Anthony Albanese says a more aggressive China requires the Australian government to take a more subtle approach than talking up conflict.
Recently installed Defence Minister Peter Dutton and home affairs chief Mike Pezzullo have talked about the "drums of war", amid growing tensions with Beijing.
"We need to recognise that China has got more aggressive and we need to recognise that China is responsible for changing the relationship," the Labor leader told a business forum at Parliament House on Thursday.
"But it doesn't mean you can't have an economic relationship, as governments in the past have done."
He said China's focus on its own interests under Xi Jinping required "a response in terms of our national sovereignty and national interests".
Already facing restrictions on coal, barley, wine, cotton and beef, some fear Australia's iron ore exports could be next.
There have been reports out of China about an "economic winter" for Australia as its largest trading partner looks for alternative steel supplies out of Africa, chief executive of the Committee for Economic Development of Australia Melinda Cilento said.
Vandita Pant, chief commercial officer at BHP, said the strength of relationships with customers in China is critical for the mining heavyweight, and would be for a long time.
Iron ore exports to China rose 20 per cent last month to $12.7 billion despite a declining relationship between the nations.
"When we are trying to get the maximum value based on competitive advantage of our resources, and making sure we get optimal placement for those resources - on behalf of BHP but also the people who work for us, the communities, and the country - we really invest deeply, strategically in relationships," she said.
Lowy Institute's strategic expert Sam Roggeveen told the forum Australia's security environment is deteriorating, but that's not a reason for panic.
"We may not be Israel, we may not be South Korea but we're not Canada either, we're not Iceland, we're not New Zealand," he said.
"We're somewhere in between and gradually we are rising up that international scale."
Purely as a military power, China already has more non-nuclear capability to strike Australia than the Soviet Union ever had, and there's much more to come, he said.
"Although China's not an enemy, it's clearly not an ally either."
Mr Albanese said it was in no one's interest to "talk up conflict", as the Morrison government appears to be doing.
US president Joe Biden has talked about "competition not catastrophe".
"We should always speak up for human rights, we should always speak up for our own interests, but that doesn't mean that we can't adopt a position which is consistent with the position of the Biden administration," Mr Albanese said.
"We picked a side under Labor, when we formed the US alliance, and were right to do so, to have those relationships with our democratic partners."
Australian Associated Press
