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.