This article has been updated. China has lost the legal case over the disputed territory of the South China Sea following a ruling on 12 July by the Permanent Court of Arbitration at the Hague. The decision, which ruled in favour of the Philippines, is expected to increase diplomatic pressure on China to scale back military activity in the area. President Xi Jinping said China would not accept any proposition or action based on the ruling.

Here's some background.

The South China Sea is home to hundreds of islands, atolls and coral reefs, plus abundant reserves of oil and natural gas, fisheries and some of the world’s busiest shipping lanes.

For decades, neighbouring countries have tussled over territory in the area, but recently tensions have been bubbling over as China reclaims land through dredging and building up atolls and islands from where it can launch military exercises.

To reassure its allies in the region, the US has been stepping up military manoeuvres in the South China Sea, fuelling concerns that the area is becoming a geopolitical flashpoint with consequences that could reverberate around the world.

A United Nations tribunal has given its verdict on a case brought by the Philippines that contests some of China’s claims in the South China Sea – a ruling that has the potential to inflame the situation further.

Here’s what you need to know about the dispute.

How did we get here?

China’s South China Sea territorial claims are based on the “nine-dash line”, a U-shaped area of the waters marked by a series of dashes that covers about 3.5 million square kilometres, or up to 90% of the South China Sea.

Territorial claims in the South China Sea
Image: CNN

The dashed area, which first appeared on Chinese maps in 1947, includes two archipelagos – the Spratlys and Paracels – that were previously occupied by the Japanese until they surrendered at the end of the Second World War.

China’s claims overlap with those of Vietnam, the Philippines, Malaysia, Taiwan and Brunei. With the exception of Brunei, all these countries have claimed various reefs, islets, atolls and islands in the Spratlys, which China calls the Nansha islands. Vietnam and China have both claimed the Paracel Islands. And the Scarborough Shoal, a chain of rocks and reefs, is claimed by China and the Philippines.

While Vietnam and the Philippines have undertaken their own construction activities in the South China Sea, China’s island and reef building has been on a far larger scale, with aerial photographs purportedly showing an airfield and harbour in the Spratly Islands that can accommodate military planes and ships.

 Image of Fiery Cross Reef, Spratly Islands
Image: Victor Robert Lee & DigitalGlobe

In 2014, China installed an exploratory oil rig in the Paracels, and has also deployed a surface-to-air missile defence system and is building a helicopter base there.

  Duncan Island, Paracels, South China Sea
Image: Victor Robert via thediplomat.com

Against this backdrop, the US has been sending ships and planes close to some of the contested islands, citing freedom of movement under international law.

What’s at stake?

China’s sovereignty claims are of huge importance to its position in the region and globally. A key shipping route, $5.3 trillion in trade passes through the South China Sea each year. The area is also rich in oil and natural gas.

 South China Sea economy and rising tensions
Image: Council on Foreign Relations

What’s happening now?

China’s construction activities and naval presence in the Scarborough Shoal prompted the Philippines to complain to the UN in 2013. Its case, which it brought before the International Tribunal for the Law of the Sea at the Hague, challenges China’s claims, arguing that the nine-dash line has no basis in law.

China is a signatory to the 1982 United Nations Convention on the Law of the Sea (UNCLOS), which says that countries have special rights to marine resources, including fisheries, oil and gas, in an area up to 200 nautical miles (370km) from their shores, called exclusive economic zones (EEZs).

 South China Sea Exclusive Economic Zones
Image: CSIS

The Scarborough Shoal is within the Philippines’ EEZ, and the UN tribunal is widely expected to rule in their favour. The court has no powers to enforce its ruling, but it says it has jurisdiction over a number of the claims.

What are the implications?

Tensions over territory in the South China Sea are being stoked by concern over the growth of China’s military power. As this map from the Center for Strategic and International Studies’ Asia Maritime Transparency Initiative shows, China easily has the largest military forces in the region.

 Armed forces in Asia
Image: CSIS

Hypothetically speaking, China's economic and military clout could help it enforce its territorial claims over other nations in the region.

Follow the debate: Rachel Morarjee, Ian Bremmer, Kil Jeong-Woo and Zhu Feng discuss Asia's shifting alliances at the 2016 Meeting of the New Champions in Tianjin, China. Watch the video here.