Aug 29, 2018

Axios Future

By Bryan Walsh
Bryan Walsh

Welcome back to Future. Thanks for subscribing.

Next week, we begin 5X Future coverage, M-F. Numerous readers emailed to express excitement and congratulations — but also worry that, given busy schedules, they would have a hard time keeping up. In response, we've decided to recap: On Fridays, we will provide links to the 1 big things from the whole week.

Consider inviting your friends and colleagues to sign up. And if you have any tips or thoughts on what we can do better, just hit reply to this email or shoot me a message at steve@axios.com.

Let's start with ...

1 big thing: The downside of trade hardball

Illustration: Lazaro Gamio/Axios

President Trump's hardball, America First negotiating tactics may produce a new agreement on NAFTA as early as Friday, but history suggests he could be creating bad blood against the U.S. for years or longer.

What they're saying: Over the centuries, arm-twisting and coerced deals have often come back to haunt the bullies, experts say.

  • Beijing, for instance, treats the 19th century Opium Wars, in which Britain and France forced China to open to trade under humiliating terms, as though they were yesterday.
  • Hitler arose after the crushing terms that ended World War I.
  • "British and French agreements with their colonies were generally rejected soon after independence," says Gary Hufbauer, of the Peterson Institute for International Economics. "But the mother of all unequal treaties was the Treaty of Versailles, and we know what happened to that." 

The big picture: On Monday, Trump announced an apparent coup, saying he had pried Mexico away from Canada and reached a handshake agreement on a new NAFTA formulation comprised almost totally of concessions by Mexico. Until then, Canadian and Mexican leaders had insisted that no deal with Trump was possible unless it was trilateral.

Then Trump gave Canada an ultimatum: Sign the agreement by Friday, with whatever tweaks it could muster with the White House, or Trump would complete the deal with Mexico and without Canada. Oh, and after that, he would levy tariffs on Canadian-made cars.

The response:

  • Yesterday, Canadian Foreign Minister Chrystia Freeland cut short a European trip and flew into Washington, D.C. In remarks this afternoon, both Freeland and Trump suggested a deal was possible.
  • If a deal is struck and gets its necessary legislative approvals in the three capitals, that would be Trump's second coup.
  • Given his frequent vows during the 2016 campaign to redo or kill NAFTA, the reshaping of the deal provides Trump with hefty bragging rights going into the November midterms.

What's next: Though he may not act until after the midterms, Trump is likely to tighten the screws on China.

  • Ian Bremmer, president of the Eurasia Group, suggests that Chinese President Xi Jinping may crack a bit, too. Xi "doesn’t want a fight," Bremmer tells Axios. "They were offering to increase purchases of U.S. goods before. They’re almost certain to put more on the table going forward." 
  • Yet the backlash may already be here, says Douglas Irwin, an economic historian at Cornell University. "There are already repercussions from Trump's aggressive negotiating stance."
  • "Almost no other country wants to negotiate a trade agreement with the United States because they know the administration will make impossible demands, or demands that end up restricting trade," Irwin adds.

Go deeper: Read the whole post.

Bonus: More on the long trade war

Illustration: Lazaro Gamio/Axios

In the last edition, we discussed the likelihood that the current U.S.-China trade war will last a year or more, and not be settled soon after the U.S. midterms, as many people think.

Going further into that scenario, Brad Setser, of the Council on Foreign Relations, says that some in the Trump administration have super-ambitious aims — to incentivize all foreign firms manufacturing in China for the U.S. market to move their operations elsewhere. He continues with...

  • A number of companies will do so if they decide the tariffs are more or less permanent, moving at least the final assembly to other countries. Those that stay will avoid buying components from the U.S. to avoid tariffs.
  • "All of Brazil’s soy will go to China, and Brazil’s farmers will feed their pigs and chickens with American soy (thanks to the discount); European oil seeds will go to China, and European pigs and chickens will be fed with U.S. soymeal."
  • "Indeed, if the tariffs are in place for several years, lifting them could come as a shock, as investments made to optimize global production for a world with tariffs would be 'stranded' if those tariffs are lifted."

But this will not necessarily be the "good" economic future that Trump seeks, Setser says. "There is more likely, especially at current levels of the dollar, to be a shift toward other Asian economies than a shift in manufacturing back to the U.S."  

2. Amazon's problem with fakes

Illustration: Rebecca Zisser/Axios

Tens of thousands of sham products have appeared on Amazon over the last two years — a rash of counterfeiting amid a growing, trillion-dollar global business of retail fakery.

Axios' Erica Pandey reports: Amazon, Alibaba and other retailers have failed to keep up with the soaring business in counterfeit brand makeup, skin care and other goods. Losses are expected to soar to $1.8 trillion by 2020, a 52% jump from $1.2 trillion last year, per the 2018 Global Brand Counterfeiting Report.

Why it matters: Losses from e-commerce fakery alone were $323 billion last year, according to the Global Brand Counterfeiting Report. The growth of e-commerce counterfeiting potentially adds to the crisis of trust facing Big Tech, already under fire for the proliferation of fake news and disinformation on their platforms.

By the numbers:

  • The Counterfeit Report, an advocacy group that looks for fake products on platforms, counted 59,749 fake goods on Amazon between May 2016 and this morning.
  • Over the last two years, Amazon customers reported 5,101 counterfeit products, according to a new report by market research firm Gartner L2, provided first to Axios.
  • In context: The actual scale of the problem isn't known — none of the reports is a representative sample, and Amazon sold 560 million products last year. But Craig Crosby, founder of The Counterfeit Report, says the problem "can only grow."

In its report, Gartner looked at 350,000 one- and two-star Amazon customer reviews from 2016 to 2018 for 321 brands, ranging from hair care to headphones to fashion. Among its findings:

  • One in three products sold by third-party merchants — sellers other than Amazon itself — received at least one customer review claiming it was "fake" or "counterfeit."
  • The problem was especially significant for makeup and skincare brands, with 75% of L'Oreal, Olay and e.l.f. products receiving at least one "counterfeit" review, Gartner said.
  • Axios reached out to all three brands: L'Oreal declined to comment, and e.l.f. and Olay, run by P&G, did not respond.

Researchers knew there were counterfeit goods on Amazon, Gartner's Cooper Smith tells Axios, but "we didn’t know the scale of the problem, and neither did brands, so we conducted this study to help bring some data-backed evidence to the conversation."

On the other side: In a statement to Axios, Amazon says it disputes the methodology used by Gartner, adding that the company takes strong measures to keep counterfeit products off the platform. Among the measures are swiftly flagging counterfeit reviews and punishing the vendors by removing them from browsing options.

Go deeper: Read Erica's whole post.

3. AI and child suicide

Sixth graders at Flint Hill School in Oakton, Va. Photo: Katherine Frey/Washington Post/Getty

Jolted by rising suicide and self-injury among young Americans, schools are using software to monitor student browsing history and logs for signs of distress, in what they hope will curb the problem.

Kaveh Waddell reports: Kids and teens increasingly rely on the internet to answer their mental health questions, creating browsing patterns that schools hope could identify potential harm before it happens. But that requires sweeping online surveillance that critics say could leave a lasting mark on students.

  • Between 2006 and 2016, the rate for black children increased 77%, to 2.62 suicides per 100,000 children, according to the Centers for Disease Control and Prevention. The suicide rate for white children rose 70%, to more than 5 per 100,000 children.

The details: Many monitoring tools are on the market, including one by GoGuardian, a Los Angeles-based education-tech company.

  • GoGuardian's early filtering products were aimed at keeping students away from online porn, Tyler Shaddix, the company's chief product officer, tells Axios.
  • After a student committed suicide in a school testing the software, an administrator asked whether better monitoring could have prevented it.
  • That led to a new system that evaluated students’ online activity for signs they may harm themselves.

At first, GoGuardian used keyword matching, a standard approach among companies like it. This generated thousands of extraneous alerts, so in its latest version — to come out in October — GoGuardian has added artificial intelligence techniques that it says improves the software's accuracy.

How it works: GoGuardian installs an extension on school-issued computers running Chrome OS or Windows. When the system detects a potential problem in chat conversations, emails, Google Docs, or browsing, it sends an alert to whomever the school has designated to receive them.

Electronic snooping always raises weighty ethical questions, even when it’s meant to safeguard young people.

  • Privacy experts worry about early, all-encompassing monitoring. Gennie Gebhart, a researcher at the Electronic Frontier Foundation, says pervasive surveillance normalizes electronic snooping, and can keep kids from testing out new ideas and identities as they grow.
  • "This piece of software is going beyond ed-tech and toward a new kind of surveillance in the classroom," Gebhart says.
  • When Shaddix was asked GoGuardian if students have a right to privacy, he says the benefits of monitoring "outweigh the negatives."

Go deeper: Read Kaveh's whole post.

4. The cannibal of Sears

Illustration: Lazaro Gamio/Axios

There may not be a more vilified U.S. corporate kingpin than Eddie Lampert, a billionaire Connecticut hedge fund manager who for 13 years has been, piece by piece, dismantling Sears, the once-iconic, 125-year-old department store chain.

Erica writes: Now, critics say Lampert is on the verge of inflicting a death blow — proposing to personally buy Sears' final consequential piece, Kenmore appliances.

  • Kenmore is a "final, egregious act to remove an asset from an estate that will eventually go bankrupt," Mark Cohen, former CEO of Sears Canada, tells Axios.
  • Why it matters: "In some towns, [Sears is] arguably the only viable department store. ... In many malls, they are the anchors," says Herb Kleinberger, a professor of retail at NYU Stern School of Business.

The big picture: Numerous storied department store chains have fallen in the last two decades — including Montgomery Ward and Woolworth's — but Sears has had the longest, and arguably most agonizing, fall of all. It has also been among the most chronicled.

The background: In 2003, Lampert, a former Goldman Sachs analyst who roomed with Treasury Secretary Steven Mnuchin at Yale, bought a then-bankrupt Kmart through his hedge fund, ESL Investments. Two years later, he combined Kmart and Sears, creating a retail empire of about 3,500 stores in the U.S. and Canada and employing some 350,000 workers.

What's happening now:

  • Today, after a bloodletting amid an implosion of mostly private equity-led retail malls, the two chains are just one-quarter the size, at 900 stores and 175,000 employees. Just last week, Sears said it would close another 46 U.S. stores in the fall.
  • Sears' share price, about $33 in 2013 when Lampert became CEO, closed at $1.22 today.
  • "He's destroyed the fabric of the company," Cohen says.

On the other side: In a statement, Sears disputed the assertion by some critics that Lampert is picking apart the company for personal profit.

  • "We look at investments in our business and stores through a broader lens than simply that which is represented by capital expenditures," Sears spokesperson Howard Riefs said.
  • Lampert's hedge fund did not return a phone call seeking comment.

Read more of Erica's whole post.

5. Worthy of your time

Illustration: Lazaro Gamio/Axios

Emerging markets and the financial crisis of 1825 (Gwynn Guilford — Quartz)

Will Silicon Valley help the Pentagon beat China? (Cade Metz — NYT)

Trump vs. Google (Dan Primack, Mike Allen -— Axios) (podcast)

When Chinese-American scientists are wrongly accused (Brit McCandless Farmer — CBS)

Mechanical Turk's bot problem (Derrick Harris — Architecht)

6. 1 artistic thing: AI at the easel

AI-generated portrait of the fictional Edmond de Belamy. Image: Christie's

AI-generated art is selling for thousands of dollars to private donors and auction houses, leapfrogging mere novelty.

Kaveh writes: We’re often told that manual work will be snapped up by robots, while creative jobs are relatively safe. It’s not clear this technology quite approximates human creativity, but its commercial success suggests a demand for simulated imagination.

What’s going on: In October, Christie’s will become the first auction house to sell a piece of art created by AI, artnet news reports: a portrait developed by a French collective named Obvious.

  • Obvious sold a painting in the same series to a private collector for about $12,000 in February.

How it works: The pieces were made using generative adversarial networks, or GANs, a state-of-the-art AI technique.

  • The painting algorithm took a crash course in portraiture, reviewing 15,000 portraits painted between the 14th and 20th centuries.
  • A second algorithm called the discriminator judged the result to see if it could discern AI- from human-created art.
  • If it could, it sent the generator back to the easel, and the cycle repeated until the generator produced something indistinguishable from human art.

The final products may not be exactly human-like, but they draw a viewer in. One member of the fictional Belamy family, Edmond, is an inscrutable, slightly pixelated ghost. Another — the count himself — looks like a wispy, glowing J.S. Bach.

Read more of Kaveh's whole post.

Bryan Walsh