“Inefficient economic policy” may sound like an abstract concept, but it has real-world consequences. Many parents were rudely awakened to this fact last May when the U.S. experienced a shortage of baby formula.
The shortages started when a major U.S. production facility shut down to address potential contamination concerns. Tariffs and regulatory barriers that prevented parents from buying infant formula from Europe exacerbated the resulting supply shock, leading to a crisis that could have been quickly and easily addressed by simply removing the tariffs.
While Congress and the White House eventually stepped in to provide temporary relief, new bipartisan legislation from Senators Mike Lee (R-UT) and Bob Menendez (D-NJ) would make many of those changes permanent, waiving tariffs and easing trade barriers on infant formula. Doing so would not only protect consumers from unnecessary restrictions on their ability to purchase infant formula, but also would ensure a market that is more resilient to supply shocks.
A Formula for Disaster
Baby formula had flown under the radar for years as a target of crushing trade restrictions. Tariffs reached up to 17.5 percent, among the highest of any food product. This is in addition to tariff-rate quotas, which raise the effective tax consumers pay up to 25 percent.
By artificially restricting an industry to favor U.S. producers, trade barriers prevent competition. This tends to allow that industry to consolidate into a select handful of domestic producers that are reliant on government favoritism to survive.
It is unsurprising then that Abbott Nutrition was able to obtain 40 percent of the U.S. baby formula market, as trade barriers had effectively disqualified many of its natural competitors. Consequently, when the Food and Drug Administration shut down Abbot’s main manufacturing plant, there was an industry-wide supply shock that left retailers scrambling for alternative supply sources that did not exist.
Congress rightly responded by passing the bipartisan Formula Act to waive all tariffs on baby formula. The act passed with a 414 to 9 majority in the House of Representatives and by Unanimous Consent in the Senate. Another bill waiving tariffs on the “base powder” used to make formula passed both Houses of Congress unanimously.
Such unilateral reductions in protectionist U.S. tariffs are extremely rare. Unfortunately, the tariff cuts came with an expiration date. While baby formula quickly rebounded from a 40 percent shortage in June to somewhat normal levels in October, the tariffs only remained dormant, ready to pop back into place when the waivers expired on January 6, all while the formula market was still recovering.
Policy that has failed as spectacularly as trade barriers on baby formula deserves a more permanent solution. Fortunately for parents, Sens. Lee and Menendez have introduced the Formula 3.0 Act, which would waive all general tariffs on baby formula.
The Act addresses many of the problems that caused the shortages. While some claim that the waivers had little effect because the original Formula Act coincided with Abbott reopening its plant, this ignores the economic factors that led to a supply shock in the first place. Namely, by placing such high tariffs on baby formula, the U.S. limited the market to fewer producers than would otherwise compete. Freeing up the market to more foreign competition would result in more affordable infant formula for American families.
Furthermore, waiving baby formula tariffs has the potential to lower government spending. The federal Women, Infants, and Children program (WIC) allows low-income citizens to use vouchers to purchase baby formula. The program funds over half of all infant formula sales. Reducing baby formula prices by eliminating burdensome tariffs would consequently reduce the cost of WIC to taxpayers. Doing so would help to reverse the current trend on WIC spending, which increased by $53 million in 2022. Over the course of President Biden’s presidency, the WIC budget has increased by around $1 billion.
The proposed Formula 3.0 Act would remove many of the barriers to affordable infant formula. By waiving general tariff rates on baby formula, this legislation would pave the way for increased competition, potentially reducing the burden on consumers and taxpayers alike. The lessons learned from the baby formula tariff debacle underscore the need for an approach to trade policy that does not undermine market competition nor impose undue costs on consumers. Legislators should learn from these instances and strive for policies that enhance economic efficiency while promoting healthy competition.