Terpenoids, including aromatic volatile monoterpenoids and sesquiterpenoids, function in defense against pathogens and herbivores. Phoebe trees are remarkable for their scented wood and decay resistance. Unlike other Lauraceae species investigated to date, Phoebe species predominantly accumulate sesquiterpenoids instead of monoterpenoids. Limited genomic data restrict the elucidation of terpenoid variation and functions. Here, we present a chromosome-scale genome assembly of a Lauraceae tree, Phoebe bournei, and identify 72 full-length terpene synthase (TPS) genes. Genome-level comparison shows pervasive lineage-specific duplication and contraction of TPS subfamilies, which have contributed to the extreme terpenoid variation within Lauraceae species. Although the TPS-a and TPS-b subfamilies were both expanded via tandem duplication in P. bournei, more TPS-a copies were retained and constitutively expressed, whereas more TPS-b copies were lost. The TPS-a genes on chromosome 8 functionally diverged to synthesize eight highly accumulated sesquiterpenes in P. bournei. The essential oil of P. bournei and its main component, β-caryophyllene, exhibited antifungal activities against the three most widespread canker pathogens of trees. The TPS-a and TPS-b subfamilies have experienced contrasting fates over the evolution of P. bournei. The abundant sesquiterpenoids produced by TPS-a proteins contribute to the excellent pathogen resistance of P. bournei trees. Overall, this study sheds light on the evolution and adaptation of terpenoids in Lauraceae and provides valuable resources for boosting plant immunity against pathogens in various trees and crops.