Last week, the President signed legislation to suspend tariffs on imported baby formula to address continued national shortages. On the one hand, Congress and the Biden administration deserve some credit both for recognizing how imports, free trade, and economic openness more generally can boost national “resilience” (something I’ve been saying for years now) and for acting to unilaterally eliminate high tariffs on—and thus boost Americans’ access to and consumption of—an essential product now in desperately short supply. In this current political environment, that’s (unfortunately) no small feat.
On the other hand, as I explained in my column at The Dispatch, several issues should temper our enthusiasm here. For starters, this simple legislation—which passed both chambers almost-unanimously—arrived on the president’s desk almost five months after the formula shortages first began, more than two months after the crisis became front‐page national news, and years after various experts (ahem) had warned of the tariffs’ potential harms. For that entire time, potential overseas relief for frantic American parents has faced a significant, artificial, and easily‐fixable impediment:
[T]hese taxes average a whopping 25.1 percent, but the restriction is actually worse than that because of how the tariffs are designed, escalating once certain import volumes are reached. Because importers may be on the hook for even higher duties than the already‐high base rates at issue (and because they can’t really know whether their shipments will be the ones to trigger the higher duties), U.S. players are further discouraged from importing.
Second, the tariffs are only one of several U.S. policies mucking up the domestic formula market and contributing to the current crisis. Most notably—
FDA regulations continue to be a long‐term barrier to sustained import supplies. As the Financial Times reported a few weeks ago, the FDA’s procedural improvements do appear to be encouraging foreign producers to participate in Operation Fly Formula, but they have major limitations….
According to a June Reuters report, these [regulatory] barriers—even in the temporarily relaxed system—blocked several other foreign applicants from selling here. The latest news is a little more optimistic: The FDA appears to be examining how to keep approved foreign producers in the U.S. market long‐term, but its plans remain vague and incomplete and appear to utilize the older, more onerous standards (just maybe helping manufacturers navigate them).
Other laws causing issues, such as the federal Women, Infants, and Children (WIC) program and abnormally strict (and costly) rules for domestic formula production, also remain in place. (You can read more about these in my recent Senate testimony, if you’re interested.)
Finally, and perhaps most importantly, the tariff relief Congress provided this week and the FDA’s unilateral attempts to encourage more import supplies are temporary—scheduled to expire in December and November, respectively. As with similar band‐aids the Biden administration applied this summer, such as “Operation Fly Formula,” that just won’t cut it:
That temporary policy changes didn’t fix U.S. shortages shouldn’t be surprising. As we discussed back in May, high regulatory and tariff barriers—along with the additional distortion of the U.S. market caused by the WIC program’s preferential treatment of a handful of U.S. producers—discourage foreign formula producers from dedicating the ample resources needed to sell here on a consistent basis, even though there was significant demand for their products here. These kinds of trade/regulatory disincentives matter a lot for any product, but they matter even more for infant formula because product reputation matters so much and because the United States is a relatively low‐growth market (we’re not having a lot of babies these days, unfortunately). In short, few companies are willing to make a ton of effort to establish a foothold in a stagnant market, and few parents are willing to take a flier on a product they’ve never heard of. These issues—combined with basic logistical impediments like shipping times and plane or warehouse space—mean that, when a crisis hits, the government can’t just flip a switch and suddenly solve the problem.…
For these reasons, I’ve proposed permanent changes to U.S. trade and regulatory policy to make it as easy as possible for major foreign producers to sell here now and, critically, in the future: nixing tariffs, requiring the FDA to allow formula approved by a competent regulator abroad (instead of “helping” them meet a second layer of difficult rules), fixing WIC, etc. Permanent changes like these are needed to ensure that foreign multinational producers 1) invest in advance in the official sales and distribution channels that would have eased and accelerated deliveries today; and 2) establish brand recognition (especially among doctors) and loyalty to truly diversify the U.S. market and thus reduce the chance of a single, dominant producer collapsing the whole market. Only those kinds of changes will prevent a single plant closure or other domestic shock from cratering the whole market in the future. Indeed, as even the FDA seems to recognize, making it easier for foreign producers to sell here is “creating more resiliency in the U.S. infant formula supply chain and reducing the risk of reliance on too few production facilities supporting the United States.”
Thus, we should welcome Congress’ initial—albeit partial and extremely delayed—effort to lower tariffs and thus ease baby formula shortages in the coming weeks, but legislators still have a lot of work left to do. Only permanent and comprehensive reforms to U.S. trade, regulatory, and welfare policy will achieve real resiliency in the U.S. infant formula market.
Scott Lincicome is the director of general economics and Cato’s Herbert A. Stiefel Center for Trade Policy Studies.