A sudden nationwide shortage of baby formula has served as a stark reminder that supply chain woes continue to be felt midway through 2022. Across the United States, 40% of formula is currently out of stock, while individual states are seeing even more acute supply gaps, which have increased by 2,000% since January. In an effort to relieve the crisis, the Biden administration announced that it is looking into increasing imports from the EU and South America, and encouraged international formula companies to quickly submit documentation outlining their product safety and nutritional standards.
The cause of the shortage can be pinned on a combination of factors that happened to coincide within the past couple of weeks. The United States produces 98% of its supply of baby formula domestically, and 90% comes from four major suppliers. This strategy was tested when one of these suppliers, Abbott (which accounts for 43% of the US supply alone), suffered a pathogen outbreak in February linked to the deaths of two infants. The plant soon shuttered and a massive recall was announced shortly thereafter, and the FDA recommended that parents stay away from formula produced by Abbott.
Second, the pandemic caused a dizzying oscillation of formula supply and demand– during the toilet paper hoard of 2020, demand for formula rose in tandem, however demand then dropped off in 2021, leading suppliers to cut production in response. This left suppliers unprepared when a sharp increase in birthrates in early 2022 led to an even greater rise in demand for formula, a trend exacerbated by declining breastfeeding rates among mothers in the United States.
The third cause has to do with the United States’ trade policies and strict criteria for the qualification of sellers authorized to sell formula, which are so notoriously inflexible that shipments from the EU have previously been seized by US customs. Even foreign-based formula that does meet US standards can be subjected to additional obstacles– imports face tariffs of 17.5% along with additional duties in compliance with quotas.
Furthermore, the USMCA explicitly discourages importing formula from Canada, the US’ largest trading partner. The Canadian exclusion was deliberately included during USMCA negotiations, as the Trump administration was under heavy pressure from the US Dairy Export Council to shield the US dairy industry from their Canadian competitors. Canada’s industry had been the beneficiary of a 2008 Chinese infant formula import boon after a tainting scandal resulted in Chinese parents distrusting locally produced formula, and instead turned to Canadian products. Due to the US dairy industry being hurt by proxy, the Trump administration insisted on adding export fees on all global exports of Canadian formula in excess of a 40,000 ton quota, which has effectively amounted to a ban on Canadian infant formula exports.
Although the United States is looking to expand domestic production – the FDA reached an agreement with Abbott to resume production on May 16 – the fact that only 2% of its formula supplies are international suggests that increasing imports may provide the greatest area for growth. The FDA is prioritizing countries that have similar safety protocols to the United States, including New Zealand, Chile, Ireland, and the UK, and hopes that foreign imports could enter US stores in a few weeks’ time. Currently, the White House is in the midst of coordinating logistical support with the four major domestic manufacturers to mitigate supply chain issues, with the hope of streamlining the distribution of international formula to American consumers.
The Biden administration has not yet signaled that it would consider tariff relief, however this is another area that trade experts are closely monitoring, as the formula shortage shows little sign of quickly abating.
Have a question about trade? Contact Jordan Perri, Allyn International.
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