For the last two years, a quiet showdown has played out over the South China Sea, the body of water bordered by China, Vietnam, Malaysia, Singapore, Indonesia, Brunei, the Philippines, and Taiwan. This little-known body of water is of vast strategic importance: Fully one-third of the world's maritime trade traverses the South China Sea, and some optimistic estimates of its untapped stores of oil and natural gas would make it a second Persian Gulf. The South China Sea is also a major highway linking the oil fields of the Middle East and the factories of East Asia, with more than 80 percent of China's oil imports (and large percentages for Japan and South Korea as well) flowing over its waters. As influential Asia-watcher Robert D. Kaplan has put it, the South China Sea's importance to the region makes it the "Asian Mediterranean."

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Due to these waters' importance, several countries -- Brunei, Malaysia, the Philippines, and Vietnam -- claim sovereignty over part of these waters. Yet China claims rights of sovereignty over almost the entire South China Sea, as detailed in the "9-dash line" included in its submission to the United Nations. While tension in these waters has waxed and waned for several decades, recent years have seen an uptick in tensions. Starting in 2009, two discernable rounds of geopolitical intrigue can be identified, and last week likely marked the beginning of round three.

The first round began in March 2009, when Chinese fishing vessels harassed the U.S. surveillance ship Impeccable in international waters, 75 miles off the coast of China's Hainan Island. Three months later, a Chinese submarine collided (apparently accidentally) with the towed sonar array of the USS John S. McCain near Subic Bay off the coast of the Philippines. Other aggressive moves followed, including reports that Beijing had declared the South China Sea to be a "core interest," putting it on par with Taiwan and Xinjiang as fundamental strategic priorities. China's assertiveness was noted around the world and caused a strong reaction.

Round two. In July 2010, the United States and much of Southeast Asia pushed back. At a meeting of the Association of Southeast Asian Nations Regional Forum in Hanoi, 12 Southeast Asian countries complained of Chinese assertiveness in the South China Sea, and U.S. Secretary of State Hillary Clinton declared freedom of navigation within the South China Sea to be a national interest of the United States. China initially reacted harshly to this pushback, with Foreign Minister Yang Jiechi reportedly declaring Clinton's remarks in Hanoi to be "an attack on China" and not so subtly reminding his Singaporean counterpart that "China is a big country and other countries are small countries and that is just a fact." A subsequent statement by the Chinese military reiterated China's "indisputable sovereignty" over 1.3 million square miles of the South China Sea -- which much of Southeast Asia naturally disputed.

The backlash apparently proved too diplomatically costly for Beijing, and China has gradually backed away from its previous assertive behavior. The head of U.S. Pacific Command, Adm. Robert Willard, told the Senate Armed Services Committee this April that China's naval behavior in the first months of 2011 had been less assertive than it was in 2010. Chinese leaders routinely claim that China does not seek to replace the United States as the leading world power, and Chinese State Councilor Dai Bingguo has forsworn a Chinese "Monroe Doctrine." Still, many in Washington and throughout Southeast Asia saw China's pullback as largely a tactical reaction to the harsh reaction it had caused and not as a strategic decision to abandon its ambitious claims of sovereignty, brazen reinterpretations of international law, and the use of harassment and coercion as tools of policy.

Round three began last week in Singapore, when the leading defense officials of the Asia-Pacific region gathered for the annual Shangri-La Dialogue, hosted by the International Institute for Strategic Studies (IISS). (Full disclosure: The author is a member of IISS.) Speakers included the Malaysian prime minister, Russia's deputy prime ministers, and defense ministers from Australia, Britain, China, Indonesia, Japan, Malaysia, the Philippines, Singapore, South Korea, the United States, and Vietnam. All gave official statements, and many participated in open question-and-answer sessions (including Chinese Defense Minister Liang Guanglie, who was questioned rather expertly by FP's Cable Guy). There were also several minister-to-minister meetings on the side of the dialogue, including a meeting between U.S. Defense Secretary Robert Gates and Liang. More than anything else, the South China Sea was repeatedly mentioned throughout the dialogue as a key issue, and many officials used the dialogue as an opportunity to announce their country's approach to the region. Based on these remarks, round three on the South China Sea has clearly begun and will likely be defined by three interrelated trends.

First, the United States is backing up its political statements with an increased military presence in Southeast Asia. Delivering his farewell message to the Shangri-La Dialogue, Gates announced that the United States would station littoral combat ships -- new, relatively small ships designed to patrol the shallow littoral waters that permeate Southeast Asia -- in Singapore, expand cooperation with Australia in the Indian Ocean, and increase the number of exercises and port visits conducted in the region by the U.S. military. Gates also announced the Obama administration's intention to sustain the United States' military presence in the region, despite the budget pressures back home. To lend specificity to his claim, Gates promised that the United States would sustain funding for "air superiority and mobility, long-range strike, nuclear deterrence, maritime access, space and cyber, and intelligence, surveillance and reconnaissance" -- all technologies needed to contain China. (It should be noted, however, that future procurement decisions will be made by the next defense secretary and Congress.)

Second, China is trying to allay regional concerns, but ultimately will not back down. In Singapore, Liang struck a more conciliatory tone than last year's Chinese speaker. He disavowed claims that China seeks to challenge U.S. military superiority or limit freedom of navigation in the South China Sea. He called for dialogue and negotiation to resolve disputes and reiterated China's oft-stated commitment to the region's peaceful development.

Yet these rather benign statements stand in sharp contrast with recent actions in the South China Sea. Just days prior to Liang's speech, a Vietnamese survey vessel conducting oil and gas exploration in the South China Sea allegedly had its seismic cables cut by a Chinese ship, and hundreds of Vietnamese subsequently converged on the Chinese Embassy in Hanoi in protest. Similarly, in recent days the Philippines has accused China of "serious violations" in the South China Sea, including the unloading of construction materials on disputed islands. Meanwhile, China continues to makes its neighbors nervous by investing in increasingly capable naval military capabilities. Rumors abound that China's first aircraft carrier is nearing operational status, and the Pentagon has been tracking China's burgeoning naval strength for several years.

Finally, regional investment in naval power is expanding, raising the potential for cooperation and the danger of conflict -- and not just between China and the United States. Vietnam used the Shangri-La Dialogue to confirm its intention to purchase six Russian-built Kilo-class attack submarines, as well as Su-30 fighters and surface-to-air missiles. Several other states around the region, including Australia, Indonesia, the Philippines, and Singapore have also recently announced plans to beef up their naval capabilities, leading some in the United States to point to an emerging Southeast Asian naval arms race. Although others have pointed out that many of the arms being procured in the region are not targeted at China but rather at other regional powers, the key takeaway is that the waters of Southeast Asia are about to get very crowded.

That's not necessarily a bad thing. Asia is especially vulnerable to natural disasters, and the U.S. Navy could use more help when tragedies like this year's earthquake and tsunami off the Japanese coast or the 2004 Indian Ocean tsunami strike. Yet busy international waters are inherently dangerous. Submarines and surface ships can easily bump into one another, endangering the crews involved and adding a dangerously destabilizing element to the complex overlapping claims that crisscross the South China Sea. Moreover, states with newfound naval capabilities now have the ability to use force, or the threat of force, to enforce claims that could mean billions of dollars in natural resources and a significant boost in national prestige.

Clearly, there is a need to harness this rather raw and nascent naval power into something that contributes to the health and success of the international system, rather than feeding a debilitating cycle of fear, antagonism, and conflict. The United States and China have an opportunity to lead the region down a productive path. A good start would be multilateral efforts to improve the region's capacity for humanitarian assistance and disaster recovery, which would develop the habits of healthy cooperation and build trust. There is also clearly a need for the region, including the United States and China, to adopt something along the lines of the 1972 "incidents at sea" agreement developed by the United States and the Soviet Union to avoid maritime collisions and manage the potential for crises resulting from accidental collisions.

A disastrous Southeast Asian arms race is not inevitable. The United States should encourage the rise of new naval powers that can help maintain their own independence, provided they do not limit freedom of navigation or threaten regional stability -- both of which are of primary importance to Washington. As these powers emerge, they will likely expect continued U.S. assistance and engagement, yet will also seek to retain good ties with China as well. That's normal. After all, this isn't the 20th century, when spheres of influence and axes defined great-power competition. Geopolitics in the 21st century recognizes that integration builds stability and allows for states to pursue economic competition rather than territorial aggrandizement. The key for all involved is to allow for such complexity.

We'll see what round four has to offer.