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Gas station worker in Kolkata, India.
Hard Numbers: India cuts gas tax, Tigrayan amnesty, US gets European baby formula, NATO beer
8: India has slashed its excise tax on gasoline by 8 rupees ($0.10) per liter to give consumers some relief from rising prices. PM Narendra Modi is scrambling to get inflation under control ahead of several state elections later this year.
4,208: Tigrayan rebels in Ethiopia plan to release 4,208 prisoners captured in their ongoing war with the federal government. It's a sign of goodwill that comes after the Ethiopian army allowed aid convoys to enter the conflict-affected region.
78,000: On Sunday, a military plane carrying 78,000 pounds of European baby formula arrived in the US to address an acute shortage. America is running out of formula due to the temporary closure of a production plant in Michigan and also because of protectionist US trade policies.
8,000: Finland is so excited about joining NATO that a Finnish brewery has launched a NATO-themed beer, shipping 8,000 cans to local supermarkets. Will Turkey spoil the party?This comes to you from the Signal newsletter team of GZERO Media. Subscribe for your free daily Signal today.
What’s behind America’s baby formula shortage?
What’s behind America’s baby formula shortage?
Bare shelves. Hungry babies. Desperate parents.
The United States is experiencing a nationwide shortage of baby formula, threatening the health of millions of infants and giving an already-unpopular President Biden yet another headache ahead of November’s midterm elections.
According to Datasembly, 43% of formula in the country is currently out of stock—up from 30% in April and under 5% in the first half of 2021.
Three in four American babies six months and younger rely at least partially on formula for sustenance. Nearly 20% of infants receive formula within two days of being born. Children of low-income parents and people of color are disproportionately dependent on formula, as are babies with digestive disorders or specialized nutritional needs.
The worsening shortage has led worried parents to hoard what little formula they are able to find, exacerbating the crunch and prompting retailers to ration supplies by limiting purchases.
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Not surprisingly given our extraordinarily polarized political environment, the episode has drawn comparisons to the bread lines and rationing the Soviet Union experienced just before its collapse. Republicans are blaming the Biden administration for both causing and failing to solve the shortage, conflating it with other consumer goods shortages, rising inflation, high gas prices, and the border crisis.
In reality, the challenges trace back to 2020, as Covid-19 strained global supply chains and disrupted virtually all industries and products—from lumber and coffee to toilet paper, gym equipment, and cars. Early in the pandemic parents rushed to stockpile formula, fearing shortages. Demand fell as they worked through their reserves, prompting suppliers to reduce production. By mid-2021, demand for formula had recovered, but producers were struggling to expand manufacturing capacity enough to keep up due to bottlenecks along every supply chain. As a result, the nationwide out-of-stock rate shot up from under 5% in the first half of 2021 to above 10% between August and December.
But the shortage didn’t begin in earnest until February 2022, when Abbott Nutrition—America’s largest formula manufacturer—issued a voluntary recall of certain formula products after suspected contamination in its Sturgis, Michigan plant was linked to the hospitalization of four infants, two of whom died. The U.S. Food and Drug Administration (FDA) ordered the Sturgis facility to shut down while it conducted an investigation, and the plant has remained closed ever since. While the FDA and Abbott agreed on May 16 to reopen the Michigan factory, parents will have to wait up to 2 months for formula to be back on shelves.
Bad policies to blame
The Abbott recalls and plant closure took a substantial chunk of the U.S. formula supply offline, at a time when the market was already stretched thin by pandemic-induced supply chain constraints. But product recalls happen all the time, and rarely do they cause national emergencies of this caliber.
Why did the recall of a single company’s products and the shutdown of a single factory cause the entire U.S. formula market to collapse?
Policy-induced market concentration. The U.S. government is the largest purchaser of infant formula in the country, accounting for about half of all sales in the country. It does so through WIC (formally known as USDA’s Special Supplemental Nutrition Program for Women, Infants, and Children), a federal welfare program that provides vouchers for low-income families to buy heavily subsidized food, including free formula. WIC feeds more than 1.2 million infants each year. The catch? In order to obtain discounted prices, WIC awards exclusivity contracts to a small number of approved formula manufacturers, and recipients are only able to use the benefit to buy designated types, sizes, and brands of formula.
This program design has resulted in a highly concentrated domestic industry, with nearly all formula sold in the U.S. produced by only three major companies: Abbott, Mead Johnson, and Gerber—the WIC suppliers. Abbott alone provides about half of the formula given to WIC recipients and about 40% of the total domestic supply. Before February, its Sturgis plant accounted for more than half of the company’s total formula production. It is no wonder, then, that the combination of recalls, the Sturgis closure, and the pandemic shock have managed to stretch the domestic industry even though all manufacturers are operating at full capacity.
Overzealous regulations. One way to increase the supply of formula at a time when domestic production can’t keep up with demand is to import more from overseas. However, the FDA’s regulation of infant formula is so nonsensically stringent that the vast majority of formula produced abroad is illegal to trade in the United States—not because it’s unsafe, but because it doesn’t meet the FDA’s onerous and often arbitrary labeling and nutritional requirements. In fact, the FDA bans the sale of formulas that have been approved by foreign regulatory agencies that the FDA itself rates as comparably capable. That includes most formulas from Europe, the largest global exporter of the product, even though studies have shown that they not only comply with FDA nutritional guidelines but also they are better than most American formulas because they don’t use corn syrup and have a higher share of lactose.
Gerald Butts, vice chairman of Eurasia Group and formerly Canadian Prime Minister Justin Trudeau’s chief political advisor, has argued that Big Dairy lobbying and regulatory capture are largely responsible for this state of affairs (though unclear if you can trust him: he’s Canadian).
The result? Only 2% of America’s formula supply is imported.
Protectionist policies. In addition to the FDA’s overly stringent requirements, which act as a non-tariff import barrier, U.S. trade policy explicitly restricts formula imports to shield domestic suppliers from competition. The U.S.-Mexico-Canada Agreement (USMCA), negotiated under President Trump to replace the North America Free Trade Agreement (NAFTA), imposes penalties on Canadian formula exports not just to the U.S. but to the whole world. What little foreign formula does manage to meet FDA requirements gets taxed at rates exceeding 17%, making it costly to expand the availability of formula when domestic production is stretched thin.
The current crisis is proof that trying to make everything at home can make the economy more vulnerable rather than more resilient, at the expense of American consumers. Contrary to politicians of both parties who rail against globalization and argue that “Made in America” equals “America First,” protectionist policies like tariffs, onshoring mandates, and federal procurement rules (“Buy American”) don’t make supply chains stronger. That’s not to say that unfettered, cost-minimizing offshoring is better. Economic security is all about design: geographic diversification, competition (both foreign and domestic), redundancies, and slack are all key to building flexible and resilient supply chains. But there is no inherent tradeoff between free trade and economic security, despite what the likes of Sen. Josh Hawley (R-Mo.) might claim.
The combination of high domestic market concentration, overzealous regulations, and protectionism induces artificial scarcity by depressing the supply of formula.
A product of special interest capture, economic nationalism, and well-intentioned but naïve policymaking, these long-standing bipartisan failures have made the U.S. formula market vulnerable to shocks like the Abbott recall and plant closure and the pandemic-induced supply snarls.
American babies are paying the price.
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Your global guide to America’s baby formula shortage
America is the richest country in the world, so it is perplexing that parents nationwide are currently faced with shortages of a crucial food staple: baby formula.
It is nothing short of catastrophic. The share of baby formula across the country is down 40%, forcing distressed parents to drive across state lines to secure formula – only to be faced, in some cases, with more naked shelves.
How did we get here? The immediate trigger for the crisis was a recall of products made by Abbott Laboratories after four infants – two of whom died – contracted bacterial infections linked to a pathogen called Cronobacter sakazakii. Abbott has since shut down its sprawling Michigan plant while the Food and Drug Administration and Centers for Disease Control and Prevention investigate claims of unsanitary conditions. (This week, Abbott reached an agreement with the FDA to reopen the plant, but it could take two months to resume a regular supply cadence.)
So, what does it feel like to be a formula-reliant parent in America right now? In short, it’s a nightmare.
“As someone who opted not to breastfeed, formula is how I feed my daughter,” says Jennifer Lemon, 35, a New Jersey based mom. “I literally wake up in the middle of the night sometimes to check online to see if stocks have replenished to hopefully pick up one tin,” she says.
“If anyone has formula fed, they know how important it is to stick to the same brand because babies have such sensitive digestive systems … it is the difference between a calm, happy baby, and a baby in pain,” Lemon says.
Similarly, Paige Dawes, 33, who lives in New York City, says this issue “has been the bane of my life for the last three months,” adding that last week she went to seven different stores to try and find formula. “I have now figured out which day the local supermarket gets their stock in and make sure I go first thing in the morning.” Still, because of rationing, Dawes can only get two tubs at a time, which doesn’t last very long. “It’s a nightmare,” Dawes says.
The shutdown has caused shortages at a time when inflationary pressures and pandemic-related supply-chain disruptions were already leading to spotty formula supply. But this isn’t the full story. Drugs and foods are recalled all the time for various reasons, and they don’t usually result in post-apocalyptic scenes at Walmart.
Formula is big business. Part of the problem is rooted in good old corporate monopolization. Four corporate behemoths – Abbott, Gerber, Mead Johnson, and Perrigo Nutritionals – control 90% of the infant formula supply in the US, meaning there’s little resilience in the system to weather big shocks, such as a nationwide recall.
What’s more, the aftershocks aren't being felt equally. This crisis is even more acute for poor Americans who buy baby formula through the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC). Recipients of the program – which includes 1.2 million infants – are only allowed to buy formula manufactured by select companies that have negotiated government contracts. Therefore, even if they find a rare baby formula tin sitting on a dusty Target shelf, they often can’t use their WIC card to purchase it.
The baby formula shortage isn’t just about corporate greed. The current calamity – which has given rise to some previously unthinkable rationing resembling Cuba’s food rationing system – can also be directly attributed to (misguided) US trade policy.
Milk melodrama. The US and Canada, whose trade relationship topped a whopping $615 billion in 2020, have long been at loggerheads over agricultural exchanges, with both trying to exploit the benefits of free trade while also trying to protect the distinct interests of their farming sectors.
Things came to a head during the Trump administration’s painstaking renegotiation of the NAFTA trade agreement with Canada and Mexico in 2018, when disagreements over dairy proved a major sticking point that threatened to derail the 24-year trade pact.
Perturbed by a Canadian policy known as “supply management ” that dates back to the 1960s – where the government has played a role in stabilizing agricultural pricing so that farmers only produce quantities reflecting expected demand – American farming lobbies had long pushed for their own protections.
As a result, the Trump administration – in a bid to win over the country’s influential farming sector – insisted on a provision in the revised trade pact making it all but impossible for Canada to export baby formula to the United States. Remarkably, it also imposed limits on the amount of baby formula Canada could produce for exports to other markets. But US-imposed trade barriers aren't just for Canada. In other instances, the US has put in place tariffs on baby formulas as high as 17.5%, an insurmountable restriction for manufacturers wanting to enter the US market.
What’s more, the Food and Drug Administration has also been accused of imposing overly stringent regulations (at best), and politically motivated decision-making (at worst) that prevents imports of European baby formula. The FDA says this is because of insufficient labeling and health concerns. But some analysts say this justification is risible because baby formula manufactured in the US often contains less-than-ideal ingredients – such as corn syrup – that are banned in the EU.
To be sure, Donald Trump is not the only one with protectionist proclivities. Joe Biden, who boasted to allies last year that “America is Back,” has also pursued protectionist trade policies in the hopes of wooing unions and the broader working class. Notably, the Biden administration infuriated Canada with its proposal to roll out financial incentives for Americans to buy US-made electric vehicles, a move Ottawa says will hurt the auto industry, one of its largest manufacturing sectors.
“The viewpoint from Canada is that Americans need to treat their friends better,” says Eurasia Group’s vice chairman Gerry Butts, who previously served as Canadian Prime Minister Justin Trudeau’s advisor. “There was a lot of misguided hope that a lot would change on the trade front with the change in administrations, but the Democrats can be just as protectionist as the Republicans,” Butts says.
But Canada clearly does it, too. As part of its “supply management” scheme, Ottawa maintains sky-high tariffs on dairy goods; US cheese exports, for instance, can be hit with a whopping 300% levy.
How should we understand this crisis in the context of an otherwise thriving, interconnected economy? “This is what happens when general agreement on trade rules starts to break down,” says Butts.
Whether it's India banning wheat exports to save domestic supplies amid a heat wave, or the US buffering its dairy sector, it is all part of the same theme: protectionism. Canada's supply management system is decades old, but it could certainly be a sign of what's to come globally: “We just don’t have general agreement on how we are going to trade with each other,” says Butts, “regardless of what trade agreements say.”