Merge conflict warning in Visual Studio Code and Salesforce Extension Pack

Using the VS Code Salesforce extension pack and their "SFDX: Deploy This Source to Org" command actually uses different deployment methods depending on the org your developing against.

As per Develop Against Any Org documentation, if you're developing against a scratch org (i.e. you set it as your Default org), then it uses the force:source:push command, which indeed checks for merge conflicts. If you're deploying against a non-sourced org, like Sandbox or Production, it uses the force:source:deploy command, which always overwrites whatever is in the org:

The source:deploy command works differently from source:push for scratch orgs. The source you deploy overwrites the corresponding metadata in your org, similar to running source:push with the --force option...

There is a safe harbor statement that Sandbox orgs might get this force:source:push functionality with source-tracking and merge conflict checking, but we won't see that (and probably it'll be in beta) until Winter 20 or after.