The Pacific needs to remain front and centre of Australia's diplomatic priorities, Defence Minister Richard Marles says, as China looks to expand its influence in the region.
Mr Marles says Australia cannot take the Pacific or its 10 million residents for granted.
"We need engagement," he told AAP.
"If we make the Pacific a focus, if we are interested in the welfare of the Pacific, the 10 million people who live there, and we're committed to that, then Australia really stands to be the natural partner of choice."
On Tuesday, China released a Pacific islands position paper after failing this week to get leaders in the region to sign up to a wide-ranging agreement.
The position paper spans security, development, and greater dialogue and diplomatic ties. It covers much of the same ground as the deal rejected by island leaders.
But the paper appears to have been watered down from the original Common Development Vision agreement, removing references to expanding law enforcement co-operation and police training as well as references to cybersecurity and national security protection.
China is proposing continued joint dialogues with Pacific island nations, scholarships for the region and development and infrastructure assistance, as well as humanitarian and COVID-19 aid.
Chinese Foreign Minister Wang Yi announced the proposed agreement and supplemental five-year action plan were being shelved as he visited Fiji on Monday as part of his 10-country blitz through the Pacific.
Liberal senator James Paterson, who chaired the parliamentary committee on intelligence and security while in government, says Canberra needs to be upfront with calling China Australia's biggest security threat.
Mr Marles said China is Australia's "biggest anxiety", but stopped short of labelling it a security threat when asked directly.
"It's true to say it's Australia's greatest anxiety but we should also be honest and speak plainly and say they are our greatest security threat as well," Senator Paterson told Sky News.
"We are not investing $270 billion over the next decade in acquiring new defence capability just for the fun of it.
"We're acquiring it because we believe it's necessary to deter potential aggressors, including China."
Senator Paterson said Australia should not claim the shelving of the agreement as a victory, adding it was an "overreach by the Chinese government that was not ever likely to succeed".
"It's very important ... we're not presumptuous or arrogant in saying this decision has been made at our behest or because of our intervention," he said.
"That would be disrespectful towards the Pacific island nations who have made this decision in their own national interest."
Mr Marles says while he remains concerned about the agreement, it is not in Australia's power to block it. The government would rather focus on relationships with Pacific island nations.
"We have so many advantages in terms of our relationships with the Pacific," he told the ABC.
"We start a long way ahead of any other country but the point is we have to go out there and do the work and put forward an agenda."
Fiji's Prime Minister Frank Bainimarama said Pacific nations needed "genuine partners, not superpowers that are super-focused on power", as he met with the Chinese foreign minister to seek a stronger commitment from Beijing to end illegal fishing and expand Fijian exports.
The United Kingdom is also increasing its presence in the region, with Royal Navy ships completing their first deployment of the Indo-Pacific before docking in Darwin this week.
The HMS Tamar is permanently deployed to the Indo-Asia Pacific and is used to deliver humanitarian supples, participate in military exercises and engage with military and government leaders in nations like Fiji and Papua New Guinea.
