Daily Memo: Israel Waits for Retaliation, Saving an Intelligence Agreement, Chinese Exports and Investment

All the news worth knowing today.

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Israel waits for retaliation. Israeli strikes on Iran-linked targets reportedly continued Monday and early Tuesday as security forces hit a Palestinian facility in the Bekaa Valley and a Hamas observation post in Gaza. Israel has claimed only the strike against Hamas. (It also acknowledged its strike Saturday in southeast Damascus, which Israel Defense Forces said targeted Iran’s Quds Force.) The Israeli drone strike that allegedly took placed Sunday in Beirut is rumored to have targeted shipping containers that housed “machinery to mix high-grade propellant” for precision-guided missiles, according to the British daily newspaper The Times. On Tuesday, Israel Defense Forces reportedly began to restrict the movement of military vehicles on roads near the Lebanese border for fear that Hezbollah might strike back. Hezbollah has yet to respond with anything other than verbal threats. But with Israel reportedly conducting strikes over the past week nearly everywhere Iran has major influence – Gaza, Syria, Lebanon, the West Bank and Iraq – it’s apparently preparing for one. Prime Minister Benjamin Netanyahu recently took the rare step of inviting his main political rival, Blue and White leader and former IDF chief of staff Benny Gantz, to a security briefing. Meanwhile, Lebanese Prime Minister Saad Hariri called Russian Foreign Minister Sergey Lavrov to ask him to ease tensions. This is mainly because the U.S. and Israel want to break Iranian power without assuming the risks of doing so – meaning Russia holds the key.

Saving an intelligence agreement. For the second time in as many days, South Korean Prime Minister Lee Nak-yon said Tuesday that Seoul may reverse its decision to abandon the General Security of Military Information Agreement – a key bilateral intelligence-sharing pact that will expire in November – if Japan removes its new export controls on critical materials needed by South Korean electronics giants. Additional Japanese export controls are set to kick in on Wednesday. The agreement was on thin ice long before Japan abruptly announced the new export controls, so for Seoul to explicitly link the pact to Japan’s trade behavior suggests one of three things: that South Korea is feeling the pressure from the U.S. to reconsider its withdrawal; that Seoul is desperate to make the export controls go away; or that Seoul thinks Tokyo was spooked by interrupted intelligence flows that reportedly surfaced after Pyongyang’s latest missile test on Friday and is ready to deal. Either way, the collapse of the pact is rooted in strategic differences that will be difficult to reconcile.

Chinese exports and investment. China’s State Council announced that six new free trade zones would be set up in several interior border regions. This comes a week after Beijing announced that it would double the size of Shanghai’s FTZ and after it introduced a series of measures to cut red tape in other FTZs. Those decisions reflect the concern among Chinese leaders that the trade war (and slowing economy) will dry up foreign investment. But the decision shows that they are worried about losing access to Western markets altogether. Most existing Chinese FTZs are located in coastal regions and so are meant to facilitate higher-value exports, particularly in various tech sectors, to the West. The locations of the new zones – most in underdeveloped provinces near Belt and Road projects intended to boost trade with Russia, Southeast Asia and Korea – reflect Beijing’s need to reduce its dependence to the West altogether. It’s a small example of how the pressure of the trade war is compelling China to accelerate moves that may make it more resilient over the long run. It just needs to avoid crashing and burning in the meantime.

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