Bob Carr says Australia needs to be wary of being seen as "deputy sheriff" to the United States in the Asia-Pacific region.
"The fact is Australia will always support settlement of these disputes according to international law. China favours direct negotiations between the parties," Mr Carr told ABC Radio.
"Australia's got to work out a way of getting negotiations that manage these disputes better, minimising the risk of accidental conflict," he said.
His comments come after shadow defence minister Stephen Conroy called on the federal government to stand up to China's "bullying".
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He is pushing for Australian military exercises near disputed islands after the Permanent Court of Arbitration ruled that China's claims over the area had no legal basis.
"[Foreign minister] Julie Bishop continues to pretend that Australia has been engaging in what's referred to as Freedom of Navigation operations," Senator Conroy said.
"When I've questioned the Department of Defence officials at Senate Estimates, they've made it very clear they are not authorised to enter into any of these disputed areas."
The federal government has accused Senator Conroy of escalating tensions over the 12-nautical mile limit area China has claimed around islands in the region.
But the shadow defence minister said the US navy had patrolled within the zones to show China its territorial waters claims were not legitimate.
Mr Conroy said he believed Ms Plibersek and Opposition Leader Bill Shorten were "absolutely on the same page".
"This decision exposes China as having no legal foundation, and Australia should be prepared to stand up for the international rules-based system. And that is vitally important for Australia with all the trade that we do through the region."
China remains Australia's main trading partner with two way trade estimated at around $155 billion.
Trade Minister Steve Ciobo told the ABC he was reluctant to link the issue of trade with the South China Sea ruling.
"I think the two issues are separate," he said.
"I also reinforce the point that by having strong trade relations, it actually is a precursor of being able to have proper conversations around these more difficult conversations as well."
The ruling in The Hague unanimously favoured the Philippines, which had undertaken the court case, but China has labelled it a farce.
Chinese officials say the country's activities in the area date back 2000 years and sovereignty has been established as a matter of history.
At a speech in Washington, China's ambassador to the United States, Cui Tiankai, reinforced China's position that the tribunal's ruling was biased and illegitimate.
He said the nation was open to working with the Philippines to resolve the issue peacefully.
"China remains committed to negotiations and consultations with other parties," he said.
"This position has never changed, and it will not change. Diplomatic efforts should not be blocked, and will not be blocked, by a scrap of paper or by a fleet of aircraft carriers."
China has continued operations in the South China Sea, landing planes on disputed islands in staunch defiance of the decision.
Such activity goes against the views of the United States, which says it believes the findings are final and should be binding.
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