China has threatened to launch fresh action against Australia after the federal government tore up Victoria's Belt and Road Initiative agreements with Beijing.
The Chinese government said it would "reserve the right to take further action" after lodging a formal protest with the Department of Foreign Affairs and Trade.
Foreign Ministry spokesman Wang Wenbin accused the Morrison government of "political manipulation and bullying" and warned cancelling the agreements would make already strained China-Australia relations worse.
Mr Dutton said Australia had been clear with China throughout the long-running diplomatic stoush.
"We're not going to have our values compromised, we aren't going to surrender our sovereignty," he told Nine on Friday.
He said Victorian Premier Daniel Andrews had done the wrong thing in signing the agreements with China.
"He shouldn't be entering into agreements that aren't in our national interest," Mr Dutton said.
"We are standing up for who we are. We've got very important diplomatic relations with many countries, including China, but we aren't going to be compromised by the principles of the Communist Party of China."
Mr Dutton also took aim at China for building up military bases in the region and launching cyber attacks.
"All of that is not the actions of a friend," he said.
"We need to make sure that yes, we've got an important trading relationship, but China and others need to understand that Australia is not going to be bullied."
Deputy Opposition Leader Richard Marles said there was no doubt Australia should stand up for its values and national interests.
"It's a difficult relationship though and it needs to be managed properly," he said.
"The reality is that under this government we've become more trade dependent on China rather than less. Under this government, despite all the rhetoric, they're the ones who sold the Port of Darwin to China."
Mr Marles said there was real anxiety across key export industries after China launched a series of trade strikes against Australian goods in retaliation to Canberra's calls for an independent coronavirus inquiry.
Beijing also harbours anger over Australia's foreign interference and investment laws, as well as the decision to ban Huawei from involvement in the 5G network.
"Thousands of jobs are at stake here," Mr Marles said.
"You need adults in the room when it comes to foreign policy. This is not something you do in the schoolyard. The prime minister doesn't do foreign policy and we've got a foreign minister who is basically in hiding.
"This is something that needs to be properly managed."
