In Daoism, you don’t necessarily even care about “happiness” as that’s a quality internal to oneself. It is understood though that all things have a Way (a dao) which they ideally align with. Being at odds with your dao causes strife.
So a fish, swimming in the water “like it’s supposed to be,” can be thought of as happy because it is living it’s Dao. Zhuangzi perhaps interprets the “how/where do you know” question as bad form on his friends part. Daoists often dismiss a lot of learned knowledge as obfuscsting one from the dao (a principle I don’t fully agree with the old masters on) so trying to dig deeper into the question “but how can you know what a fish thinks?!” is missing the point entirely. Fish are “happy” because, as animals, they naturally live in accordance with Dao.
The correct answer is telling your asshole relatives that they need to do a match with the mini-goliath themselves if they think they’re so tough. Then they either have to play along with the bit or else they’re the asshole who hurt a child’s feelings. (Spoilers if they’re like my family: they will, but then you and the lil bro can bond over that shared trauma. Ah, family!)