The U.S. Infant Formula Shortage: Causes and Potential Solutions
Critics of globalization and free trade often raise valid security concerns about letting parts of the American supply chain remain abroad. In particular, it is certainly plausible that heavy reliance on key goods coming from volatile regions could significantly hurt the national economy. If foreign conflicts or economic shocks can threaten domestic access to goods, then they also have the potential to painfully expose our economic weaknesses. Localization, or domestic production of key goods, can in part protect against foreign supply shocks that threaten the market.
But what happens when it is not a foreign shock that threatens markets, but a domestic one? What happens when, in an industry where American companies meet a whopping 98% of American demand, one of those producers recalls one of its most popular products? To make the situation even worse, what if a very large number of low-income Americans only had access to that one particular brand? Factor in another issue: similar products made in foreign markets are subject to tariffs as high as 17.5% and heavy regulation by the FDA. Combine all of these events together and you get the current baby formula crisis.
Infant formula is an important product. When lactation is difficult or impossible, or parents simply desire a healthy alternative to breastfeeding, access to a formula is critical to ensuring the development of healthy babies. Additionally, some young children have allergies or other medical conditions that necessitate access to one specific formula. A lack of formula access or the use of a faulty substitute can endanger children’s health.
Currently, stores across the US are facing a significant infant formula shortage. Some parents have reported driving for hours just to find little formula available. Stores are rationing what little supply they can get their hands on.
There is one clear cause of the current shortage and several exacerbating factors making the crisis worse.
Earlier this year, Abbott, one of the largest producers of formula, issued a recall of a leading product due to concerns over a rare bacteria possibly linked to the product. In February, the company shut down a key plant in Sturgis, Michigan, due to related health and sanitation concerns. The plant has been estimated to produce between one-fifth and one-quarter of all US formula. This greatly shocked the domestic formula market, leading to the shortage. Additionally, the shortage sparked an increase in hoarding of formula, which has led to the rationing of purchases in stores across the country.
There are several exacerbating factors making the crisis worse. First is the aforementioned industry concentration. When nine-tenths of the market is controlled by four companies, one large hit to a single producer has massive ripple effects. Current policies protect this concentration by discouraging domestic competitors from entering large markets and restricting the kinds of foreign products that can be imported to the United States.
One such example is the way that government programs subsidize formula for low-income mothers. The Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) is one such program that supplements formula purchases for low-income families and families with nutritional risks. It is responsible for almost half of the formula purchases in the country. Across the US, each state awards a WIC contract to one company, and that company provides all the formula for WIC recipients in the state. These massive contracts do help consumers in regular times. The producers often sell formula to WIC recipients at up to 92% off of wholesale prices (those given to normal retailers purchasing the good) because winning a contract brings in a windfall of customers. In exchange, WIC recipients are prohibited from buying other brands of formula.
Another such example is the network of various tariff-rate quotas found in trade agreements which penalize the import of quantities above a certain threshold. These kinds of restrictive policies work in conjunction with already-high FDA standards to limit what kinds of formula can be safely imported into the United States. European formula, for example, often differs from US formula in terms of the water-to-powder ratio, how high dairy percentages are in the formula, or even how the ingredients are labeled on the formula cans. The FDA operates a “red list'' of formulas that are confiscated upon arrival in America. The disjunction between foreign and FDA standards means that European companies who wish to export to the US have to significantly alter their product to meet American regulations and often choose to not export at all. Some of the extra standards for FDA approval are surely well-intentioned, and there are risks that come from buying foreign products; but parents still ought to have the option to buy European formula if they decide it is the best option for their child.
The Biden administration seems to be implementing decently smart short-term solutions to these problems. For example, the White House invoked the Defense Production Act to boost domestic production and fly in foreign formula as a substitute, while examining the current market structure. The WIC program has also temporarily expanded the permitted choices recipients can make. But in the long run, something has to change. The federal government can start by trying to incentivize greater domestic competition. The WIC can be reformed by making the changes to permitted formulas permanent.
The most important of these solutions, though, is increasing access to foreign formula – specifically formula made in Europe, the largest formula-producing region in the world. European formulas do not have to be an option of last resort. There ought not to be an “In-Case-of-Emergency-Break-Glass''-style box which, when opened, reveals a magical supply of European baby formula to cure any shortage. Parents are increasingly looking to European formulas as a matter of both nutritional value and personal preference. As I noted, differences between FDA-approved formula and European formula exist, but I am not inclined to believe that European-style formula, which is the primary option for millions of families across the globe, is a nefarious, contaminated product that cannot be allowed to enter the American market. I trust parents to research the kind of formula desirable for their own children in conjunction with their needs.
Increased trade helps consumers by increasing the raw supply available while offering more choices of products. High tariffs and other protectionist policies hurt consumers by limiting available goods. If the FTC and the rest of the Biden administration really want to help American parents, they will critically reexamine these current policies which made the crisis possible. Freer entry into the market will decrease exposure to domestic shocks while simultaneously giving American consumers more options to choose from.
I highly recommend reading this newsletter from the Cato Institute’s Scott Lincicome, writing for the Dispatch. He details all these problems and more, and some possible solutions I could not mention here. Ultimately, industry titans would love nothing more than to keep their stranglehold on the formula market. However, the current formula crisis should be a warning to the American people of the dangers of over-reliance on a highly-concentrated group of companies.
