Recent months have witnessed renewed tensions over disputed territories in the South China Sea. In response to China’s encroaching military maneuvers and the country’s designation of the whole area as part of its indisputable sovereignty, several South East Asian countries have found themselves dangerously vulnerable. A murky legal regime has led to the emergence of a series of overlapping territorial claims in the area, but at the center of tensions are five key-actors: China, the Philippines, Vietnam, the Association of Southeast Asian Nations (ASEAN), and increasingly the United States.

Despite growing economic interdependence, a two-decade-long Chinese charm-offensive, modest levels of pan-regional political integration, and considerable institutional-political linkages, the South China Sea issue is an intractable issue reigniting inter-state tensions and threatening the very stability of the whole Asia-Pacific region. However, the issue is also a catalyst for a more pro-active regional response that emphasizes rule-based diplomatic resolutions of both existent and emerging conflicts.

In a region known for its economic miracles, mercantilist states with performance-based legitimacy, and growing global financial clout, economics might once again trump politics and allow the voice of reason to prevail. But China’s evolving strategic outlook is central to any prospects for regional stability. The United States should maintain immense strategic patience if it seeks to avoid a great-power clash over an essentially regional issue. The territorial conflicts should also serve as an impetus for a more concrete and binding institutionalization of regional norms, rules, and principles.

The Megatrends

Broader global trends are shaping the geostrategic contours of the South China Sea region. China’s rapid rise, concomitant with seemingly stark U.S. decline, is creating significant anxiety among smaller states allied to and dependent on Washington. China’s growing military expenditure, meteoric rise in high-end and cutting-edge research and innovation, and increasing geopolitical assertiveness — heightened since the global financial crisis — is changing the complexion of international affairs.

But the U.S.-China dynamic is not new. China expanded its area-wide operations — culminating in the 1995 Mischief Reef incident — when Washington withdrew its bases from the Philippines in the immediate post-Cold War era. In addition, earlier China-Vietnam clashes also took place when the Soviet Union showed reticence in upholding its mutual defense treaty with Vietnam. Thus, China’s behavior has proven sensitive to balance-of-power configurations.

China’s growing assertiveness in the South China Sea reflects its broader and evolving security doctrine. Aware that its fleet is meager compared to U.S. naval power, China is in the process of upgrading its blue-water capabilities. The People’s Liberation Army Navy (PLAN) now boasts an aircraft carrier, highlighting China’s emphasis on greater investment in naval rather than land-based military capabilities — marking a decisive shift in the country’s strategic calculus. The South China Sea’s proximity to the mainland makes it a natural area for Chinese naval projection. China is deepening its presence in the area by expanding its nuclear submarine fleet and developing a second-strike nuclear capability. Dominating the region gives China control of one of the world’s busiest sea lanes — rendering Japan and Korea vulnerable to any blockade — but it also enables Beijing to further its goal of transforming China into the prime Pacific power.

But there are more immediate economic considerations influencing China’s geopolitical maneuvering in the South China Sea, including its growing stake in the global commodities trade and the necessity of securing natural resources to continue economic expansion. Energy security is a key Chinese national priority, making the South China Sea important in light of two developments: growing volatility in energy markets partly as a result of instability in the Middle East and China’s rapid development of its offshore-drilling and downstream technological capabilities. The South China Sea potentially hosts one of the world’s richest reservoirs of hydrocarbon resources, and China increasingly views its claims in the area as part of its energy security agenda. Domestic politics also plays a role as Chinese officials consider tapping into the growing nationalist sentiments of China’s booming, educated, young and middle-class population. After all, China’s historical claim to the whole area is ingrained in the Chinese national psyche.

Anatomy of the Problem

The South China Sea conundrum is an intersection of conflicting legal interpretations and seemingly irreconcilable political interests. On the legal front, there is a disjunction between domestic legal regimes and existing international law. Although countries such as the Philippines have tried to align domestic laws with international conventions, China is well known for its moves to embed external territorial claims into its constitutional framework.

The United Nations Convention on the Laws of the Sea (UNCLOS) could be a guideline for resolving issues in the region. But China and Southeast Asian countries have adopted divergent interpretations of certain provisions of the convention. There is no consensus on sections that tackle the “regime of islands,” which seek to clarify the nature of rocks and atolls in the South China Sea, and their corresponding jurisdictional implications for the party that occupies them.

In 2002, China and members of ASEAN signed the Declaration of Conduct (DOC), which emphasizes peaceful, multilateral, and rule-based resolution of conflicting claims in the South China Sea in accordance with established regional and international principles. But the non-binding declaration leaves no mechanism for monitoring and enforcing its implementation. The 2005 Joint Marine Seismic Undertaking (JMSU), signed by the Philippines, Vietnam, and China, was a novel attempt at transforming the issue into a potential source of cooperation. But China is the only party that is truly capable of pushing sustained and expansive exploration schemes. Besides, the Chinese are said to have used the agreement — fraught with secrecy and questionable provisions — as a springboard to extend their claims into other hydrocarbon-rich areas well beyond the scope of the agreement.

Whenever there is a quasi-legal vacuum, marked by the absence of clear and defined legal regimes, political forces take over. On one hand, Southeast Asian countries, especially the Philippines, claim that only portions of the South China Sea are subject to conflicting territorial claims. Beijing, on the other hand, claims the whole nine-dash line. This is a big problem, because it allows China to claim areas already within the Philippines’ jurisdiction.

Regional Interdependence and Balance of Power

Although many analysts tend to adopt a dichotomous understanding of China’s foreign policy in Southeast Asia, either bilateralist or multilateralist, in reality China is using a sophisticated bi-multilateralist approach. Under this doctrine, China tends to use multilateralism as a component of its charm-offensive strategy, but it simultaneously utilizes bilateral ties in order to reinforce, if not impose, its interests. Given China’s huge economic clout, its investment prowess, and its wide network of socio-political connections — especially with Chinese communities across Southeast Asia — it has been very savvy in influencing its smaller neighbors, constraining their room for maneuvering.

Two decades of charm offensive and rapid economic growth have allowed China to deepen its presence among Southeast Asian countries, especially in the realm of investment and economics. As the second largest — soon to be biggest — economy in the world, China represents a key market for many resource-exporting countries in the region, from Burma and Indonesia to the Philippines and Malaysia. Moreover, China’s so-called Beijing Consensus has transformed it into a major source of concessional loans, cheap and affordable technology, and favorable investment opportunities. China’s growing middle class is also becoming a major boon for the regional tourism industry.

With China becoming involved in strategic infrastructural development schemes — from railways to highways — Beijing has become central to the national development of its southern neighbors. Conscious of its economic influence, China has become more confident in pushing its political agenda.

Despite growing regional interdependence — from industrial vertical integration to intra-regional complementary trade — China holds immense leverage over its neighbors. No wonder, then, that the Philippine president’s most recent visit to China ended up as a high-profile courtship for $60 billion in Chinese investments. The primacy of economic considerations is allowing China to shape the geopolitical architecture of the region.

The ASEAN Element

By East Asian standards, ASEAN is a fairly developed institutional body designed to facilitate economic integration and security cooperation. However, it is more of a soft institution, focusing on confidence-building and preventive diplomacy rather than conflict-resolution/management. ASEAN either totally shuns controversial issues — in the spirit of non-interference — or fails to develop needed enforcement mechanisms. Although lacking both teeth and resolve on intractable issues, the institution itself is plagued by internal divisions.

On the South China Sea issue, for instance, members have taken varying positions. Laos, Cambodia, and Burma are more sympathetic to China; Malaysia and Indonesia have cautioned against Washington’s meddling; Thailand and Singapore took a more neutral stance; and Vietnam and the Philippines, wary of balance-of-power considerations, called for more decisive U.S. policy on the issue. ASEAN might have shown considerable success in the realm of economic integration and trade-facilitation, but hard security issues continue to expose its fundamental weaknesses.

These realities have allowed China to conduct its diplomatic tango with considerable ease. During the 2011 ASEAN Regional Forum, regional leaders adopted guidelines on a more formal, binding regional code of conduct. In reality, nothing has changed on the ground. Meanwhile, China has been able to project a more responsible image by facilitating the drafting and adoption of the so-called guidelines. On the surface, calmer heads seem to have prevailed, considering the huge economic interests at stake.

But the South China Sea issue might precipitate a new round of military build-up as some Southeast Asian countries coax and cajole their U.S. partner to get involved. ASEAN needs to strengthen its multilateral institutional mechanisms and ensure that Washington stays out of the conflict to prevent a great-power confrontation.

The U.S. Factor

The dynamics of U.S.-China relations will largely shape future patterns of global governance. President Obama must handle sensitive issues that involve Beijing very delicately, because any misstep could send shockwaves through the international system. Washington is already reliant on China on a number of key issues: resolution of major security challenges such as the Iranian nuclear program and North Korea; U.S. debt and financial stability; and establishing the foundation of a post-crisis global economic order. This is why the United States can’t be too aggressive in its approach to two key regional issues: China-Taiwan relations, and the South China Sea conflict. The Chinese already treat these issues as core interests, drawing red lines against any direct U.S. intervention.

Beijing is neither irrational nor reckless. Washington must understand Beijing’s unique needs and challenges, and adopt a more nuanced policy position. Ultimately, China seeks stability as it rises within the current international order. The United States should avoid a self-fulfilling prophecy of confrontation with the world’s next preeminent power. If Washington plays its cards well, it could avoid confrontation with China and further integrate China into an evolving and stable international system that reflects new geopolitical realities.

In The Future of the Liberal World Order, John Ikenberry analyzes how the current international liberal order provides a solid structure of payoffs, ultimately encouraging compliance and cooperation rather than great-power confrontation and hegemonic wars. In terms of carrots, the liberal international order provides a set of relatively stable, predictable, and transparent institutional mechanisms to facilitate trade, cooperation, and conflict resolution, especially among major powers. The cost of confronting or directly challenging the current order is simply too much: isolation, backlash from both emerging and established powers, trade disruption, and military confrontation with an alliance of status-quo powers.

But China stands out for its sheer size and rate of growth. In “How to Think About China,” China expert Joshua C. Ramo contends that, “China is ambitious, to be sure, but it is too insecure to be audacious yet.” According to Ramo, the United States and China need to “evolve together to serve each other’s mutual needs.” China’s rapid ascent is creating considerable anxiety among the established powers.

But the era of China’s easy growth may be approaching its end. In “The Post-China World,” Ruchir Sharma, a Morgan Stanley-based economist, argues that China, like Japan and other previously booming economies, is entering a stage of “economic maturity” that will feature more modest rates of growth. As a more normal rising economic giant, China might become a more mature and responsible power whose primary goal is stability and steady growth. Still, it is natural to expect greater assertiveness among emerging powers when it comes to their own regional affairs.

The South China Sea conundrum could serve as blessing in disguise if it helps to strengthen the fundamentals of ASEAN and encourage a more responsible and stable relationship between the world’s most powerful countries, the United States and China.