Infant Formula Revisited

The infant formula shortage is a crisis for many American families, and the end is not in sight. What caused supplies of a staple product to run out? The most thorough explanation I have seen comes from Scott Lincicome of the Cato Institute. (Numerous links in the original are omitted here.)

Lincicome fingers government as the culprit, with protectionism as villain number one:

U.S. policy has exacerbated the nation’s infant formula problem by depressing potential supply. First, … the United States maintains high tariff barriers to imports of formula from other nations—all part of our government’s longstanding subsidization and protection of the politically powerful U.S. dairy industry. Imports of formula from most places, such as the European Union, are subject to a complex system of “tariff rate quotas,” under which already-high tariffs (usually 17.5 percent, but it depends on the product) increase even further once a certain quantity threshold is hit.

We even restrict imports of formula from most “free trade” (scare quotes intended!) agreement partners, including major dairy producing nations like Canada. In fact, a key provision of the renegotiated NAFTA—the U.S.-Mexico-Canada Agreement (USMCA)—actually tightened restrictions on Canadian baby formula to ensure that new investments in Ontario production capacity by Chinese company Feihe would never threaten the U.S. market…

Government regulators contributed to the problem:

If tariffs were the only problem here, then high prices in the United States right now might induce alternative supplies from overseas producers looking for new customers and profits. Unfortunately, however, the United States also imposes significant “non-tariff barriers” on all imports of infant formula. Most notable are strict FDA labeling and nutritional standards that any formula producer wishing to sell here must meet. Aspiring manufacturers also must register with the agency at least 90 days in advance and undergo an initial FDA inspection and then annual inspections thereafter. And the FDA maintains a long “Red List” of non-compliant products that are subject to immediate detention upon arriving on our shores. As a result, the FDA routinely issues notices that it has seized “illegal” (e.g., improperly labeled) infant formula from overseas.

The issue is not one of quality or safety. Perfectly good European products are confiscated:

Key here is the European Union, which is the world’s largest producer and exporter of infant formula, especially in the Netherlands, France, Ireland, and Germany. (China, it must be noted, produces a lot of formula but sells almost all of that to its domestic market.) European formula also has been found to meet FDA nutritional requirements, and is in high demand by some American consumers. Yet, when parents here have tried to import European formula, it’s been routinely subject to seizure by the FDA. In fact, formula made by two of the most popular European brands—HiPP and Holle—is on the FDA’s red list and thus only arrives here via unofficial, third party channels.

Unless the FDA gets to it first.

There is much more at the link, including the fact that the federal government buys about half of all U.S. baby formula through the WIC program, which requires sole-source contracts for infant formula. The result has been a highly concentrated industry with little incentive for new entrants:

[A]s the dominant buyer of infant formula in the United States and by demanding below-market contract prices, WIC may discourage additional investments in U.S. capacity or new market entrants. Put simply, nobody had an incentive to break into the U.S. infant formula market—or to boost existing U.S. production—when half of the market is effectively controlled by a single buyer demanding unprofitable prices and compliance with piles of state and federal regulations.

As a conservative, I am pro-free trade. But events of the last few years have convinced me that for security reasons, the U.S. needs to assure a safe–most likely domestic, but probably including, say, Canada, Mexico and a handful of other countries–supply of energy, pharmaceuticals, and critical minerals. Our feckless trade policies have led to a potentially disastrous reliance on China for all three of these product categories. But Lincicome argues that protectionism creates its own security issues:

[T]he infant formula situation is an unfortunate reminder that the trendy economic nationalist policies proposed to make America more “resilient”—tariffs, localization mandates, government contracts, etc.—can actually make us weaker by discouraging global capacity, supplier diversity, and system-wide flexibility. As I’ve said a million times now, reshoring supply chains might insulate us from external supply and demand shocks, but it also can amplify domestic shocks (and reduce overall economic growth and output to boot). We’re seeing that reality play out once again in the highly protected and regulated U.S. dairy market, where domestic production accounts for the vast majority of American consumption. Indeed, infant formula—with its protectionism, regulations, and heavy dose of government direction—is pretty much the poster child for what nationalist “industrial policy” advocates today propose for all sorts of “strategic” industries.

Those points deserve thoughtful consideration. One way of putting it is that if we are going to onshore critical industries, we should make sure that our regulatory agencies don’t screw them up. But how to do that, when the swamp rules?

I am not going to change my view that we are crazy to rely on China and other hostile powers for products and materials that are critical to our survival. But at the same time, globalism and international trade can provide diversity of supply–a good thing, if only to keep our own power-hungry agencies in check.