Carter's remarks came ahead of his trip next week to an Asian security summit in Singapore, where China's actions in the contested waterway will likely dominate discussions.
"China's actions could erect a Great Wall of self- isolation," Carter told graduating officers at the US Naval Academy in Annapolis, Maryland.
"Countries across the region - allies, partners, and the unaligned - are voicing concerns publicly and privately at the highest levels."
For instance, the Fiery Cross Reef Outpost, located between the Philippines and Vietnam, has since 2014 been converted from a sandy speck in the ocean to an island stretching more than three kilometres, complete with a lengthy runway.
"China's actions (in the South China Sea) challenge fundamental principles, and we're not going to look the other way," Carter said.
The United States disputes China's sovereignty in the region and has conducted several "freedom of navigation" operations in which it deliberately sails close by the islands, attracting the ire of Beijing.
"China's cyber-actors have violated the spirit of the Internet - not to mention the law - to perpetrate large-scale intellectual property theft from American companies," he said.
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