US-China Military Standoff in the South China Sea
In early 2026, military exercises by both the US and China in the South China Sea overlapped in time and space, raising the risk of accidental armed conflict to its highest level since the end of the Cold War. The security order of the entire Indo-Pacific alliance network, including Japan, is at a turning point for reorganization.
── Understand in 3 points ─────────
- • From January to March 2026, the US Navy conducted "Freedom of Navigation Operations" (FONOPs) in the South China Sea at an unprecedented pace, carrying out at least 8 operations in the quarter.
- • The Chinese People's Liberation Army Navy (PLAN) conducted large-scale live-fire exercises around the Spratly Islands in February 2026, deploying a fleet including the aircraft carrier "Fujian".
- • In mid-March 2026, an incident occurred near Scarborough Shoal in the South China Sea where a US destroyer and a China Coast Guard vessel approached each other unusually closely (approximately 45 meters), with both sides blaming the other.
── NOW PATTERN ─────────
At the root of the South China Sea situation is a structural pattern where "path dependency," preventing both the US and China from retreating from their positions, and the "spiral of conflict," where each reacts to the other's actions by continuously increasing its military presence, mutually reinforce each other.
── Probability and Response ──────
• Base case 55% — Partial resumption of US-China military dialogue, de-escalation messages from both sides after close encounter incidents, continuation of formal dialogue at ASEAN regional forums, realization of a summit meeting between Xi Jinping and Biden's successor.
• Bear case 30% — Rapid increase in the frequency of close encounter incidents (more than 3 per month), unilateral declaration of "exercise zones" by China in specific maritime areas, breakdown of the US-China military hotline, physical attacks by the China Coast Guard on Philippine forces, passage of hardline South China Sea-related legislation in the US Congress.
• Bull case 15% — Announcement of concrete agreements on the South China Sea at a US-China summit, China's agreement to a prior notification system for military exercises, acceleration of COC negotiations and substantive agreement on articles, signing of a practical agreement between the US and Chinese navies on preventing accidental collisions in the South China Sea.
📡 THE SIGNAL — What Happened
Why it matters: In early 2026, military exercises by both the US and China in the South China Sea overlapped in time and space, raising the risk of accidental armed conflict to its highest level since the end of the Cold War. The security order of the entire Indo-Pacific alliance network, including Japan, is at a turning point for reorganization.
- Military Trends — From January to March 2026, the US Navy conducted "Freedom of Navigation Operations" (FONOPs) in the South China Sea at an unprecedented pace, carrying out at least 8 operations in the quarter.
- Military Trends — The Chinese People's Liberation Army Navy (PLAN) conducted large-scale live-fire exercises around the Spratly Islands in February 2026, deploying a fleet including the aircraft carrier "Fujian".
- Military Trends — In mid-March 2026, an incident occurred near Scarborough Shoal in the South China Sea where a US destroyer and a China Coast Guard vessel approached each other unusually closely (approximately 45 meters), with both sides blaming the other.
- Diplomacy — The US further expanded base access under the Enhanced Defense Cooperation Agreement (EDCA) with the Philippines, agreeing to utilize two new locations.
- Diplomacy — The Japanese government increased its 2026 defense budget to 2.1% of GDP, accelerating the development of missile defense and long-range strike capabilities for the Nansei Islands (Southwestern Islands).
- International Law — Ten years have passed since the 2016 South China Sea arbitration ruling, but China continues to reject the ruling as "a piece of paper" and persists in the militarization of artificial islands.
- Economy — The annual trade volume passing through the South China Sea amounts to approximately $5.3 trillion, with about one-third of global trade relying on this waterway.
- Security Policy — Discussions on reviewing security policy are accelerating in Japan, with debate between ruling and opposition parties regarding the expansion of the scope of "situations threatening Japan's survival."
- Alliance Relations — In February 2026, the Japan-US-Australia-India (QUAD) Leaders' Summit reaffirmed the maintenance of a "rules-based order" in the South China Sea and agreed to expand joint patrol activities.
- Technology & Armaments — China has increased the deployment of DF-26 intermediate-range ballistic missiles (the so-called "carrier killer") in its Southern Theater Command, strengthening its A2/AD (Anti-Access/Area Denial) capabilities.
- Domestic Politics — The Xi Jinping administration is rushing to achieve its military modernization goals for the 100th anniversary of the founding of the People's Liberation Army in 2027, with the strengthening of effective control in the South China Sea seen as a symbolic action toward this goal.
- Domestic Politics — In the US, with the November 2026 midterm elections approaching, a hardline stance against China has become a bipartisan consensus, putting political pressure on the administration to strengthen its military presence.
To understand the current phase of US-China confrontation in the South China Sea, it is necessary to consider at least three historical contexts.
First, there is the origin of China's "nine-dash line" claim. It began in 1947 when the Republic of China government drew an "eleven-dash line" on maps covering almost the entire South China Sea, which the People's Republic of China inherited as the "nine-dash line." Despite the extremely ambiguous basis of this historical rights claim under international law, it is deeply intertwined with China's national identity, making it a classic example of "path dependency" from which no regime can easily retreat. The 2016 Hague arbitration ruling rejected China's historical rights based on the nine-dash line, but China completely rejected it and instead accelerated the construction and militarization of artificial islands. As of 2026, ten years after the ruling, China's military infrastructure in the Paracel and Spratly Islands is almost complete, with runways, radar facilities, and anti-ship missile positions in place.
Second, there is the context of the US "freedom of navigation" principle and the maintenance of its hegemonic status. After World War II, the United States acted as the guarantor of the maritime order in the Western Pacific. This role has been institutionalized through a network of bilateral alliances such as the Japan-US Security Treaty, the US-Philippines Mutual Defense Treaty, and the ANZUS Treaty. In the "unipolar era" after the end of the Cold War, the overwhelming superiority of the US Navy supported this order, but this premise began to waver with the rapid modernization and expansion of the Chinese Navy since the 2010s. In particular, China's A2/AD (Anti-Access/Area Denial) strategy aims to restrict the freedom of action of US carrier strike groups, and the operational deployment of DF-21D and DF-26 anti-ship ballistic missiles is forcing fundamental revisions to US military operational plans.
Third, and most directly explaining "why now," is the domestic political dynamics in both the US and China. On the Chinese side, Xi Jinping has positioned the 100th anniversary of the founding of the People's Liberation Army in 2027 as a milestone for military modernization, promoting the construction of a "world-class military." The expansion of effective control in the South China Sea serves as a visible indicator of achieving this goal. In China, where economic slowdown persists, nationalism is a crucial source of regime legitimacy, making compromise on the South China Sea issue politically extremely difficult. On the US side, the framework of strategic competition with China, established since the Trump administration, has become a bipartisan consensus, and in the political environment leading up to the November 2026 midterm elections, a diminished presence in the South China Sea risks being perceived as "weak."
In addition to these structural factors, there are direct factors increasing the risk of accidental collisions. This is the instability of military communication channels between the US and China. After then-Speaker Pelosi's visit to Taiwan in 2022, China unilaterally suspended many military dialogues. Although partially restored since then, crisis management mechanisms remain fragile. As the 1914 Sarajevo incident and the 1962 Cuban Missile Crisis demonstrate, unintended escalation between great powers arises from a lack of communication and a chain of misperceptions. In 2026, the South China Sea simultaneously presents three conditions: physical proximity, hardline political stances, and incomplete crisis management channels, where the "spiral of conflict" structurally lowers the threshold for accidental collisions.
Furthermore, the ripple effects on Japan's security policy cannot be ignored. While the 2015 revision of security legislation allowed for the limited exercise of collective self-defense, how a "situation threatening Japan's survival" would be recognized in the event of a US-China conflict in the South China Sea remains a politically and legally gray area. As of 2026, within the Liberal Democratic Party, comprehensive scenario planning linking a Taiwan contingency with a South China Sea contingency is underway, which could signify one of the largest shifts in Japan's post-war security policy.
The delta: In early 2026, the frequency of US and Chinese military activities overlapping in time and space in the South China Sea surged, structurally increasing the probability of accidental collisions. The biggest change is that the overlap of military exercises is shifting from "exception" to "norm," significantly reducing the margin for crisis management (brakes at lower stages of the escalation ladder) compared to before.
🔍 BETWEEN THE LINES — What the News Isn't Saying
Behind the principled rhetoric of "freedom of navigation" and "sovereignty defense" in the South China Sea conflict, the greatest destabilizing factor is that neither side accurately understands the other's "red lines." Internal assessments by the US Department of Defense highlight the opacity of the rules of engagement (ROE) granted to Chinese military field commanders, with the greatest concern being the risk of divergence between political leadership's intentions and on-the-ground actions. Conversely, China is constantly testing the credibility of US "extended deterrence," and actions aimed at testing the effectiveness of US security commitments to the Philippines, in particular, could become the starting point for unintended escalation. The fundamental issue is that the South China Sea has become a venue for US-China "strategic communication," where military actions are used as a means of diplomatic messaging, but there is no guarantee that the sender's intent and the receiver's interpretation will align.
NOW PATTERN
Spiral of Conflict × Overextension of Power × Alliance Strain × Path Dependency
At the root of the South China Sea situation is a structural pattern where "path dependency," preventing both the US and China from retreating from their positions, and the "spiral of conflict," where each reacts to the other's actions by continuously increasing its military presence, mutually reinforce each other.
Intersection of Dynamics
The three dynamics of "spiral of conflict," "path dependency," and "alliance strain" mutually reinforce each other in the geographical space of the South China Sea, driving the structural deepening of the crisis.
Path dependency provides the fundamental fuel for the spiral. Precisely because neither the US nor China can retreat from their past positions, they are left with no choice but to respond to the other's actions with "stronger reactions," causing the spiral to continue. If China had room to flexibly interpret its nine-dash line claim, or if the US could adjust the frequency of FONOPs without political cost, it might be possible to brake the spiral. However, the path dependency of both sides does not allow for this.
Alliance strain indirectly accelerates the spiral's rotation speed. From China's perspective, any perceived cracks in the Japan-US alliance or ASEAN unity create the perception that "if we push a little harder, the other side will yield," thereby inducing more assertive actions. This is a classic pattern of deterrence failure, a structure akin to the misreading of "appeasement" in 1930s Europe. Conversely, from the US perspective, disunity among allies increases the need to further strengthen its own presence to "demonstrate" the alliance's credibility, which also accelerates the spiral.
As a result of these three dynamics acting simultaneously, the classic structure of the "security dilemma" has emerged in the South China Sea. That is, actions taken by each actor to enhance its own security paradoxically diminish the sense of security of other actors, increasing overall instability. What is particularly dangerous is that within this structure, "rational actors" can "act rationally" yet still lead to conflict, and this is precisely the fundamental reason why the South China Sea situation in 2026 is the most dangerous since the Cold War.
📚 PATTERN HISTORY
1914: Outbreak of World War I (Escalation from the Sarajevo Incident to World War)
Spiral of Conflict • Chain of Alliances
Structural similarities with the present: Competitive arms races and mutual assurances between two alliance blocs escalated a localized incident into an uncontrollable world war. This demonstrates the danger of an accidental spark being amplified within a structural conflict.
1962: Cuban Missile Crisis
Spiral of Conflict • Lack of Crisis Management Channels
Structural similarities with the present: The nuclear standoff between the US and Soviet Union reached the brink of accidental war but was averted by the existence of back channels and the restrained judgment of both leaders. A hotline was established after the crisis, recognizing the importance of communication channels. The current US-China relationship has not fully utilized this lesson.
2001: Hainan Island Incident (EP-3 Reconnaissance Plane Collision)
Spiral of Conflict • Accidental Escalation
Structural similarities with the present: A US reconnaissance plane and a Chinese fighter jet collided in the airspace over the South China Sea, resulting in the death of the Chinese pilot. This developed into a diplomatic crisis, but US-China relations at the time were not as confrontational as they are now, and the incident was resolved relatively quickly. However, it served as a precedent demonstrating that the normalization of physical proximity makes accidental collisions inevitable.
2012-2016: Scarborough Shoal Standoff and Arbitration Ruling
Path Dependency • Institutional Degradation
Structural similarities with the present: In 2012, the Philippines and China confronted each other at Scarborough Shoal, with China establishing effective control. The Philippines appealed to an arbitration tribunal, but China did not change its behavior after the ruling, exposing the limits of international legal resolution mechanisms. This reinforced the "logic of power," where military presence becomes the only means of deterrence when legal avenues fail.
2023-2024: Intensification of the Second Thomas Shoal (Ren'ai Jiao) Standoff with the Philippines
Spiral of Conflict • Alliance Strain
Structural similarities with the present: The China Coast Guard obstructed Philippine military resupply activities, taking escalatory actions such as using water cannons and laser illumination. The application of the US-Philippines Mutual Defense Treaty was discussed, but the US response was cautious, exposing the ambiguity of the alliance's "red lines."
Patterns Revealed by History
Historical patterns issue clear warnings. In military standoffs between great powers, the combination of a spiral of conflict and incomplete crisis management mechanisms creates a structural risk of transforming accidental incidents into unintended escalation. The lesson of 1914 demonstrates that a chain of alliances and automatic escalation mechanisms can expand a local spark into a full-scale war. The 1962 Cuban Missile Crisis teaches the dangers of "brinkmanship" in the nuclear age and the decisive importance of back channels. The 2001 Hainan Island incident demonstrated that accidental military contact can indeed occur in the specific space of the South China Sea. And the cases of Scarborough Shoal and Second Thomas Shoal since 2012 vividly illustrate the process by which the "logic of power" becomes dominant when international legal solutions fail. The common pattern shown by these historical precedents is that the spiral of conflict does not stop on its own. The spiral stops either when one side clearly retreats (the Soviet Union in the Cuban Missile Crisis), when both sides face catastrophic consequences and only then build institutions (arms control during the Cold War), or when conflict actually occurs (1914). The South China Sea in 2026 is "on the path of the spiral," not yet having reached any of these exits, and therefore requires the most careful monitoring.
🔮 WHAT'S NEXT
Base case scenario: Sustained tension and managed conflict. Throughout 2026, military tensions between the US and China in the South China Sea will remain high, but careful crisis management by both sides will prevent actual armed conflict. Overlapping FONOPs and Chinese military exercises will continue, and close encounter incidents will occur sporadically, but on-site commanders and diplomatic authorities from both sides will maintain minimal communication to break the chain of escalation. This scenario is based on the premise that both sides accurately recognize the costs of actual armed conflict. For China, direct conflict with the US military entails immense economic and military risks, with the possibility of further semiconductor sanctions and financial sanctions acting as a deterrent. For the US, a three-front response in the Indo-Pacific, Europe, and the Middle East is militarily challenging, creating strong incentives to avoid conflict. During this period, Japan will steadily advance the strengthening of its defense capabilities in the Nansei Islands (Southwestern Islands) and the deployment of long-range strike capabilities, aiming to bolster deterrence. The Philippines will accept the forward deployment of US forces based on the expanded EDCA while focusing on maintaining effective control in areas such as Second Thomas Shoal. However, "managed conflict" is not stability. The normalization of tension constantly carries the risk that a single miscalculation or accident could develop into uncontrollable escalation, and the fact that this "false stability" is the most probable scenario is not necessarily reassuring.
Implications for Investment/Action: Partial resumption of US-China military dialogue, de-escalation messages from both sides after close encounter incidents, continuation of formal dialogue at ASEAN regional forums, realization of a summit meeting between Xi Jinping and Biden's successor.
Bear case scenario: Accidental collision and escalation crisis. During 2026, an incident occurs in the South China Sea where US and Chinese warships or military aircraft physically collide, leading to casualties. This incident is not a planned attack but results from an accidental contact or an on-site judgment error, yet public opinion in both countries immediately flares up, narrowing the political leadership's room for restrained response. In China, nationalistic reactions erupt, particularly on social media, and the Xi Jinping administration, fearing being seen as "weak," takes retaliatory actions (e.g., a unilateral declaration of "exercise zones" in specific maritime areas, effectively a blockade). On the US side, in the political environment leading up to the midterm elections, calls for a strong response from Congress intensify, leading to countermeasures such as deploying additional carrier strike groups to the South China Sea. In this process of mutual escalation, Japan will be forced to make serious policy judgments regarding the scope of application of Article 5 of the Japan-US Security Treaty and the recognition of a situation threatening Japan's survival. The Philippines may request the invocation of the US-Philippines Mutual Defense Treaty, testing the entire regional security architecture. In the worst case, an accidental incident escalates into a cycle of sanctions, cyberattacks, and even gray-zone military actions, leading to a period where commercial navigation in the South China Sea effectively ceases. The impact on the global economy would manifest as a triple shock: soaring energy prices, supply chain disruptions, and financial market panic.
Implications for Investment/Action: Rapid increase in the frequency of close encounter incidents (more than 3 per month), unilateral declaration of "exercise zones" by China in specific maritime areas, breakdown of the US-China military hotline, physical attacks by the China Coast Guard on Philippine forces, passage of hardline South China Sea-related legislation in the US Congress.
Bull case scenario: Diplomatic breakthrough and de-escalation. During 2026, substantial progress is made between the US and China on a bilateral agreement regarding a code of conduct in the South China Sea, or broader military confidence-building measures (CBMs), leading to a visible reduction in tensions. The conditions for this scenario to materialize first require an environment where the leaders of both the US and China can politically frame de-escalation as a "victory" domestically. For example, if China faces economic difficulties (deepening real estate crisis, export slowdown) and positions the stabilization of US-China relations as a prerequisite for economic recovery, it might accept partial concessions in the South China Sea (e.g., introduction of a prior notification system for military exercises in specific maritime areas). The US side, too, might have an incentive to present "the establishment of a crisis management mechanism" in the South China Sea as a diplomatic achievement before the midterm elections. Furthermore, there is a non-zero possibility that ASEAN-led COC negotiations could see unexpected progress, leading to an agreement on a framework that, while perhaps not legally binding, imposes substantive behavioral constraints. If this scenario materializes, Japan would have room to adjust the pace of its defense buildup while allocating diplomatic resources to improving Japan-China relations. However, the probability of this scenario is the lowest because the path dependency and domestic political constraints of both sides make such flexible diplomatic actions extremely difficult.
Implications for Investment/Action: Announcement of concrete agreements on the South China Sea at a US-China summit, China's agreement to a prior notification system for military exercises, acceleration of COC negotiations and substantive agreement on articles, signing of a practical agreement between the US and Chinese navies on preventing accidental collisions in the South China Sea.
Key Triggers to Watch
- US-Philippines-China military contact incidents at Scarborough Shoal or Second Thomas Shoal: April-June 2026 (overlapping with China's military exercise season)
- Passage of hardline anti-China legislation in the US Congress before the US midterm elections: July-September 2026 (period of intensified election campaigning)
- First full-scale blue-water deployment of China's aircraft carrier "Fujian" with electromagnetic catapults: Mid-2026 (after completion of trial operations following commissioning)
- Agreement on concrete implementation of joint patrol activities in the South China Sea at the QUAD Leaders' Summit: Second half of 2026 (timing of annual leaders' summit)
- Xi Jinping's important speech on military policy for China's 100th anniversary of the PLA's founding in 2027: October-December 2026 (period of intensified anniversary preparations)
🔄 TRACKING LOOP
Next Trigger: China's large-scale spring military exercises in the Southern Theater Command in April-May 2026 — the presence or absence of spatiotemporal overlap with US FONOPs will be the first turning point determining the year's tension level.
Continuation of this Pattern: Tracking Theme: The Spiral of US-China Military Standoff in the South China Sea — The next milestones are the frequency of overlap between China's spring exercises and US FONOPs in April-May 2026, followed by the presence or absence of an agreement on joint patrols at the QUAD Leaders' Summit in autumn 2026.
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