Australia will spend another $270 billion on defence over the next decade to protect against China's rise and the fallout from the coronavirus.
The country will for the first time be armed with long-range missiles as it adopts a more aggressive footing.
Prime Minister Scott Morrison wants the Australian Defence Force to firmly focus its efforts on the Indo-Pacific.
Mr Morrison says Australia will never surrender its sovereignty or seek to intimidate its neighbours.
But the country's prosperity and security are under increasing strain.
The prime minister says strategic competition between China and the United States is creating "a lot of tension in the cord and a lot of miscalculation".
Other regional tensions, such as border skirmishes between China and India and China's intransigence over the South China Sea, have worsened in recent years.
"We need to also prepare for a post-COVID world that is poorer, more dangerous and more disorderly," Mr Morrison said on Wednesday.
The prime minister has released a defence strategic update and new force structure plan.
The major documents warn Australia must become more self-sufficient and less reliant on the US.
Mr Morrison referenced the 1930s and lead up to World War II several times in his speech.
Defence Minister Linda Reynolds said the references were not made lightly.
The review warned the chances of intense military conflict between the US and China in the Indo-Pacific were "less remote" than at the time of the 2016 Defence White Paper.
Mr Morrison said Australia must be able to respond to any miscalculation with military force while also building stronger defences to guard against attacks.
He has promised the ADF $270 billion over the next decade, up from the $195 billion promised in 2016.
The force will look for long-range weapons to strike ships or land thousands of kilometres away, as well as test long-range hypersonic weapons.
It will also boost cyber capacity and surveillance, and build a network of satellites so Australia has an independent communications network.
Mr Morrison said Australia remains prepared to make military contributions outside of the Indo-Pacific region, including backing US-led coalitions.
"But we cannot allow consideration of such contingencies to drive our force structure to the detriment of ensuring we have credible capability to respond to any challenge in our immediate region," he said.
"If we are to be a better and more effective ally, we must be prepared to invest in our own security."
Labor has welcomed the extra funding and pivot to the Indo-Pacific.
But Save the Children wants the government to back up the defence spending boost with increased foreign aid.
"The decline in Australia's aid budget is as stark as the increase to defence," deputy chief Mat Tinkler said.
"We need to support our neighbours right now. Not only is it in our national interest, but it's the right thing to do."