China’s game of chicken in the East China Sea by @FortuneMagazine December 4, 2013, 5:42 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons Demonstrators marching during an anti-Japanese protest outside the Japanese Embassy in Beijing in 2012 FORTUNE — For the last three decades, China’s principal foreign policy objective has been to seek a stable external environment as a favorable condition for domestic economic development. This grand strategy was summarized by the late leader Deng Xiaoping as “hiding brightness and building up strength quietly.” By and large, this has been an extraordinarily successful foreign policy strategy. Its achievements are easy to spot. It has enabled China to gain access to the West-dominated international trading system and increase its economic growth at a rate no Chinese leader, Deng included, had thought possible. Today, few observers of Chinese foreign policy would agree that “hiding brightness and building up strength quietly” remains Beijing’s grand strategy. China’s assertiveness on the global stage since 2010 has been in clear violation of Deng’s dictum. By pressing its maritime claims in the South China Sea and the East China Sea, Beijing has demonstrated that it has gained enough strength to be treated like a great power. If there is one single incident that best illustrates the decisive shift in Chinese foreign policy, it has to be Beijing’s announcement of its East China Sea Air Defense Identification Zone (ADIZ) in late November. Compared with its previous steps taken to assert its maritime or territorial claims, the recent move represents a far more dangerous escalation. MORE: Detroit bankruptcy ruling: We’ve been here before On the surface, there is nothing illegal about China’s establishment of an ADIZ. International law does not forbid sovereign nations to set up such zones (indeed, the United States and Japan both have such zones). However, what makes China’s new ADIZ over the East China Sea unusual is that it overlaps with the ADIZs of Japan and South Korea. Most importantly, China’s ADIZ also covers the air space over a group of uninhabited islands (the Senkaku or Diaoyu) claimed both by Japan and China. The Chinese military, which will enforce the ADIZ, has demanded that aircraft flying through the zone must communicate their flight plans in advance and identify themselves. Beijing’s ADIZ move challenges Japan’s long-standing claim that it has sole administrative authority over the disputed islands. Since the Japanese government “nationalized” these islands in late 2011 (in order to prevent an ultra-nationalist from purchasing them), the Chinese government has escalated its countermeasures. It has sent official vessels to patrol the territorial waters and occasionally sent planes over the islands. In one encounter, a Chinese naval ship locked its fire control radar on a Japanese coast guard ship. Apparently, Beijing must have felt that contesting Japanese claims would require more than symbolic measures. Setting an ADIZ over the islands is a far more potent move because it has the appearance of international law and can be enforced by military means. Because aircraft from other nations flying through the ADIZ will have to notify the Chinese military, Beijing can interpret such communication as acknowledgement of Chinese administrative control. Once this practice has been firmly established, Beijing will have convinced itself that it has nullified Tokyo’s claim of unchallenged sovereignty over the islands (under international law, effective control gives a claimant advantage over disputed territories). Tokyo fully understands the legal implications of China’s move. It has announced that it does not recognize China’s new ADIZ and instructed its civilian airlines not to comply with Chinese requirements when they are flying through the zone. Japan has also sent its military aircraft through the zone without identifying themselves with the Chinese military, openly defying Beijing (South Korea has done the same). The escalating Sino-Japanese tensions have placed the United States in a delicate position. To show that it views China’s ADIZ as illegitimate, the United States immediately dispatched two unarmed B-52s to fly through the zone. While this measure reassured Japan, a treaty ally, Washington does not want to put American civilian aircraft in any danger. So the U.S. government advised American airlines to comply with China’s ADIZ requirements even though it continues to reject its legitimacy. The American policy, reflecting principled pragmatism, does not fully satisfy Japan, which wants the U.S. to take the same hardline position. When Beijing and Tokyo renewed the Senkaku-Diaoyu dispute two years ago, only a small minority thought that the two countries would start a military conflict over these barren rocks. Today, unfortunately, the risks of a shooting incident are both real and rising. China’s ADIZ has drastically raised the odds that Japanese and Chinese military aircraft could engage, through human error or sheer bad luck, in an accidental conflict in the zone. In the worst-case scenario, we might even see a replay of the KAL 007 tragedy (when a Soviet jet fighter shot down a strayed Korean Boeing 747 in 1983). Because of the U.S.-Japan security treaty, a Sino-Japanese conflict could even drag in the U.S. military. MORE: Hess successfully shrinks itself to grow Rising geopolitical tensions will inevitably have economic repercussions. When the Senkaku-Diaoyu dispute started two years ago, sales of Japanese cars in China fell nearly a third as many Chinese consumers boycotted Japanese brands. Japan’s China-bound investment plunged as well. This time around, China’s establishment of the ADIZ must have only reinforced the anxiety of the Japanese business community that China’s geopolitical risks are becoming unbearable. Japanese companies will almost certainly accelerate their move out of China in the coming years. In Beijing, advocates of a tough foreign policy must be patting themselves on the back for a brilliant tactical move that puts Tokyo on the spot. But those in charge of China’s troubled economy have no reason to celebrate. The timing of China’s ADIZ could not be worse. On Nov. 15, the Communist Party unveiled an ambitious economic reform plan. Less than 10 days later, the Chinese military announced the controversial ADIZ. Chinese leaders need all the energy and good will of the international community to ensure the success of their economic plan. Their most momentous foreign policy move in years raises serious doubts about their real priorities. Minxin Pei is the Tom and Margot Pritzker ’72 Professor of Government at Claremont McKenna College and a non-resident senior fellow of the German Marshall Fund of the United States.