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There is a new, troubling question on Wall Street: Just how far could the conflict between the U.S. and China escalate?

BCA Research thinks it could stretch beyond trade and financial markets and become a new Cold War. The firm’s geopolitical strategy team first raised the possibility of that type of military conflict between the U.S. and China back in 2012, years before tariffs even sounded like a possibility.

Now, “after tariffs and currency depreciation, the next likeliest manifestation of strategic tensions lies in the military sphere,” writes BCA in a Monday note.

In other words: The conflict started as a trade war and recently escalated into a currency war. The next step would be military war, cold or hot.

That helps explain why the Treasury market—a global haven—is rallying and pushing yields toward record lows. It also explains why strategists at Bank of America Merrill Lynch and Academy Securities have been citing North Korea and Iran as potential trouble spots for the U.S. (Both countries are subject to heavy U.S. sanctions, so it’s tough to imagine how they would cause economic trouble.)

There are a few different ways the conflict between the U.S. and China could escalate into a military war, BCA says.

One potential hot spot is Hong Kong, where anti-government protests have been happening for weeks. Mainland Chinese officials have stepped up the intensity of their opposition to the demonstrations, and state-owned television seems to be hinting at the possibility of military intervention.

“The deployment of mainland troops would likely lead to casualties and could trigger sanctions from western countries that would have common cause on this issue,” the firm writes.

The response from the region would be more important, however—a Chinese crackdown on Hong Kong could provoke more civil unrest in Taiwan.

“Unrest in Hong Kong has already galvanized opposition to the mainland’s policies in Taiwan, where the presidential election polling has shifted in incumbent President Tsai Ing-wen’s favor,” BCA writes.

Taiwan could be a potential flashpoint for military conflict because of its unusual relationship with China. The Chinese government sees the island as a province, but it has been independently governed since 1949.

What’s more, Taiwan has had a robust unofficial relationship with the U.S. for more than 40 years, and has maintained strong ties with U.S. ally Japan. That raises the stakes significantly if the island does become a site of conflict.

Taiwan also has laid claim to a group of uninhabited islands in the East China Sea that both China and Japan have claimed as well. (The islands, which Japan calls the Senkaku Islands, were at the center of a diplomatic spat six years ago.)

Those islands are another source of potential military conflict. If China steps up the intensity of its challenges against the claims by Japan—again, a U.S. ally—that could end up escalating the conflict as well.

Potential trouble could pop up in the South China Sea, too, because it is a “vital supply line for all of the countries in the region,” says BCA, and China has been “asserting itself” in the area.

“Even if the [U.S.] washed its hands of Beijing’s efforts to control the sea lanes, U.S. allies would still face a security threat that would drive tensions in these waters,” the firm writes. “This is a formidable group of Asian nations that China fears will seek to undermine it. And of course the Americans are not washing their hands of the region but actually reasserting their interest in maintaining a western Pacific defense perimeter.”

And last but not least, North Korea has been testing short-range missiles even as the White House remains upbeat about talks to contain its nuclear program. China has offered to cooperate in sanctioning North Korea for nuclear test programs, BCA says, which means it could withdraw that cooperation if the relationship between the U.S. and China deteriorates.

China isn’t the only U.S. competitor under pressure, either.

“Russia, like China, is feeling immense domestic political pressure, including large protests that may result in greater foreign policy aggression,” BCA writes. “As China and Russia tighten their informal alliance in the face of a more aggressive U.S., American allies face new operational pressures and the potential for geopolitical crises will rise.”

Write to Alexandra Scaggs at alexandra.scaggs@barrons.com