Behind the APEC Summit’s landmark deals by Elizabeth Economy @FortuneMagazine November 14, 2014, 9:38 AM EST E-mail Tweet Facebook Google Plus Linkedin Share icons The outcome of this week’s APEC summit meeting between U.S President Barack Obama and Chinese President Xi Jinping was better — much better — than most observers had anticipated. The two leaders managed to downplay their differences and celebrate their common interests, striking three bargains and issuing a joint statement of intent. The agreements covered the waterfront —a decision to reduce or eliminate tariffs on information technology products, a plan to extend the term of visas, a promise to develop rules of the road for maritime and air encounters in the western Pacific, and a commitment on the part of both countries to take action to address climate change by reducing their carbon emissions. Whatever acrimony might have emerged over issues, such as Hong Kong or cyber, was kept under wraps in favor of a positive message of expanding the common ground between the two countries. What accounts for this important, albeit surprising, progress? Undoubtedly, a number of factors — countless hours of negotiation by exhausted Chinese and American officials, domestic imperatives on trade in the United States and clean air in China, and above all, a confluence of interest at the very top: President Obama’s legacy and President Xi’s ambition. Since 2011, President Obama has made the pivot or rebalance to Asia a U.S. foreign policy priority: reinvigorating U.S. leadership in the region, reassuring U.S. allies of Washington’s security commitment, working to foster good governance in emerging democracies such as Myanmar, and promoting free trade through the Trans-Pacific Partnership. And a central element of the pivot is engaging China in these same trade, security, and governance norms. With only two years left in his tenure, a robust U.S. presence and rising influence in Asia, coupled with a China that is largely within the U.S. tent, will be an important element of his foreign policy legacy. Xi Jinping, in contrast, is at the beginning of his presidency—just on the cusp of his third year in office in what will likely be a 10-year tenure. For Xi, the Asia Pacific is China’s backyard and a natural platform for Chinese leadership. His vision of a “new relationship among major powers” with the United States represents an understanding that regional leadership will need to be shared for now but also a belief that over time, all roads will lead to Beijing. Xi’s cooperation with the U.S. on climate, security and trade at the APEC summit are part of a short-term strategy to maintain regional stability and earn the respect of the region as a cooperative and constructive player. At the same time, Xi is laying the foundation for Chinese leadership in the future by promoting new Chinese-designed institutions, such as the Asian Infrastructure Investment Bank, the Asia-Pacific Free Trade Area, and an Asian security architecture — all of which compete with pre-existing or proposed institutions that are led by the United States or other actors in the region. President Obama’s desire for a positive legacy and President Xi’s ambition for greater Chinese influence moving forward may well be enough to support further positive growth in the relationship. Indeed, the two countries have already committed to moving more aggressively to achieve a Bilateral Investment Treaty over the next year or so, and to work together on a range of issues such as promoting stability in Afghanistan, denuclearizing the Korean Peninsula, and cooperating on law enforcement Of course, obstacles remain. The U.S. has adopted an almost reflexive negative response to any institutional innovation proposed by Beijing. Washington, for example, has actively opposed the Chinese establishment of an Asian Infrastructure Investment Bank (AIIB), perceiving it (correctly) as a challenge to the U.S. and Japan-supported Asian Development Bank (ADB). Yet rather than refusing to join and encouraging others to boycott membership in the AIIB, Washington should accept Beijing’s offer to participate and then work from within to ensure that the AIIB adopt environmental, labor, and governance standards equal to those of the ADB and other development banks. In this instance, rather than exerting positive leadership in the region, Washington appears to be undermining a potentially very useful initiative merely because it is driven by China. For China’s part, President Xi has stoked a particularly virulent form of Chinese nationalism that has the potential to undermine both relations with the United States and his own vision and ambition for Chinese regional and global leadership. Under Xi, the Internet is being strangled, artists and intellectuals stifled, and Western political and cultural ideals demonized. This insidious form of nationalism, if not brought to a halt, will eat away at Xi’s ability to portray China as able to articulate a vision shared by much of the rest of the world. After all, it will be difficult to win over the hearts and minds of the very people whose ideals and values are being condemned. President Obama and President Xi each have a strong personal incentive to make real advances in the U.S.-China relationship over the next two years. Each will have to make room for the others’ ideas and institutions — understanding that the more that short-term interests can be aligned today the better the chance for longer-term coincidence of interest. While the APEC summit did not represent a reset for the U.S.-China relationship, it could well represent the beginning of a rethink. Elizabeth Economy is the C.V. Starr Senior Fellow and Director in Asia Studies at the Council on Foreign Relations. She is also the author of “China’s Imperial President” in the November/December issue of Foreign Affairs magazine.