China conducted large-scale military exercises around Taiwan, effectively rehearsing a naval blockade. Since then, PLA military activities around Taiwan have become normalized, establishing a "new normal." The hollowing out of the median line, frequent incursions into the Air Defense Identification Zone (ADIZ), and circumnavigation of Taiwan by naval vessels have become routine.
It is within this context that the events of early 2026 must be understood. The current military exercises are not isolated incidents but rather an extension of the gradual escalation over the past few years. However, what makes this time qualitatively different is that both the U.S. and China are conducting large-scale exercises simultaneously. This means that both militaries are operating in close proximity, dramatically increasing the risk of accidental collision.
Historically, accidental collisions between great powers are as dangerous as, if not more dangerous than, planned wars. As the Sarajevo incident in 1914 demonstrated, controlling the escalation ladder is far more difficult than imagined, and military confrontations, once begun, tend to expand by their own logic. The U.S. and China lack comprehensive military hotlines and accidental collision prevention mechanisms comparable to those that existed between the U.S. and Soviet Union during the Cold War, which further amplifies the risk.
For Japan, this situation presents the security imperative of "a Taiwan contingency is a Japan contingency" as a reality. The Nansei Islands, particularly Yonaguni Island, are located just 110 kilometers from Taiwan, creating a geographical inevitability that Japan would be automatically drawn into a military conflict in the Taiwan Strait. Since the 2015 security legislation, Japan has enabled the limited exercise of collective self-defense, but political and legal ambiguities still remain regarding the Self-Defense Forces' role and scope of involvement in an actual Taiwan contingency.
From an economic perspective, instability in the Taiwan Strait poses an existential risk to the global economy. Taiwan is home to TSMC, which accounts for over 90% of the world's advanced semiconductor manufacturing, and the Taiwan Strait is a critical maritime chokepoint through which approximately 40% of global trade passes. Should military conflict or a naval blockade materialize, a supply chain crisis far exceeding the COVID-19 pandemic of 2020 would occur, and the global economy would likely plunge into a severe recession.
The delta: The simultaneous large-scale military exercises conducted by the U.S. and China in the Taiwan Strait in early 2026 have structurally elevated the risk of accidental collision to a new level. This marks a shift from the previous pattern of "one side exercises while the other monitors" to a pattern where "both sides simultaneously project military power," qualitatively increasing the difficulty of escalation management.
🔍 BETWEEN THE LINES — What the News Isn't Saying
The biggest dynamic that official statements fail to address is that the domestic political pressures on both the U.S. and China are the true drivers of the crisis. China needs external nationalism to mask its deepening real estate crisis and rising youth unemployment, while the U.S. fears being labeled "weak" on China as a fatal risk ahead of the midterm elections. Both sides speak of "peace and stability in the Taiwan Strait," yet paradoxically, escalation is the most rational choice domestically for both. Furthermore, behind Japan's "enhanced alert posture" lies the inconvenient reality that specific roles and responsibilities in a Taiwan contingency have not yet been agreed upon between Japan and the U.S., with ambiguity itself creating both deterrence and vulnerability.
NOW PATTERN
Spiral of Conflict × Overextension of Power × Alliance Strain
The "spiral of conflict," where both the U.S. and China repeatedly escalate tensions in the Taiwan Strait, is the dominant dynamic, making de-escalation structurally difficult due to domestic political pressures and military logic on both sides.
Intersection of Dynamics
The three dynamics of "Spiral of Conflict," "Overextension of Power," and "Alliance Strain" are deeply interconnected, complexly destabilizing the security environment in the Taiwan Strait. The essence of the current crisis lies precisely at the intersection of these three.
As the spiral of conflict accelerates, the overextension of power by both the U.S. and China intensifies. China must continue to invest resources to maintain its normalized military activities around Taiwan, and the U.S. must continue to strengthen its presence in the Indo-Pacific. This expansion of military commitments gradually erodes both sides' economic foundations and diminishes their capacity to address domestic issues. However, the logic of the spiral of conflict does not permit retreat, making it politically impossible to reduce commitments even with an awareness of overextension.
Concurrently, the spiral of conflict widens alliance strains. As tensions rise, allies face the question of "how far to commit," making visible the gap between U.S. expectations and individual nations' intentions. Japan's posture of strengthening its alert posture while refraining from explicitly stating concrete military commitments clearly demonstrates this dynamic. And if alliance strains widen, China will interpret this as a success in deterring the U.S., gaining an incentive to apply further military pressure. This creates a vicious cycle that further accelerates the spiral of conflict.
The most dangerous scenario is one where the exhaustion from overextension of power creates a sense of "now or never" urgency, causing the escalation speed of the spiral of conflict to become uncontrollable, and alliance strains lead to a dysfunctional collective response during a crisis—a triple failure occurring simultaneously. The current situation in the Taiwan Strait is approaching this dangerous intersection, with the risk that the runaway of any one dynamic could trigger a chain reaction in the other two.
📚 PATTERN HISTORY
1914: Outbreak of World War I (Sarajevo Incident)
Local incident escalates into global war due to alliance chains and a spiral of conflict
Structural similarities to today: When alliance obligations and mutual distrust among great powers combine, managing the escalation of accidental incidents becomes far more difficult than imagined. The existence of automatic escalation mechanisms is the greatest risk factor.
1962: Cuban Missile Crisis
Direct military confrontation between nuclear powers on the brink of accidental war
Structural similarities to today: Backchannels (informal negotiation channels) and securing mutual "exits" are key to crisis management. However, there is no guarantee of success, and multiple coincidences averted catastrophe. The fact that a hotline was established after the crisis proves the inadequacy of pre-existing crisis management mechanisms.
1995-96: Third Taiwan Strait Crisis
China's missile exercises and U.S. aircraft carrier deployment over Taiwan's presidential election
Structural similarities to today: The overwhelming superiority of the U.S. military functioned as a deterrent, but China used this "humiliation" as a driving force for military modernization. A paradox where short-term crisis management success accelerated a long-term spiral of conflict.
2001: Hainan Island Incident (EP-3 Reconnaissance Plane Collision)
Accidental contact between U.S. and Chinese military aircraft as an entry point to escalation
Structural similarities to today: Accidental military contact can always occur. The issue is the subsequent political management, where both sides' face and domestic public opinion make de-escalation difficult. At that time, US-China relations were relatively stable, making it manageable, but in the current confrontational environment, similar incidents are far more dangerous.
2022: Speaker Pelosi's Visit to Taiwan and China's Military Exercises
Symbolic political act triggers large-scale military response, establishing a new "normal"
Structural similarities to today: Once raised, the level of military presence does not easily revert. The "new normal" of China's military activities around Taiwan is irreversible, and the spiral of conflict accelerates in only one direction.
Patterns Revealed by History
A consistent pattern revealed by historical precedents is the fact that "turning back" is structurally extremely difficult in military confrontations between great powers. From Sarajevo in 1914 to Pelosi's visit to Taiwan in 2022, each stage of escalation has established a new "normal," making a return to the previous equilibrium impossible. Particularly noteworthy is the contrast between the 1996 Taiwan Strait Crisis and the current situation. At that time, the overwhelming superiority of the U.S. military functioned as a deterrent, but 30 years of Chinese military modernization have fundamentally altered that premise. The current U.S.-China relationship lacks comprehensive crisis management mechanisms like those established between the U.S. and Soviet Union after the 1962 Cuban Missile Crisis, meaning the probability of accidental incidents escalating may be higher than during the Cold War. The 2001 Hainan Island incident was resolved relatively amicably because US-China relations at the time had many cooperative aspects, but the same outcome cannot be expected in the current environment of structural competition. History teaches that stopping the spiral of conflict requires one or both sides to make intentional and significant political concessions, but the current domestic political environments of both countries do not permit this.
🔮 NEXT SCENARIOS
Tensions in the Taiwan Strait will remain high throughout 2026 but will not escalate into direct military conflict. Both the U.S. and China will continue their game of intimidation and deterrence through military exercises while maintaining minimal communication channels to avoid accidental collisions. Specifically, the PLA will further expand its military activities around Taiwan as a "new normal," making the hollowing out of the median line a fait accompli. The U.S. military will maintain its frequency of Taiwan Strait transits and exercises in the vicinity but will avoid intentionally crossing China's "red lines." Accidental near-miss incidents will occur but will be managed through restraint at the on-site commander level on both sides and de-escalation via diplomatic channels. Japan will accelerate the strengthening of its defense posture in the Nansei Islands and may formulate a supplementary budget to achieve its defense spending target of 2% of GDP by fiscal year 2027 ahead of schedule. Cooperation within the QUAD and AUKUS frameworks will be strengthened, but concrete military planning for a Taiwan contingency will proceed behind the scenes. Economically, the rise in Taiwan Strait risk premiums will lead to a permanent increase in maritime transport costs, and the cost of supply chain restructuring will act as a drag on global economic growth, reducing it by approximately 0.3-0.5% annually. Decoupling the semiconductor industry from Taiwan will accelerate, but complete replacement will be difficult until the 2030s.
Implications for Investment/Action: Maintenance and regular use of the US-China military hotline, continuation of crisis management dialogues at the diplomatic level, rapid de-escalation after accidental incidents, gradual implementation of arms sales to Taiwan (avoiding large-scale packages)
Some provisional agreement on Taiwan Strait tension management is reached between the U.S. and China, leading to a significant reduction in military tensions. This agreement would not take the form of an official treaty but rather an "implicit understanding" where both sides voluntarily restrict military activities. Several preconditions are necessary for this scenario to materialize. First, a severe deterioration of the Chinese economy creates an incentive for the Xi Jinping administration to seek diplomatic stability. If the deepening real estate crisis and rising unemployment rates approach a critical point of social unrest, domestic stability may be prioritized over external military adventures. Second, forces within the U.S. that emphasize dialogue and management, even within the framework of "strategic competition," gain influence in policy decisions. Third, Taiwan intentionally maintains a low profile and avoids giving China a pretext for provocation. In the bull case scenario, agreements such as a "Code of Conduct for Maritime Encounters" at a US-China summit, expansion of military hotlines, and technical arrangements to prevent accidental collisions are realized. The regional security environment, including Japan, temporarily stabilizes, and a decrease in maritime insurance rates and revitalization of trade are expected. However, even in this scenario, the fundamental resolution of the Taiwan issue is not achieved, and tensions remain temporarily managed.
Implications for Investment/Action: Realization of direct US-China summit talks and issuance of a joint statement, voluntary reduction in the scale and frequency of PLA military exercises, temporary suspension or slowdown of US arms sales to Taiwan, rapid deterioration of China's economic indicators
An accidental military collision occurs, escalating into a limited but direct armed conflict between the U.S. and China. The most probable trigger is an accidental contact between U.S. and Chinese military aircraft or vessels (a more serious repeat of the Hainan Island incident), which makes political de-escalation difficult due to inflamed domestic public opinion and sensational media coverage on both sides. While the conflict would not escalate into full-scale war, it could unfold as limited naval and aerial engagements, exchanges of cyberattacks, and a chain of economic retaliatory measures. Scenarios such as a limited naval blockade of Taiwan by China (under the guise of "quarantine") or a unilateral declaration of closure of specific maritime areas and airspace around Taiwan are also conceivable. In this case, Japan would be forced to make extremely difficult choices. While logistical support for U.S. forces based on the Japan-U.S. Security Treaty would be minimally required, direct involvement in armed conflict would be politically extremely difficult domestically. Civilian evacuation from the Nansei Islands would emerge as a realistic challenge, potentially exposing the limits of the Self-Defense Forces' transport capabilities. The economic impact would be catastrophic. If navigation in the Taiwan Strait is even temporarily disrupted, global supply chains would fall into chaos, and the cessation of semiconductor supply would cause trillions of dollars in damage to the automotive, electronics, and AI industries. Crude oil prices would exceed $150 per barrel, and the global economy would plunge into a severe recession. Stock markets are expected to plummet by 20-30%, with the possibility of a financial crisis surpassing the 2008 Lehman Shock.
Implications for Investment/Action: Frequent abnormal close-proximity incidents involving US and Chinese military aircraft and vessels, breakdown of the military hotline, establishment of navigation and flight restricted zones around Taiwan by China, additional deployment of US aircraft carrier strike groups, intensification of Chinese cyberattacks
Key Triggers to Watch
- Occurrence of accidental contact incidents involving US and Chinese military aircraft/vessels: April-June 2026 (highest risk during the ongoing exercise period)
- US Congressional approval of a new large-scale arms sales package to Taiwan: Summer 2026 (within the legislative cycle before the midterm elections)
- Decisions regarding Taiwan policy at a Plenary Session of the Central Committee of the Communist Party of China (e.g., Third Plenary Session): Autumn 2026
- US midterm elections in November 2026 and shifts in China policy before and after: September-December 2026
- "Accidental" submarine cable damage incidents around Taiwan: Throughout 2026 (potential for gray zone attacks)
🔄 TRACKING LOOP
Next Trigger: Next direct dialogue between US and Chinese leaders (G20 Summit in November 2026 or a separately arranged bilateral meeting) — Whether an agreement on Taiwan Strait crisis management mechanisms is reached at this event will determine the trajectory until year-end.
Continuation of this Pattern: Tracking Theme: Taiwan Strait Escalation Ladder — The next milestone is the deliberation of the US-Taiwan arms sales package in summer 2026 and the scale of China's military response to it.
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