The United States, and really only the United States, had a severe shortage of infant formula in 2022. Scott Lincicome, Gabriella Beaumont‐Smith, and Alfredo Carrillo Obregon review the what happened in “Formula for a Crisis: Protectionism and Supply Chain Resiliency—the Infant Formula Case Study” (Cato Briefing Paper No. 146, January 11, 2023). As they write, the shortage was a result of “problematic trade, regulatory, and welfare policies.”
The story starts with regulatory policy. “Between September 2021 and February 2022, the U.S. Food and Drug Administration (FDA) investigated four reports of ill children—two of whom died—after consuming formula produced by Abbott Nutrition at its plant in Sturgis, Michigan.” Abbott disputed whether the deaths were connected to its products, but it voluntarily shut down the plant and recalled some of what had been produced there. Because Abbott produces around 40% of all infant formula consumed in the US, most of it from this plant, shortage quickly appeared.
So far, this sounds like an example of the regulatory system functioning well–that is, a health hazard is detected, and production is shut down until safety is assured.
But the US infant formula industry is not very resilient. It turns out that 98% of all US formula is produced in the US. One reason is that the domestic industry is protected by tariffs of about 25% on imported infant formula. But the bigger reason is are rules imposed by the FDA. The authors write:
Even more restrictive than tariff barriers are the nontariff barriers that foreign‐made formula faces. Most notably, the FDA imposes strict nutritional, labeling, and other standards and requires retailers to notify the agency at least 90 days in advance of selling a new formula product—and that is after manufacturers of new brands have submitted detailed explanations of the development of the formula, the results of clinical trials and studies on the nutrients in the formula, and details on quality controls in the production facilities, as well as having undergone FDA sampling and inspections of their facilities.
Thus, just because an infant formula product is considered safe for use, say, across the European Union, it has to jump a lot of hurdles to be sold in the United States–and to jump those hurdles all over again if the product changes. EU producers of infant formula have little incentive to redo all the testing and labelling that they have done for their home market so that they can then face tariffs when trying to sell in the US market. So they don’t bother trying.
These regulations affect the US market, too. Regulatory costs are often a more-or-less fixed amount regardless of whether a company is large or small; as a result, small companies are likely to be unable to pay these costs. As a result, the US infant formula market is dominated by a few large producers: “Three large corporations—Abbott, Reckitt/Mead Johnson, and Nestlé Gerber—accounted for more than 83 percent of total market share in 2021.” When the biggest company (Abbott) shuts down production, there are not many other companies ready and able to ramp up production. The authors note that in 2021, just before the shortage hit, the FDA considered 42 new applications for infant formula. It managed to respond to 18 of those applications–without offering a clear “yes” or “no” in any of those cases.
Another issue is that the special Supplemental Nutrition Program for Women, Infants, and Children, commonly known as WIC, provides vouchers for low-income households to buy infant formula–but only formula produced by certain companies. Companies have to lobby to be included in the WIC list of approved brand names, which of course tends to favor larger companies as well.
During the pandemic, the government announced various policies that sounded impressive: using military planes to fly formula from Europe to the US, removing the tariffs for a limited time only, and invoking the Defense Production Act so that producers of infant formula had priority in ordering production inputs. The government announced that the FDA would consider allowing more but still limited and temporary imports of infant formula, but the FDA would continue to enforce its own version of health and safety certification. Dozens of companies from around the world applied, and the FDA approved nine of them.
The effects of these policies were predictably very small. Having stifled import competition and constructed a market with only a few large producers of infant formula for decades, you can’t just flick a few policy switches and suddenly create a new and resilient market.
The lawsuits and regulatory struggles over infant formula of course are ongoing. As best as I can tell, some bacterial contamination was found at the production site, but it is not clear that this contamination actually caused the infant death–or even that it contaminated the infant formula that was shipped. Abbott says it will recover all of the market share it lost in the infant formula market by the end of 2023. Meanwhile, a shortage of infant formula imposes costs of its own, especially on low-income families who were limited in the brand they could buy with WIC vouchers. One small-scale study found that when formula was unavailable “unsafe infant feeding practice, such as watering down infant formula, using expired infant formula, using homemade infant formula or using human milk from informal sharing” increased.
But as the legal issues directly involving Abbott are gradually resolved, the bigger question remains: We all want infant formula to be safe, but we also want a market that can adjust to supply shocks, and that has genuine competition across producers. US infant formula policies are gradually drifting back to what they were before the shortage of 2022: that is, the same regulations about testing and labelling; the return of tariffs and other restrictions on imports; and supporting low-income families by requiring them to buy certain infant formula brands. But after the shortage, some systematic rethinking of these rules seems appropriate.