Tariffs and Regs Helped Create the Baby Formula Shortage

 WSJ Editorial:

Last year Abbott accounted for 42% of the U.S. formula market, about 95% of which is produced domestically. There are only four major manufacturers of formula in the U.S. today: Mead Johnson, Abbott, Nestle, and Perrigo. One reason the market is so concentrated is tariffs up to 17.5% on imports, which protect domestic producers from foreign competition. Non-trade barriers such as FDA labeling and ingredient requirements also limit imports even during shortages.

Canada’s strong dairy industry has attracted investment in formula production. But the Trump Administration sought to protect domestic producers by imposing quotas and tariffs on Canadian imports in the USMCA trade deal. The FDA can inspect foreign plants so the U.S. import restrictions aren’t essential for product safety. They merely raise prices for consumers and limit choice.

Further limiting competition is the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) for low-income mothers. By the Department of Agriculture’s estimate, WIC accounted for between 57% and 68% of all infant formula sold in the U.S. Under the welfare program, each state awards an exclusive formula contract to a manufacturer.

Companies compete for the contracts by offering states huge rebates on the formula women can buy. The rebates equal about 85% of the wholesale cost, according to a 2011 USDA study. Women can only use WIC vouchers to purchase formula from the winning manufacturer. These rebates reduce state spending, but there’s no such thing as free baby formula.

Why would manufacturers give states an enormous discount? Because the contracts effectively give them a state monopoly. Stores give WIC brands more shelf space. Physicians may also be more likely to recommend WIC brands. After 30 states switched their WIC contracts between 2005 and 2008, the new provider’s market share increased on average by 84 percentage points.