Grey zone games: Lessons from the 2025 Australia-Japan-United States simulation

Executive summary

• Each year since 2023, the United States Studies Centre (USSC) has convened a ‘Strategy Simulation’ in which senior Australian, Japanese, and US (AJUS) experts engage with a simulated strategic crisis in the Indo-Pacific. Working in national teams, AJUS experts draft policy recommendations for their respective political leaderships (simulated by a control team) in responding to the evolving crisis, negotiating both internally and trilaterally in shaping national policy responses. The Strategy Simulation provides an opportunity to refine and ‘stress test’ AJUS trilateral approaches to regional strategy while tracking how AJUS trilateral strategic dynamics are evolving in response to changes in the Indo-Pacific strategic environment.
• The 2025 Strategy Simulation was held in Sydney in September and involved senior Australian, Japanese, and US foreign policy and defence experts, including former senior government officials, former flag officers, and academic and think tank experts. The 2025 Strategy Simulation centred on a simulated People’s Republic of China (PRC) grey zone campaign in which the PRC used aggressive posturing of naval and coastguard assets, economic coercion, and threats of military escalation to assert influence, control, and/or sovereign claims over maritime features in the East and South China seas.
• The three teams were in consensus on the need to coordinate actions to counter PRC incursions and restore deterrence, but lacked decisive tools for deterring in the grey zone. AJUS military responses were outmatched by the PRC, which enjoys significant operational advantages in East Asia, while economic options were constrained by interdependencies with the PRC.
• Informational and diplomatic tools demonstrated utility in this context, with AJUS deploying a coordinated campaign to shape regional narratives around China’s grey zone activities, both to isolate Beijing and mobilise domestic and international audiences to counter Chinese provocations at relatively low cost.
• In a multi-front, grey zone crisis, teams faced a dilemma between using their limited resources to address immediate national priorities or allocating them to joint operations to bolster collective deterrence.
• The game was designed to insert a level of ambivalence by the American President, forcing the teams to prepare options for different levels of US involvement and to make a compelling argument to Washington about the level of allied burden-sharing and risk. This led Australian and Japanese teams to solicit stronger US assurances while also offering resolute support for combined action, ostensibly to demonstrate allied commitment to burden sharing and incentivise US engagement.

Recommendations for AJUS

• Develop the toolkit for deterrence in the grey zone including capacity building and domain awareness for frontline states like the Philippines through the Squad framework.
• Intensify trilateral and allied planning to counter economic coercion; identify options for increasing the coordination of economic statecraft vis-à-vis China with Europe; prepare options for economic cost-imposition in advance of crises; and weigh vulnerabilities and escalation control options for each.
• Identify where AJUS has informational leverage over the PRC (human rights, the political status of Tibet, etc.) and the conditions under which this might be favourably exercised.
• Develop protocols for rapidly declassifying intelligence related to PRC grey zone incursions in a crisis.
• Ready an AJUS task force that can rapidly coordinate informational activities in a crisis, including with respect to messaging, language, and evidence release.
• Evaluate the sufficiency of AJUS crisis communication mechanisms for near-term Indo-Pacific contingencies which are likely to involve multiple fronts.
• Australian, Japanese, and US officials should be prepared for effective deterrence options given a broader range of political views in Washington while seeking to expand stakeholders in the US Congress, administration, and civil society focused on security in the Indo-Pacific.
• Ready an AJUS task force that can rapidly coordinate informational activities in a crisis, including with respect to messaging, language, and evidence release.
• AJUS to develop rules of engagement, command structures, and planning mechanisms that accommodate potential allied demand for enhanced roles alongside the United States in regional contingencies.

Introduction

Stability in the Indo-Pacific is under strain from a more assertive and capable People’s Republic of China (PRC), which is pursuing regional expansion through a multifaceted strategy encompassing territorial revisionism, grey zone coercion, foreign interference, and a rapid yet opaque buildup of its conventional and nuclear forces. Australia, Japan, and the United States (AJUS) have emerged as the most willing and able states to coordinate deterrence of PRC expansionism, leveraging their increasingly institutionalised defence integration; aligned preferences and values; and significant diplomatic, informational, military, and economic (DIME) capabilities.¹

Recognising the importance of the AJUS trilateral to regional security and the associated need to refine and ‘stress test’ AJUS approaches to regional strategy, each year since 2023, the United States Studies Centre (USSC) has convened senior Australian, Japanese, and US experts — including current and former lawmakers, diplomats, industry leaders, academics, flag officers, and government officials — for a ‘Strategy Simulation’ involving a simulated strategic crisis in the Indo-Pacific. Over two days, Australian, Japanese and US teams draft policy recommendations for their respective political leaderships in responding to the evolving crisis. Teams can negotiate both privately and trilaterally in shaping national policy recommendations, which are then reviewed and acted upon by respective national leaderships simulated by a control team.

Exposing AJUS experts to simulated Indo-Pacific crises (nuclear tests, territorial skirmishes, etc.) generates insights into how future such crises are likely to play out.

The purpose of the Strategy Simulation is two-fold. First, exposing AJUS experts to simulated Indo-Pacific crises (nuclear tests, territorial skirmishes, etc.) generates insights into how future such crises are likely to play out. While the outcomes of crisis simulations do not establish prescriptively what will and will not happen, should these or similar contingencies occur in the real world, observing interactions between experts ‘acting out’ these scenarios can prove instructive in understanding how actors in the real world are likely to understand, analyse, and respond to such contingencies. And second, as an annual event, the Strategy Simulation provides an opportunity to track how preferences and assumptions that underpin AJUS crisis decision making — for example, those around alliance cohesion, the rules-based order, and trilateral defence integration — are evolving over time.

This report summarises the major outcomes of the 2025 Strategy Simulation across these two domains. Drawing on teams’ policy recommendations and transcripts from intra- and inter-team crisis negotiations, Section 1 assesses the challenges and opportunities likely to face AJUS in a crisis involving coordinated PRC attempts to assert influence over maritime features in the Indo-Pacific through a ‘Small Island Strategy’ of grey zone coercion. We find that the PRC enjoys significant operational advantages in the grey zone, while AJUS efforts are likely to be hampered by limited military and economic options for imposing costs upon the PRC, political barriers to AJUS coordination, and a limited ability to generate capability and mass at points of PRC incursions. Section 2 compares the 2025 simulation outcomes with those from previous years² to assess how preferences and assumptions that underpin AJUS decision-making are trending. We find that the change in US administration has cultivated uncertainty in Canberra and Tokyo regarding the US commitment to regional engagement in a crisis. We further find that this uncertainty is creating a strategic imperative for these US allies to demonstrate initiative in responding to PRC incursions, specifically to demonstrate alignment with US administration preferences around burden sharing.

Source: Australian Department of Defence

Countering a PRC Small Island Strategy

The scripted scenario that formed the basis of the 2025 Strategy Simulation centred on a version of the PRC’s ‘Small Island Strategy’ involving PRC aggressive posturing of naval and coastguard assets, grey-zone tactics, economic coercion, and threats of military escalation to assert influence, control, and/or sovereign claims over maritime features in the East and South China seas (Figure 1).³ These were supplemented by a variety of grey zone attacks on AJUS directly, including cyber and foreign influence operations. In the context of the simulation, PRC actions targeting multiple pressure points across the Indo-Pacific were scripted to stretch AJUS resourcing, confound AJUS planning, and wedge AJUS in terms of threat prioritisation and risk tolerance.

In this section, we examine the teams’ policy recommendations and transcripts from both intra- and inter-team crisis negotiations to evaluate the challenges and opportunities AJUS would likely encounter in a comparable real-world crisis involving coordinated PRC efforts to assert control over maritime features in the Indo-Pacific.

Deterring in the grey zone

For all three teams, the overarching objective in the crisis was to restore deterrence, both by denying China its objectives and by imposing costs for its grey zone incursions. All teams sought to restore deterrence through the coordinated use of instruments of national power across the DIME.

Military responses

Teams’ military recommendations rested largely on (1) deploying military assets to sites of PRC incursions, and (2) freedom of navigation operations (FONOPS)⁴ to delegitimise contested PRC territorial and maritime claims. Such approaches were, however, hampered by the lack of AJUS military assets in-theatre (the closest hubs of AJUS maritime power being US bases in Singapore and southern Japan). The limited AJUS ability to rapidly bring capability and mass to points of PRC incursions, coupled with the PRC’s interior lines of communication and offensive advantage in being able to pick the time, place, and scale of incursions, allowed Beijing to open multiple fronts simultaneously, stretching AJUS assets and compelling it to rely on a lumbering ‘whack-a-mole’ strategy.

This led to in-game, inter-team discussions on long-term options for improving AJUS force readiness in the South China Sea. Teams suggested rotational force arrangements with Southeast Asian states as a way of boosting the supply of AJUS military assets, as well as crisis management mechanisms to rapidly and optimally assign in-theatre AJUS military assets to points of PRC incursions. The Philippines emerged as a preferred partner for such arrangements, supported by its existing rotational force agreements with AJUS⁵ and growing multilateral links between the Philippines and AJUS in the form of the ‘Squad’: an informal security grouping consisting of the United States, Australia, Japan, and the Philippines. Teams expressed support for a ‘formalisation’ of the Squad grouping, including through joint contingency and operational planning, and the establishment of a Squad joint operations centre in the Philippines.

Economic responses

Even assuming that sufficient force could be mustered, participants acknowledged that military deterrence in the grey zone would be constrained by concerns around PRC escalation and informational campaigns that would seek to ‘blame’ AJUS for escalating the conflict, potentially ceding “legal and moral ground.” Japanese military deployments were further constrained by constitutional limits on Japan’s use of military force.

Given these constraints, participants identified economic sanctions as a viable means to impose proportionate costs upon the PRC with manageable escalation risk, with export controls, tariffs, and travel bans dominating early discussions. However, here too, AJUS faced challenges. First, participants viewed the PRC’s integration in the global economy as placing upper limits on the use of economic sanctions, i.e. for fear of cascading economic consequences such as supply chain disruptions and market volatility. Second, participants viewed the lag between the implementation of economic sanctions and the materialisation of their effects (which can take months or years) as reducing their coercive utility in the short term. And third, economic sanctions were difficult to coordinate trilaterally, given, in particular, Australia’s exposure to the PRC export market.

Participants acknowledged that such economic measures would be difficult to implement and come with “big costs,” particularly efforts to build long-term economic independence from the PRC.

Participants workshopped solutions for bringing economic leverage back to AJUS despite such challenges. These solutions fell into four broad categories:

• Building short-term resilience in AJUS economies, for example through purchasing bonds, earmarking supply in strategic goods for partner governments, or subsidising industries targeted by PRC economic coercion.
• Building a critical mass of economic leverage over the PRC by soliciting other, particularly European, participation in economic sanctions.
• Imposing or threatening reversible economic sanctions (tariffs, export controls, etc.) that could be traded away in negotiations, i.e. to increase negotiating leverage.
• Building long-term economic independence from the PRC through diversifying supply chains, especially in critical minerals and rare earths.

Participants acknowledged that such economic measures would be difficult to implement and come with “big costs,” particularly efforts to build long-term economic independence from the PRC, which would require, as one Australian participant put it, “reconsideration around the foundations of our economy.”

Discussions on engaging Europe as a partner in economically containing the PRC were equally vexed. Participants agreed that AJUS would need to secure European participation to impose decisive economic costs on the PRC, though were divided on the prospect of broad European support for such measures. One participant, however, suggested that the time may be ripe for stronger coordination with Europe on economic policy towards the PRC, given its ongoing economic engagement with Russia, which is propping up the latter’s operations in Ukraine.

Informational and diplomatic responses

Perhaps lacking strong military and economic options, participants leant into informational and diplomatic tools for restoring deterrence in the grey zone. Through informational and diplomatic instruments, teams sought to mobilise domestic and international opposition to the PRC’s grey zone activities, both to sap the PRC’s will to continue and to provide AJUS the strategic space to respond resolutely to PRC incursions, namely among audiences wary of military or economic escalation.

To these ends, teams were proactive in attributing grey zone incursions to the PRC. This included recommendations that AJUS officials make public statements denouncing the PRC grey zone attacks; fly international media to the sites of PRC incursions; share intelligence on PRC incursions with regional states; and raise a resolution on PRC incursions in the UN Security Council, thereby forcing the PRC to “veto it publicly.” Participants also workshopped a type of informational ‘horizontal escalation’⁶ in the form of a campaign to highlight the plight of Uyghurs in Western China to mobilise Muslim-majority Southeast Asian states. Importantly, teams identified the need to thread these various grievances into a coherent narrative that demonstrated that the evolving crisis represented “a broad PRC assault against the status quo, not a series of discrete incidents.”

Overall, the complexity of deterring in the grey zone led participants to reflect on the trilateral’s need for a “coordinated strategy” that demonstrates “strategic and creative depth” in countering PRC grey zone activities. To build up their counter-grey zone playbook, AJUS should look to solutions developed in other theatres, in particular Europe’s efforts to counter recent Russian grey zone activities.⁷

The challenges of prioritisation

The PRC’s simulated Small Island Strategy involved coordinated incursions at multiple sites throughout the Indo-Pacific, including the Paracel and Spratly islands, the Solomon Islands, Luzon, and the Senkaku / Diaoyudao / Diaoyutai (SDD) Islands. The volume and geographic spread of these incursions stretched AJUS resources and imposed a dilemma upon individual teams between: (a) prioritising national interests (Solomon Islands for Australia, SDD Islands for Japan, and upholding Japanese and Philippine alliance commitments for the United States), even at the expense of allied operations elsewhere; or (b) committing national resources to joint operations to establish a critical mass of capability and send strong deterrence signals to the PRC, even if doing so risked the teams’ own, more immediate national interests.

This dilemma manifested in two ways in the simulation. First, it cultivated inter-team uncertainty regarding one another’s willingness to act in joint operations, with teams questioning whether others would scale back commitments to joint operations and instead redeploy national assets to counter threats closer to home. And second, it catalysed inter-team conversations on establishing divisions of labour, with different partners concentrating the bulk of their forces in distinct areas of responsibility. Divisions of labour were seen as an option for distributing AJUS assets to cover off on the various points of pressure being applied by the PRC while simultaneously placating political forces that would demand prioritisation of national over allied interests.

This need for AJUS to coordinate effective divisions of labour and/or reassure one another of ongoing commitment to joint operations in a multi-front crisis underscored the need for robust trilateral crisis communication mechanisms.

Trends in AJUS

As an annual event, the Strategy Simulation offers an opportunity to track trends in AJUS strategic dynamics over time. Over the last year, there have been several changes in the Indo-Pacific strategic context that are likely to bear on the AJUS trilateral’s ways of working. These include the inauguration of Donald Trump and his administration’s pursuit of an ‘America First’ foreign policy; increasing PRC provocations, including closer defence cooperation with Russia and a PLAN circumnavigation of Australia; and the formation of new AJUS defence cooperative agreements, including the establishment of Trilateral Defence Consultations and an agreement on naval logistics.⁸ In this section, we compare the negotiations and outcomes from this year with those from past Strategy Simulations to assess how AJUS strategic dynamics are changing in this evolving strategic context.⁹

US commitment in question

All three teams evinced greater uncertainty than in previous years regarding the United States’ willingness to act in response to regional PRC provocations. The backdrop was the second Trump administration’s more transactional outlook on international alliances, willingness to ‘make deals’ with adversarial states, and caution around the use of force beyond the US homeland (for the purpose of this game, however, the US president was a generic figure with uncertain views about security in Asia). In a crisis context, this uncertainty manifested in Australian and Japanese teams seeking greater assurances of US support in countering PRC incursions, with these teams committing to act “only if we were utterly confident that we were working in lockstep” with the United States.

Recognising the need to sustain strong US engagement amid such uncertainty, all three teams explored strategies to ensure continued and robust involvement from a potentially more conservative US administration. Four general strategies emerged from these conversations:

• Australia and Japan should align diplomatic efforts in pushing for robust US engagement and might consider further enlarging their pool of influence by increasing coordination with other regional US treaty allies, in particular the Philippines and South Korea.
• Australia and Japan should work with allies in the US political system — particularly within Congress — to reinforce the case for robust US engagement in the face of regional security crises.
• Australia, Japan, and like-minded US officials should be strategic regarding the timing and context of engaging with the US president on US engagement in the Indo-Pacific. They might, for example, seek to shape US policy at the Departmental level to build momentum for presidential endorsement. And when engagement with the White House is sought, it should be in terms that align with White House priorities, for example, securing foreign policy “wins,” restoring deterrence (thereby ‘ending war’) in the Indo-Pacific, and punishing PRC violations of prior undertakings to the US president.
• Australia and Japan should offer ‘wins’ to the US administration in the form of demonstrable allied burden-sharing that supports their own national interest priorities, recognising that while support for alliances in the Indo-Pacific is strong among the American public, so is the growing expectation that allies will do more to help themselves.¹⁰ In demonstrating burden sharing — taking risks, committing resources, etc. — Australia and Japan should encourage US reciprocity by couching these efforts as part of a coordinated AJUS response, i.e. “here’s what AJUS needs to do to succeed, and here is what Australia/Japan is ready to contribute.”¹¹

Allied initiative

Reflecting the strategic logic of visibly demonstrating burden sharing with the United States, the Australian and Japanese teams were, as described by one US participant, “more forward leaning than expected.” Both teams were, for example, willing to challenge a de facto PRC blockade of a stranded Philippine vessel. They also recommended leaving naval assets in the South China Sea to counter PRC operations despite simultaneous strategic challenges developing in their respective areas of immediate concern: the Solomon Islands for Australia and the SDD Islands for Japan. According to one participant, this front-footedness was “About trying to convince the US that we are credible and that we are going to mount a credible response which we would like them to be a part of. That’s what we’re trying to do.”

This apparent shift in Australia and Japan’s strategic calculus toward demonstrating initiative in regional crises presents both opportunities and challenges for AJUS. It presents an opportunity for Canberra and Tokyo to revisit their relatively restrained military postures toward the PRC, specifically by interrogating the long-term viability of such restraint in light of US administration priorities and the need to secure strong US engagement. The scenario further highlighted the structural implications of alliance networks in which the American taxpayer is spending more on defence than Australian or Japanese taxpayers and receiving fewer social welfare benefits than citizens in those countries. Ultimately, the expectation that US allies should do more in defence will not completely abate even with a new president in the Oval Office. In addition to the domestic political factor, the sheer growth of PLA capabilities puts added pressure on allies.

At the same time, and as demonstrated in the Strategy Simulation, allied initiative can complicate US planning. When Australia and Japan volunteered to challenge the PRC blockade, for example, there was a debate within Team USA whether allies leading the operation would be in the US interest, with US participants attempting to balance the importance of cultivating and demonstrating allied burden-sharing with concerns around maintaining escalation control.

Overall, the scenario demonstrated the degree to which the United States and its allies have entered an era of intensified mutual interdependence in which defence spending, command and control, technology, and information transfer are not keeping pace with the new demands to deter in both the grey zone and traditional military scenarios. This sharpens concerns around uncertainty over US leadership in the region and declining relative US regional power.

Conclusions

The 2025 Strategy Simulation underscored the growing complexity of deterring the PRC in the grey zone, with AJUS efforts hampered by limited in-theatre capabilities, economic interdependencies, and political constraints on participating in joint operations. Despite these challenges, the simulation highlighted promising avenues for strengthening AJUS deterrence posture. These include enhancing military readiness through rotational force arrangements, particularly with Southeast Asian partners; coordinating PRC economic policy with European partners; and leveraging informational and diplomatic tools to shape international narratives around PRC grey zone activities.

Uncertainty surrounding the United States’ commitment to regional deterrence prompted Australian and Japanese teams to be more front-footed in driving AJUS responses to PRC incursions, ostensibly to demonstrate burden sharing and incentivise US engagement.

The simulation further revealed evolving strategic dynamics within the AJUS trilateral. Specifically, uncertainty surrounding the United States’ commitment to regional deterrence prompted Australian and Japanese teams to be more front-footed in driving AJUS responses to PRC incursions, ostensibly to demonstrate burden sharing and incentivise US engagement. This shift in Australia and Japan’s strategic calculus toward greater burden sharing should prompt thinking in AJUS planning and operations to accommodate expanded Australian and Japanese roles.