Lorna Cole (Rene Russo) is pregnant with LAPD Sergeant Martin Riggs' baby; they are not married, but both are thinking about it. LAPD Sergeant Roger Murtaugh's daughter Rianne (Tracie Wolfe), is also pregnant, though he is not told the child is with Detective Lee Butters (Chris Rock) since he did not want his daughter to marry a police officer. Due to issues with the department's insurance carrier over Riggs and Murtaugh's actions as sergeants, Captain Murphy (Steve Kahan) promotes them to captains.
The officers along with Leo Getz (Joe Pesci) come upon a Chinese immigrant smuggling ring after running an ocean-going vessel aground. The captain of the boat escapes. In the subsequent investigation, Murtaugh finds Hong (Eddy Ko) and his family hiding from US Immigration officers to avoid deportation. Murtaugh offers them shelter in his home, and their families, along with Riggs and Cole, quickly bond. Hong reveals he is looking for his uncle, a skilled engraver, who had paid for their passage to the United States.
Continued investigation of the smuggling ring leads the officers to "Uncle" Benny Chan, a crime boss operating from a Chinatown restaurant. There, they are introduced to high-ranking Triad negotiator Wah Sing Ku (Jet Li). Chan forces them out of his restaurant when the officers show no probable cause. Outside, Riggs spots the escaped captain and tries to give chase but fails to capture him. However, Ku later intercepts the captain and kills him as punishment for attracting the police attention. Chan and Ku take steps to eliminate all those in on their plans.
Hong is able to contact his uncle, but this leads the Triads to Murtaugh's house. Ku and the Triad thugs kidnap the Hongs, tie up Murtaugh, his family, Riggs and Cole and set the house ablaze. Ping, Hong's son, had evaded capture and helps to free the others in time. Though Riggs and Murtaugh chase down and kill some of the Triad, Ku escapes. Ku brings Hong to his uncle at a warehouse, where he has been engraving plates for a counterfeiting operation for Ku and Chan in exchange for transit for his family. Ku kills Hong in front of his uncle to assure his continued work.
The officers attempt to shake Chan for more information, but are unable to get any leads until they discuss what they know with Detective Ng (Calvin Jung), who has worked on cases involving the Chinese government before. Ng recognizes that Ku must be trying to negotiate with a corrupt Chinese general for the release of the Four Fathers, high-ranking Triad members that include Ku's brother (Conan Lee). New information leads them to the abandoned warehouse where they find the bodies of Hong, his uncle, and Chan, the latter two killed by Ku after they served their usefulness. Knowing that Ku plans to use counterfeit money, the police intercept the exchange between Ku and the general, telling the general the money is fake. A firefight breaks out between the Triad, the general's private army and the police, and most of the Triad and army are killed. Ku attempts to escape with his brother, but his brother is shot and killed by Murtaugh. Riggs and Murtaugh are separated as they follow Ku to a pier. Riggs engages in a fistfight with Ku that collapses the pier and sends them underwater. Riggs is able to find a gun and kill Ku, while Murtaugh arrives in time to help rescue Riggs from a piece of concrete that had pinned him underwater.
Later, Riggs visits his dead wife's grave and asks her for advice about his impending marriage with Lorna, about which he still has doubts; Getz arrives and offers a childhood story that gives Riggs a new light on the situation. They learn Lorna is about to give birth and race to the hospital, where Riggs and Lorna are ceremonially married by a rabbi just before she enters labor. Their son and Rianne's daughter are born, and Murtaugh accepts Butters as his son-in-law. Murphy gives Riggs and Murtaugh their rank of Sergeant back since the city is insured again and Hong's family is granted asylum.
Who sets Murtagh's house on fire?
Riggs and Cole