This Sea has been in dispute for a number of years (read Council on Foreign Affairs research here), but the most recent disputation was when the Hague ruled that under the United Nations Convention on the Law and the Sea (UNCLOS), China's nine-doted line claim [to have sovereignty over a disproportionate amount of the South China Sea] is invalid. While the Hague's ruling is not enforceable, it does stand as a litmus test of how international organizations and international law play a role in the global order. If last week's ASEAN conference reminded us of anything, it is that this dispute is far from over. If anything, the South China Sea dispute is only going to create a greater diplomatic impasse in the foreseeable future.
There are a few scenarios in which this could play out in a more escalated fashion. One such example has to do with the Philippines. Philippines need for this claim to go through since the natural gas from the Reed Bank will greatly help their fast-growing economy. If China continues to exert enough pressure where the Philippines cannot procure the natural gas, it could very well draw a red line for the Philippines. Given the 1951 Mutual Defense Treaty that the United States signed with the Philippines, the United States military might be dragged into the Sino-Philippine dispute. Hopefully, the Philippines won't provoke China to that level, but the Hague ruling might have overly emboldened the Philippine government. We also have to keep in mind Taiwan's reaction, since the Hague did not rule favorably for Taiwan, either. This has the potential to subtly undermine the Hague's ruling, as well.
The outcome will largely depend on how China reacts or how much China will use the South China Sea dispute as leverage in future diplomatic, economic, or military negotiations. The Chinese government could deny United States ships entry into China's 200-mile exclusive economic zone (EEZ), which could somewhat damper American economic growth. China also can reward countries who side with China by encouraging investment and tourism in the allied countries. But this is a matter of how China fits into the greater world order. To what extent will China cooperate and play ball? To what extent will it completely ignore international law?
Historically, China has preferred to remain a regional hegemon, as opposed to a more global one. While the past can have predictive power of what the future holds, it hardly guarantees that China's aspirations remain the same. Even with a growing economy and military, China still has to watch its step as it figures out how to handle its territorial claims over the South China Sea. After all, the Chinese government's official position is still to solve the dispute amicably and diplomatically. While the direction seems to be diplomatic, we cannot rule out a militaristic approach in the near future, either from China or the United States. I would hope that with its "One Belt, One Road" initiative, that it will lean towards trade and diplomacy over military escalation, especially given that threatening trade flows anywhere would be folly akin to shooting oneself in the foot. However, given that China has historically been difficult to predict, only time will tell.