Scott Morrison wants Pacific nations to see Australia as "family", as he pushes back against China's rising influence in the region.
But he also says China and the United States can co-exist peacefully and there is no need for a confrontation between the two superpowers.
In his first major speech on foreign policy, the prime minister said the Pacific will be his highest priority.
"I want to see us have a more effective relationship with the Pacific, because they're family," he told the Asia Society in Sydney on Thursday.
"[But] like all families, sometimes we take each other for granted."
Mr Morrison said Australia was committed to the Pacific, just like it was committed to good relations with southeast Asian neighbours.
"We stick at things, we stay around and we do it because of not some short-term transactional opportunity, we do it because we just think it's the right thing to do," he said.
China has been ramping up its loans to Pacific nations, sparking questions about how well Australia has been looking after its own backyard.
China is also fighting a trade war with the United States, but Mr Morrison said there was no need for Australia to pick sides.
"It is important that US-China relationships do not come to be defined by confrontation. In the long run, this risks strategic instability," he said.
"It risks unimagined damage to economic growth and the global order. Damage where no one benefits. Lose-lose."
He said a higher degree of competition between the two countries was inevitable, but Australia would maintain strong relationships with both.
"We've got to be really clear about where the lines are, what the rules are," Mr Morrison said.
"Our response must be grounded confidently in our beliefs and in a hard-headed view of our interests. We need both pragmatism and purpose."
Mr Morrison said Australia would strengthen its relationship with Indonesia, which he said was an important partner in regional security.
Australia and Indonesia are two of the world's top 20 economies and close neighbours, but neither is on the other's top 10 list of trading partners.
The prime minister also said Australia was committed to spending at least two per cent of GDP on defence, with the largest regeneration of the navy since World War II.
