US-China Military Tensions in the South China Sea
In early 2026, simultaneous US and Chinese military exercises in the South China Sea have pushed the risk of accidental conflict to its highest level since the Cold War. This tension is not merely a localized dispute but a military manifestation of the structural conflict between an existing hegemon and a rising power, with repercussions for the global economy, supply chains, and alliance systems.
── 3 Key Points ─────────
- • From January to March 2026, the US Navy increased its "freedom of navigation" operations in the South China Sea by approximately 40% year-on-year, conducting continuous joint exercises with the Philippines, Japan, and Australia.
- • The Chinese People's Liberation Army continues to expand military facilities on artificial islands in the South China Sea, reportedly deploying new anti-ship missile systems to at least three outposts in the Spratly Islands.
- • The United States has secured access to four new military sites under the Enhanced Defense Cooperation Agreement (EDCA) with the Philippines, strengthening its presence around the South China Sea.
── NOW PATTERN ─────────
US-China tensions in the South China Sea are caught in a classic "escalation spiral," where each side's pursuit of stronger deterrence heightens the other's perception of threat, leading to further military buildup. This spiral is exacerbated by the excessive strategic commitments of major powers and the dysfunction of multilateral cooperation mechanisms, structurally narrowing the room for crisis management.
── Probability and Response ──────
• Base case 55% — Maintenance of regular US-China military hotline operations, South China Sea statements at ASEAN summits maintaining a tone consistent with previous years, gradual increase in maritime insurance premiums (not a surge), stabilization of exercise scales by both sides at current levels.
• Bull case 15% — Setting up and progress in preparations for a US-China summit, stabilization of military hotline operations by China, reports of concrete progress in ASEAN Code of Conduct negotiations, decrease in South China Sea maritime insurance premiums.
• Bear case 30% — Intensification of China Coast Guard actions around Second Thomas Shoal, commencement of direct US military escort for Philippine convoys, simultaneous large-scale exercises by both sides in proximate waters, delayed response or inoperability of military hotlines.
📡 THE SIGNAL — What Happened
Why it matters: In early 2026, simultaneous US and Chinese military exercises in the South China Sea have pushed the risk of accidental conflict to its highest level since the Cold War. This tension is not merely a localized dispute but a military manifestation of the structural conflict between an existing hegemon and a rising power, with repercussions for the global economy, supply chains, and alliance systems.
- Military Trends — From January to March 2026, the US Navy increased its "freedom of navigation" operations in the South China Sea by approximately 40% year-on-year, conducting continuous joint exercises with the Philippines, Japan, and Australia.
- Military Trends — The Chinese People's Liberation Army continues to expand military facilities on artificial islands in the South China Sea, reportedly deploying new anti-ship missile systems to at least three outposts in the Spratly Islands.
- Diplomacy — The United States has secured access to four new military sites under the Enhanced Defense Cooperation Agreement (EDCA) with the Philippines, strengthening its presence around the South China Sea.
- Diplomacy — China continues negotiations with ASEAN countries on a "Code of Conduct (COC) in the South China Sea," but a legally binding agreement has yet to be reached.
- Economy — The South China Sea is a vital maritime chokepoint through which approximately one-third of global trade (worth about $3.4 trillion annually) passes, and an escalation of conflict would have a devastating impact on the global economy.
- Technology — China is expanding its underwater surveillance network ("Underwater Great Wall") in the South China Sea, enhancing its anti-submarine warfare capabilities.
- Legal Framework — The 2016 Permanent Court of Arbitration ruling rejected China's "nine-dash line" claim, but China has consistently ignored this ruling.
- Alliance Relations — Japan's Maritime Self-Defense Force has increased the frequency of destroyer deployments to the South China Sea since the beginning of 2026 and is expanding its participation in US-Philippine joint exercises.
- Resources — The South China Sea holds an estimated 11 billion barrels of oil and 190 trillion cubic feet of natural gas, making it strategically vital for energy security.
- Incidents — Since late 2025, "dangerous close encounter" incidents between US and Chinese vessels and aircraft in the South China Sea have surged, with at least 18 abnormal approaches confirmed in 2025 alone.
- Domestic Politics — Ahead of the US midterm elections in November 2026, the Biden administration (or its successor) is under domestic political pressure to maintain a firm stance against China.
- Domestic Politics — The Xi Jinping administration, in order to consolidate its power base for a third term, is taking an uncompromising stance on territorial issues, a position bolstered by domestic nationalism.
The intensification of US-China confrontation in the South China Sea did not begin suddenly in 2026. Its roots can be traced back to at least four historical contexts.
First, there is the structural contradiction between the US "hub-and-spoke" alliance system post-Cold War and the rise of China. Since 1945, the United States has built a security order in the Western Pacific centered on bilateral alliances with Japan, South Korea, the Philippines, and Australia. This system was stable when China was economically and militarily weak, but China's rapid military modernization since the 2000s has led to a direct clash of interests between the existing order and the rising power. The "Thucydides Trap" — a structural tendency for war when an existing hegemon is confronted by a rising power — proposed by political scientist Graham Allison, precisely foresees this situation.
Second, there is the historical background concerning territorial claims in the South China Sea. China has asserted sovereignty over almost the entire South China Sea based on the "eleven-dash line" (later revised to the "nine-dash line") announced by the Nationalist government in 1947. However, this claim overlaps with those of the Philippines, Vietnam, Malaysia, Brunei, and Taiwan, causing friction for many years. The 2012 Scarborough Shoal incident (where China effectively seized an area under Philippine effective control) was a turning point that clearly demonstrated China's will and capability to alter the status quo using gray-zone tactics.
Third, there is the "game-changer" of China's artificial island construction since 2013. China extensively reclaimed seven reefs in the Spratly Islands, transforming them into military outposts capable of accommodating runways, radar facilities, and missile deployments. This is a classic example of a "fait accompli" strategy, creating a situation where military removal becomes extremely difficult once construction is complete. The Obama administration's initial failure to take effective countermeasures against this construction was criticized for sending a signal to China that "cost-free status quo alteration" was possible.
Fourth, there has been a comprehensive deterioration of US-China relations since 2018. Starting with the trade war in the first term of the Trump administration, followed by the technological hegemony struggle (semiconductor regulations, Huawei exclusion), the debate over responsibility for the COVID-19 pandemic, and the sharpening of the Taiwan issue, US-China relations have shifted from "strategic competition" to "strategic confrontation." The Biden administration has largely inherited the Trump administration's hardline stance on China while seeking to enhance deterrence against China by strengthening cooperation with allies (AUKUS, Quad).
These four contexts are simultaneously at play today in 2026. Under its "Integrated Deterrence" strategy, the United States is expanding joint exercises with allies and partner nations in both quality and quantity, aiming to raise the costs of China's actions in the South China Sea. China, meanwhile, under the third term of the Xi Jinping administration, is further strengthening the South China Sea's status as a "core interest" and adopting a strategy to raise the costs of US military intervention through the enhancement of its A2/AD (Anti-Access/Area Denial) capabilities. As both sides pursue escalation dominance, the risk of accidental conflict continues to rise structurally.
Of particular concern is the fragility of military communication channels between the US and China. During the Cold War, hotlines and military exchanges functioned as a safety net for crisis management between the US and Soviet Union, but such mechanisms are not sufficiently institutionalized between the US and China. After Speaker Pelosi's visit to Taiwan in 2022, China temporarily suspended US-China military dialogues, and although they have partially resumed, communication at the operational level remains unstable. This "absence of guardrails" increases the risk of accidental conflicts escalating into intentional ones.
The delta: In early 2026, the military presence of both the US and China in the South China Sea simultaneously escalated in both quantity and quality, structurally increasing the risk of accidental conflict transforming into intentional escalation. Particularly dangerous is the confluence of a surge in dangerous close encounter incidents and the fragility of military communication channels, recreating the "stability-instability paradox" seen since the US-Soviet rivalry during the Cold War.
🔍 BETWEEN THE LINES — What the News Isn't Saying
The core truth that official statements don't reveal is that both the US and China are using the South China Sea as a "rehearsal space for a Taiwan contingency." For the US, strengthening joint exercises in the South China Sea is a venue to test the practical interoperability of allies in a Taiwan contingency. For China, the militarization of artificial islands and the demonstration of A2/AD capabilities are rehearsals for preventing US military intervention in a Taiwan invasion scenario. While both sides outwardly frame the issues as "freedom of navigation" or "territorial sovereignty," the true focus lies in their strategic positioning for a future contingency involving Taiwan. This implicit game is the structural factor that is raising tensions in the South China Sea far beyond the level of a mere territorial dispute.
NOW PATTERN
Escalation Spiral × Overextension of Power × Alliance Strain × Failure of Cooperation
US-China tensions in the South China Sea are caught in a classic "escalation spiral," where each side's pursuit of stronger deterrence heightens the other's perception of threat, leading to further military buildup. This spiral is exacerbated by the excessive strategic commitments of major powers and the dysfunction of multilateral cooperation mechanisms, structurally narrowing the room for crisis management.
Intersection of Dynamics
The three dynamics of "Escalation Spiral," "Overextension of Power," and "Failure of Cooperation" are mutually reinforcing, amplifying the risk of crisis in the South China Sea. It is at this intersection that the current situation encompasses systemic risks beyond a mere regional dispute.
First, the "Escalation Spiral" accelerates the "Overextension of Power." As both the US and China continue to expand their military commitments to counter the other's strengthening military presence, the allocation of strategic resources in both countries becomes skewed towards the South China Sea, reducing their capacity to respond to other regional or domestic challenges. This resource constraint creates an incentive to undertake higher-risk military actions (provocative approaches, large-scale exercises) to achieve greater deterrence with fewer resources, further accelerating the spiral.
Next, the "Failure of Cooperation" neutralizes the braking mechanism of the "Escalation Spiral." Normally, escalation spirals in international conflicts are slowed or halted by diplomatic negotiations, multilateral frameworks, and crisis management mechanisms. However, in the South China Sea, bilateral military dialogue between the US and China is unstable, ASEAN's multilateral framework is dysfunctional, and international legal judgments lack enforcement power. This triple absence of safety nets significantly degrades the spiral's self-regulating capacity.
Furthermore, there is a reverse feedback loop where "Overextension of Power" exacerbates the "Failure of Cooperation." Under strategic resource constraints, both the US and China tend to prefer military displays (a signal of "strength") over diplomatic compromises (actions that could be perceived as "weakness" in the short term). This creates a vicious cycle where the importance of diplomatic channels relatively diminishes, and reliance on military means increases.
The intersection of these three dynamics creates a "stability-instability paradox." That is, while the risk of large-scale, all-out war is low due to the existence of nuclear deterrence, this "stability" paradoxically permits "instability" in the form of provocations and limited conflicts at the conventional force level. In the South China Sea, both the US and China are expanding their risk-taking at the conventional force level under the implicit assumption that nuclear war will not occur, which structurally increases the probability of accidental conflict.
📚 PATTERN HISTORY
1914: Sarajevo Incident to the Outbreak of World War I
Escalation Spiral + Failure of Cooperation
Structural similarities with the present: The rigidification of alliance systems and the absence of crisis management mechanisms escalated a local incident into a world war. In a state of accumulated arms race and mutual distrust among great powers, accidental incidents can trigger uncontrollable chain reactions.
1962: Cuban Missile Crisis
Escalation Spiral → Successful Crisis Management
Structural similarities with the present: The US and Soviet Union reached the brink of nuclear war but averted it through back-channel diplomacy and the restraint of both leaders. This crisis became a catalyst for establishing US-Soviet crisis management mechanisms (hotlines, arms control treaties). Such institutionalization is currently lacking between the US and China.
2001: Hainan Island Incident (US-China Military Aircraft Collision)
Limited Manifestation of Escalation Spiral
Structural similarities with the present: A mid-air collision between a US EP-3 reconnaissance plane and a Chinese fighter jet resulted in the death of the Chinese pilot. Diplomatic resolution took 11 days. This showed that an accidental incident could escalate into a serious diplomatic crisis, but at the time, US-China relations were relatively stable, making it manageable. At the current level of confrontation, a similar incident carries the risk of leading to a more severe escalation.
2012-2016: Scarborough Shoal Standoff to the Arbitration Ruling
Failure of Cooperation + Accumulation of Fait Accompli
Structural similarities with the present: China's process of establishing effective control over Scarborough Shoal after a standoff with the Philippines and subsequently ignoring the arbitration ruling exposed the limits of international law and multilateral frameworks in restraining the actions of major powers. This "successful experience" encouraged China to undertake further actions to alter the status quo.
2022: Speaker Pelosi's Visit to Taiwan and China's Large-Scale Military Exercises
Escalation Spiral + Overextension of Power
Structural similarities with the present: An instance where political symbolism triggered military escalation. China conducted unprecedented large-scale military exercises around Taiwan, which became a "new normal." This demonstrated the potential for domestic political constraints to limit diplomatic flexibility and permanently lower the threshold for escalation.
Patterns Revealed by History
The most important pattern revealed by historical precedents is that "when an escalation spiral exceeds the capacity of crisis management mechanisms, accidental incidents trigger unintended escalation." The 1914 Sarajevo Incident is an extreme example where a rigid alliance system and insufficient diplomatic channels transformed a local incident into a world war. While the situation in the South China Sea today differs significantly, the structural similarities cannot be ignored.
On the other hand, the 1962 Cuban Missile Crisis demonstrated that even at the brink of nuclear war, leaders' restraint and creative diplomacy could avert a crisis. However, the "success" of the Cuban Missile Crisis was only sustainable because it led to the subsequent institutionalization of crisis management mechanisms (hotlines, arms control treaties). This institutionalization is critically lacking between the US and China today.
The 2001 Hainan Island Incident is the most direct precedent as a "rehearsal" for an accidental incident in the South China Sea, but the intensity of the confrontation, the scale of military presence, and the level of domestic political constraints all differ between then and now. There is no guarantee that a similar incident occurring today would remain a manageable diplomatic issue. History repeatedly teaches that military confrontation between great powers cannot be safely managed indefinitely without institutionalized crisis management mechanisms.
🔮 WHAT'S NEXT
Military tensions between the US and China in the South China Sea will remain high throughout 2026 but will not escalate into direct military conflict. Accidental "dangerous close encounter" incidents will continue to occur, but both sides will ultimately choose to avoid escalation, and limited military communication channels will function minimally.
In this scenario, the US will maintain and expand joint exercises with allies and "freedom of navigation" operations at or above the current pace, while China will continue to strengthen military facilities on artificial islands and employ gray-zone tactics (harassment by China Coast Guard vessels, utilization of maritime militia). Tensions between the US, China, and the Philippines over Second Thomas Shoal will intermittently rise but will not lead to physical use of force.
Economically, instability in the South China Sea will prompt a gradual increase in maritime insurance premiums and some supply chain restructuring, but no large-scale disruption to maritime trade will occur. Diplomatically, ASEAN's Code of Conduct negotiations will formally continue but without substantial progress. Limited dialogue between US and Chinese leaders will be maintained, but no substantive military confidence-building measures will be achieved. Towards the end of the year, as both sides re-evaluate their medium-term strategies towards China/US for 2027 and beyond, a stalemate of the status quo will become entrenched.
Implications for Investment/Action: Maintenance of regular US-China military hotline operations, South China Sea statements at ASEAN summits maintaining a tone consistent with previous years, gradual increase in maritime insurance premiums (not a surge), stabilization of exercise scales by both sides at current levels.
A new framework for managing military tensions in the South China Sea is agreed upon between the US and China, significantly reducing the risk of accidental conflict. The condition for this scenario to materialize is the opening of a "window" in both countries' domestic political situations that allows for diplomatic compromise.
A potential trigger could be the establishment of a provisional bilateral US-China agreement on a "code of conduct" for military activities in the South China Sea during a US-China summit expected in mid-2026. This agreement is likely to be limited to practical confidence-building measures, such as strengthening mutual notification mechanisms, prior notification of exercises in specific maritime areas, and improving protocols for preventing maritime accidents, rather than a comprehensive, legally binding accord.
In this scenario, a slowdown in the Chinese economy provides an incentive for the Xi Jinping administration to stabilize external relations, while in the US, political motivations to demonstrate diplomatic achievements before the midterm elections come into play. Indirect momentum is also added to ASEAN's Code of Conduct negotiations, bringing a limited but legally binding partial agreement into view. The geopolitical premium (insurance costs, risk assessment) in the South China Sea decreases, bringing positive effects to the entire regional economy. However, since the more fundamental structure of US-China rivalry, such as the Taiwan issue and the technological hegemony struggle, remains unchanged, the easing of tensions would be limited and temporary.
Implications for Investment/Action: Setting up and progress in preparations for a US-China summit, stabilization of military hotline operations by China, reports of concrete progress in ASEAN Code of Conduct negotiations, decrease in South China Sea maritime insurance premiums.
An accidental military conflict occurs between the US and China in the South China Sea, rapidly deteriorating the overall security environment in the region. Scenarios for such a conflict include physical contact between naval vessels, warning shots at aircraft, or US military intervention in response to the China Coast Guard's use of force against Philippine vessels.
The most probable trigger is a clash between the China Coast Guard's forceful obstruction of a Philippine resupply convoy to Second Thomas Shoal and a US military escort action in response. Alternatively, an accidental incident (radar lock-on, misinterpretation of threatening behavior) during simultaneous and geographically overlapping military exercises by both sides could also trigger escalation.
Should a conflict occur, its scale is likely to remain limited (a few to dozens of casualties), but the political and economic impacts would be immense. Domestic public opinion in both countries would demand retaliation, forcing leaders into difficult choices between avoiding escalation and preserving national "face." Economically, maritime insurance premiums in the South China Sea would surge, and some commercial vessels would opt for alternative routes (bypassing the Malacca Strait, via the Lombok Strait), increasing logistics costs by 15-25%. Severe disruptions to global supply chains would ensue, and stock markets, particularly in the Asia-Pacific region, could experience a 10-20% correction. Economic decoupling between the US and China would accelerate, deepening divisions in semiconductor, rare earth, and energy supply chains. Militarily, both sides would transition to post-conflict escalation management, but the risk of spillover into the Taiwan Strait and East China Sea would also increase during this process.
Implications for Investment/Action: Intensification of China Coast Guard actions around Second Thomas Shoal, commencement of direct US military escort for Philippine convoys, simultaneous large-scale exercises by both sides in proximate waters, delayed response or inoperability of military hotlines.
Key Triggers to Watch
- China's physical obstruction of Philippine resupply activities at Second Thomas Shoal and US military intervention: April-September 2026 (period of increased activity around the monsoon season)
- Simultaneous conduct of US-Philippines Balikatan joint exercises (Spring 2026) and China's counter-exercises: April-May 2026
- Success or failure of a US-China summit and feasibility of resuming military communication: June-September 2026 (opportunity during G20 Summit or UN General Assembly)
- Sharpening of China policy ahead of the 2026 US midterm elections: August-November 2026
- Decision on foreign strategic policy at the Chinese Communist Party Central Committee Plenary Session: October-December 2026
🔄 TRACKING LOOP
Next Trigger: US-Philippines Balikatan joint exercises April-May 2026 — Whether the scale, number of participating countries, and scope of operations in the South China Sea exceed previous years, and what countermeasures China takes, will be the first key indicator determining the direction of US-China military tensions in 2026.
Continuation of this Pattern: Tracking Theme: US-China Military Escalation Path in the South China Sea — The next milestones are the Balikatan exercises in April-May 2026 and China's counter-exercises, followed by the feasibility of a US-China summit in June-September, and the sharpening of policies ahead of the US midterm elections in the latter half of the year.
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