‘Very Wrong’ Policies Limit Tariff Remedy in Baby Formula Crisis

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Legislation to pause tariffs on some infant formula imports is lawmakers’ latest effort to ease a supply crisis, but trade experts warn that other hurdles are keeping foreign formula out of the US.

Congress cleared a bill Thursday to suspend tariffs on certain formula imports until the end of December, sending the legislation to President Joe Biden to sign. Lawmakers hope pausing tariffs of as much as 17.5% for some countries will make foreign formula makers more likely to export to the US, offering relief to parents facing empty shelves since Abbott Laboratories in February recalled some of its products, and then temporarily shut down a major plant in Michigan.

“This change should help make formula more affordable and accessible for families in every state,” said Rep. Earl Blumenauer (D-Ore.), the sponsor of H.R. 8351. Almost 30% of shelves were out of baby formula in mid-July, according to data analytics company IRI.

Still, industry researchers say a suite of factors beyond tariffs makes the US market unattractive to foreign manufacturers. “In many respects, the infant formula market is a case study of economic policies that have come together to go very, very wrong,” said Eric Miller, president of trade consultancy Rideau Potomac Strategy Group.

Mike Lee (R-Utah), the bill’s sponsor in the Senate, said he and other lawmakers are working on further actions to increase formula supply by lowering barriers for manufacturers. “While this is an important first step, it’s certainly not the last,” he said.

FDA Regulations

Waiving tariffs isn’t the first US effort to address formula shortages. The federal government invoked defense powers in May to fly in formula from overseas, importing more than 61 million bottles as of the end of this week. It also gave foreign manufacturers more flexibility on meeting US food safety requirements.

But unlike many food regulators, the US Food and Drug Administration hasn’t historically had reciprocity with other countries. This means other countries’ standards for infant formula aren’t automatically accepted in America.

The lack of reciprocity makes it more difficult for foreign manufacturers to get authorized to sell in the US, said Andrew Novakovic, a professor of agricultural economics emeritus at Cornell University.

Earlier this month, the FDA said it plans to meet with foreign formula companies to “determine what additional steps would be needed to provide a pathway to long-term, uninterrupted marketing for safe and nutritious formula,” which could reduce barriers for importing foreign formula long-term. Companies that could be affected include the British company Kendal Nutricare and Bubs Australia, both which have sent formula to the US during the crisis.

Prior to the recent actions, analysts say the lack of reciprocity contributed to the US importing far less infant formula than it exports. In 2021, the Congressional Research Service estimated that the US imported $28.8 million worth of infant formula, satisfying about 1.5% of the country’s domestic demand.

Market Consolidation

The market for infant formula is also highly saturated, the CRS found in its report, with US producers exceeding demand. The market is dominated by three major companies — Abbott, Nestle SA, and Mead Johnson — which “may make the United States a relatively unattractive market for foreign manufacturers, particularly of low-cost infant formula,” according to the government research agency.

The consolidation in the formula market is in part linked to states’ sole-source contracting for the Special Supplemental Nutrition Program for Women, Infants, and Children. Within this model, states contract with individual formula manufacturers for the government assistance program.

“Basically, what the sole source contract does at this point is trade market power for the ability, for the WIC program, to provide benefits to all comers,” said Lauren Bauer, a fellow in economic studies at the Brookings Institution.

The model means formula makers have to compete in order to contract with the state, and in effect provide their product at a lower cost than they would otherwise. While this allows WIC to serve more parents than it could otherwise, it also leads to a system where a few big companies dominate the market.

“We support USDA’s goal of stretching WIC resources as far as possible, and it is clear that the sole-source contract model has allowed for cost containment and the ability to serve more WIC participants,” eight Democratic senators wrote to Agriculture Secretary Tom Vilsack in May. “However, this crisis has shined an important light on the fact that systemic resilience must be a factor in program decision-making going forward.”

One change, Bauer said, would be to impose more consequences for production failures for any formula makers with WIC contracts.

“If you win a sole source contract and you have to shut down a factory for safety reasons, it shouldn’t be a gentleman’s agreement between the head of the firm and the Secretary of Agriculture,” she said.

An FDA user fee bill advanced by the Senate HELP committee last month (S. 4348) would require formula makers to notify the FDA within five business days of any disruptions in their infant formula supply.

Global Supply Issues

Beyond regulatory requirements and other factors that make the US formula market unappealing to outside manufacturers, Novakovic noted that dairy supply is shrinking in certain regions.

Pandemic shutdowns have slowed down supply chains to get farmers’ dairy products to markets, while drought and other natural disasters have also curbed supply, prompting milk shortages in places like Australia and Cuba.

As a result, Novakovic said there probably isn’t “this big dormant excess capacity for formula in any other country.”

And even if the temporary tariff waiver could boost “surge imports” from other countries that have excess formula, Miller, from the trade consultancy, said the fix is only temporary. The bill pauses the tariffs until the end of the year rather than changing the market’s structure .

“When you when you think about how much money is being spent to fix the current dysfunction,” Miller said, “It is worth asking the question of: ‘Why is everything we’re doing only temporary fixes that will not actually lead to new competition or new investments or new supply heading for the market over the longer term?’”

To contact the reporter on this story: Maeve Sheehey in Washington at msheehey@bloombergindustry.com

To contact the editors responsible for this story: Anna Yukhananov at ayukhananov@bloombergindustry.com; Robin Meszoly at rmeszoly@bgov.com

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