On 28 October 2025, ten ASEAN leaders and Chinese Premier Li Qiang signed CAFTA 3.0 in Kuala Lumpur, expanding trade cooperation into the digital and green economies. Three weeks earlier, a Chinese coast guard vessel had fired water cannons at a Philippine patrol boat near Scarborough Shoal.
The two events happening in the same month was no coincidence. The South China Sea carries more than USD 3 trillion in global trade annually, sits atop disputed oil and gas reserves, and is subject to China's claim over nearly 90 percent of its waters through the nine-dash line, which overlaps with the exclusive economic zones of four ASEAN member states.
At the same time, for the first time, total ASEAN-China trade surpassed USD 1 trillion in 2025. Tension and dependency have grown in tandem, and that is what makes it so difficult for the region to choose a side.
What Is Actually Being Disputed
China's claims over the South China Sea rest on the nine-dash line, a demarcation first published by the Republic of China government in 1947. The line covers nearly 90 percent of the sea and directly overlaps with the EEZs of the Philippines, Vietnam, Malaysia, and Brunei.
While Indonesia is officially not a claimant in the sovereignty dispute, the nine-dash line extends into Indonesia's EEZ in the North Natuna Sea, and a number of incidents between Chinese vessels and Indonesia's maritime security agency Bakamla have taken place in the area. Jakarta has consistently rejected the nine-dash line as having no legal basis, while maintaining that it does not recognise any overlap in sovereignty claims.
On 12 July 2016, the Permanent Court of Arbitration in The Hague ruled that China's historical claims through the nine-dash line were incompatible with UNCLOS and had no lawful effect.
China rejected the ruling, and on the ninth anniversary of the decision, a spokesperson for China's Ministry of Foreign Affairs called it "nothing but a piece of waste paper that is illegal, null and void, and non-binding."
The dispute does not exist only on paper. Physical incidents continued throughout 2025:
- Philippines: On 11 August 2025, a Chinese coast guard vessel pursuing Philippine Coast Guard patrol vessel BRP Suluan near Scarborough Shoal collided with a PLA Navy warship that had crossed its path. Manila condemned the "dangerous maneuvers" and stated that "the Philippines bears no responsibility for the collision between the PLAN vessel and the CCG vessel."
- Vietnam: In May 2025, Vietnam sent diplomatic notes to both China and the Philippines protesting their activities at Sandy Cay, which Vietnam claims as part of the Spratly Islands. Foreign Ministry spokesperson Pham Thu Hang stated that "Vietnam calls on the relevant parties to respect Vietnam's sovereignty, comply with international law, and contribute to maintaining peace and stability in the East Sea."
- Malaysia: Defense Minister Khaled Nordin told reporters that "each individual member country of ASEAN will be in no position to face any challenge, especially if it comes from a superpower."
Why Economic Cooperation Continues
Despite all of this, ASEAN-China trade has only grown larger. Total two-way trade surpassed USD 1 trillion in 2025, and in Q1 2026, China's trade with ASEAN grew 15.4 percent year-on-year according to data from China's General Administration of Customs.
China has been ASEAN's largest trading partner since 2009, while ASEAN has been China's largest trading partner since 2019. CAFTA 3.0, signed in October 2025, added nine new chapters covering the digital economy, green economy, and supply chain connectivity. Since the original CAFTA came into force in 2010, bilateral trade has grown more than fivefold, from USD 192.5 billion in 2008 to USD 982 billion in 2024.
An Uneven Dependency
This dependency is not distributed equally across ASEAN, and that imbalance shapes the political position of each country at the negotiating table:
- Cambodia: In 2024, FDI from China reached USD 3.4 billion, roughly 75 percent of total FDI inflows into the country.
- Laos: Debt payments to Chinese banks alone are expected to reach USD 700 million annually until 2028. The IMF projects Laos' public debt will reach 126.7 percent of GDP by 2029, with the majority of loans sourced from China.
- Indonesia: China has been Indonesia's largest trading partner for more than a decade. Indonesia's exports to China are dominated by raw mineral commodities, while China accounts for 40 percent of Indonesia's non-oil and gas imports.
- Vietnam, the Philippines, and Malaysia: All three carry significant trade dependency on China, while also actively deepening defense cooperation with the United States and other regional partners.
This imbalance is precisely what makes consensus within ASEAN on the South China Sea nearly impossible: countries most financially tied to China tend to resist backing confrontational statements, leaving the ten-member bloc rarely speaking with one voice.
What Options Remain
Nevertheless, ASEAN-China negotiations on a Code of Conduct for the South China Sea continued throughout 2025. The Philippines, as ASEAN Chair for 2026, is expected to push for the conclusion of those negotiations before the end of the year.
This pattern is what international relations literature calls hedging: not fully aligning with China, nor with the United States, while maintaining economic ties with both. Ships are rammed at sea, trade agreements are signed on land. For most ASEAN members, the option of ending their partnership with China is not a viable one, at least not in the near term.
