ChainMail | Oh Baby!

How protectionism worsened the infant formula shortage

ChainMail | Oh Baby!

The baby formula shortage, which I included on a recent list of COVID casualties, turns out to be a more involved saga with broader implications for trade and the supply chain.

True, the pandemic knocked supply and demand out of whack for formula. Then in February the Food and Drug Administration ordered the shutdown of an Abbott Nutrition factory in Michigan that makes Similac. This came after several babies that consumed the formula became sick, and two died. A government inspection determined the plant failed to properly maintain sanitary conditions, but Abbott says no clear link between the plant and baby illnesses has been found.

As of May 8th, more than 40% of baby formula nationally was out of stock. In a market with robust competition, the closure of one factory probably wouldn’t have caused this frightening situation for parents. Baby formula companies, though, get special government purchasing support, plus trade protection that limits or shuts out Canadian and European suppliers to help the domestic dairy industry.

The U.S. government plays an outsize role because the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) is the largest buyer of formula. Major formula-makers offer steep discounts to win those contracts and expand market share, effectively eliminating new competition. Abbott dominates the market along with a few other companies. As the Atlantic magazine put it, “The U.S. baby formula industry is minuscule by design.”

The government also limits foreign entrants, which might have come to the rescue.  European brands offer the same quality but are kept at bay by tariff, label, and nutrition restrictions. Canadian products are subject to quotas and tariffs imposed by the new NAFTA trade deal, known as USCMA.

The result, as one public policy expert put it, is a near monopoly in the formula market. Call it Big Baby.

There are good reasons for the FDA to keep a sharp eye on the production of a sensitive product like infant formula. But market distortions such as quotas, large government contracts, and red tape create vulnerabilities. The Biden administration is now scrambling to import formula and take other steps to help families. A more open market might have prevented this crisis.

Read the complete Issue 11 of ChainMail here.

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