Australia won't rule out dropping World Trade Organisation action over China's $20 billion trade sanctions if the nations can negotiate a "win-win" outcome.
Prime Minister Anthony Albanese said he would keep engaging with Beijing in the country's national interest after Chinese ambassador Xiao Qian suggested dropping the formal complaints would be a good idea.
In a press conference on Tuesday, Mr Xiao said the countries should settle the dispute over tariffs placed on barley and wine between themselves rather than through the international forum.
Mr Albanese said both nations would benefit from increased trade as they rebuilt their damaged relationship.
"With regard to our economic relationship, it is in Australia's interests to export the wonderful products that we have ... but I'll tell you what, it's in China's interest to receive those products as well," he told reporters on Wednesday.
"A win-win is what we're looking for here. I want to see a positive development. The dialogue has been constructive."
Mr Albanese dismissed Mr Xiao's suggestion Japan might invade Australia given it hadn't apologised for doing so in World War II, highlighting a "very positive relationship" between the nations.
But he agreed the relationship between Australia and China was on the up after Mr Xiao said the Labor government was a key reason for the shift in attitude.
Mr Albanese met with President Xi Jinping in November, making him the first Australian prime minister to meet with his Chinese counterpart since 2016.
"No one can argue the mood in the relationship has not been enhanced substantially since I've been prime minister," Mr Albanese said.
"But we do have differences with China, and we'll continue to stand up for our interests where we must."
Mr Xiao also indicated Australia's lucrative international student sector could be set for a huge boost.
Government data shows Chinese student visa holders more than halved between 2019 and 2022, falling from 165,149 to 78,234 during the pandemic period.
The ambassador said "bad political relations" had contributed to students' reluctance to come to Australia but more stability in the relationship should see that trend reversed.
"Once we have an improvement (in the) relationship that absolutely is going to send messages to students you should have confidence about the future," he told reporters.
Mr Xiao said some policies for international students could also deter students from coming to Australia.
Student visa holders require approval from the Department of Home Affairs to switch courses and some require initial approval before they can begin a course.
"This is absolutely extraordinary ... this is very much not a normal kind of practice in many other countries," Mr Xiao said.
Australia's international student sector was valued at $40 billion in 2019.