This article analyzes China’s policy approach to dispute settlement through the angle of its attitude on international law, especially the role of third‐party compulsory mechanism in solving international disputes. It explains China’s position of no acceptance and no participation in the South China Sea arbitration case and discusses the legal implication of the arbitration case and its political and security impacts on the South China Sea (SCS). A compulsory dispute settlement mechanism may not be the only or the best option for addressing the disputes in the SCS. A model of maritime dispute management is proposed with the goal of achieving peace and stability in the region of the SCS. This article suggests a practical four‐tiered model of maritime dispute management in the SCS, namely, environmental security as a driving force of cooperation in the SCS, fisheries cooperation as a start of the SCS dispute resolution, United Nations Convention on the Law of the Sea as a framework for ocean governance in the SCS, and lastly, transformation of ways of thinking as a foundation to lead policy and research direction.