Five Rotten Reasons to Oppose Infant Formula Trade Liberalization

  • June 5, 2023
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Gabriella Beaumont-Smith and Alfredo Carrillo Obregon

On May 31, 2023, legislation was introduced to lower U.S. barriers to imports of infant formula and infant formula base powder. As we and our colleague Scott Lincicome have explained (repeatedly), eliminating tariffs is one of several smart policy reforms that would not only help American babies and parents, but also ensure a more stable U.S. market in the future.

Unfortunately, some U.S. interest groups oppose such commonsense reforms, while their allies in Congress echo industry claims (and thus demonstrate the longstanding link between American protectionism and constituent service). As we’ll explain, however, these groups’ five main arguments are as sour as month‐​old milk.

1. Trade liberalization must always be reciprocal.

Lowering U.S. trade barriers benefits Americans. When the U.S. reduces or removes a tariff on an import, that good or service becomes cheaper. At the same time, heightened market competition encourages domestic firms to innovate and accelerates U.S. economic growth. The U.S. government should not deny its residents these and other benefits, just because our trading partners do so to their residents.

Moreover, the U.S. should not cede control of its economic policy to that of other countries. The U.S. was built on the foundation of liberty and should maintain the freedom to improve its economy without waiting for other countries to do the same. Ceding U.S. sovereignty in this way also undermines important reform. While most countries in the world have lower barriers than ever before thanks to multilateralism, the last few rounds of World Trade Organization (WTO) negotiations to continue liberalizing trade (especially in agricultural goods) have been mired as members are less willing to expend the political capital necessary to lead the way. The same idea applies to reciprocity, promising future inaction on trade reform and hence the argument’s popularity with protectionists.

In short, the U.S. should not maintain high trade barriers that impoverish Americans because other countries lack the economic insight or political strength to stop impoverishing their citizens, nor should the U.S. abandon its fundamental values and stall reforms, promoting lower standards of living.

2. Reducing tariffs on infant formula imports hurts dairy farmers.

Given the highly protected nature of the U.S. infant formula market and, more broadly, the U.S. dairy industry, it is possible that allowing more formula imports could decrease demand for some U.S. dairy products. However, it’s far from certain that liberalization would significantly harm the dairy industry.

First, formula production accounts for a small fraction of total U.S. dairy consumption. Domestic farmers would continue to service the overwhelming majority of dairy consumption in the United States, and as Figure 1 suggests, tariffs on other dairy products would remain high.

Second, and more importantly, it does not necessarily hold that trade liberalization would undermine the U.S. dairy industry. As the examples of Australia and New Zealand show, a country can liberalize its market for dairy products and host a thriving industry. Both countries not only apply low tariffs on dairy imports (see Fig. 1), but also removed farm subsidies. In response, many dairy farmers adapted their organizational structure and practices to be successful in both domestic and global markets. Given the increases in U.S. dairy farming productivity witnessed in recent years (largely due to the integration of more advanced technology in the sector), there is little to suggest that American farmers would not be able to do the same.

3. Freeing up trade in infant formula would have spillover effects for other products and expose U.S. dairy farmers to unfair trade practices.

Interest groups opposed to tariff liberalization often suggest that foreigners will respond with “tariff engineering”—physically manipulating a higher‐​tariff product in non‐​commercial ways so that it qualifies for a lower tariff under U.S. law. Some U.S. dairy farmers are reportedly concerned that this could be done with the infant formula base powder that is liberalized under the new bill, but this claim is far‐​fetched. Infant formula base powder is not a product that will be used in anything other than infant formula, and any milk solids incorporated into other products, including in U.S. infant formula, will remain protected by other dairy program provisions.

Furthermore, other U.S. laws and enforcement actions can address trade practices that might arise from eliminating basic U.S. tariffs. This includes “trade remedies”—anti-dumping and countervailing duties (AD/CVDs)—that address harms to domestic producers caused by surges of “unfairly traded” imports. As Cato scholars have long explained, the U.S. trade remedies system is flawed, but in ways that benefit domestic industries. Thus, while these laws should be reformed, their existence today would act as a check on illegally “dumped” or “subsidized” formula imports allegedly harming the U.S. dairy industry.

4. Foreign suppliers of infant formula are unreliable and make the supply chain less resilient.

There are several problems with this argument. First, there is little support for the notion that foreign suppliers are inherently unreliable. The fact that formula imports rose throughout the formula crisis in 2022, particularly after tariff‐ and non‐​tariff barriers were suspended by the federal government (see Fig. 2), shows that the U.S. market is attractive to foreign producers and they are willing to export to the United States. Moreover, amidst last year’s shortages, the country turned to suppliers from countries like Spain, Germany, the Netherlands, Australia, New Zealand, and the United Kingdom—all longstanding U.S. trading partners and countries with some of the highest health and safety standards in the world. That the federal government authorized these suppliers to ship formula without having to go through the onerous Food and Drug Administration’s (FDA) inspection and approval process is suggestive that U.S. policymakers are confident about the safety and quality of the products imported from these countries.

On a more fundamental level, both economic theory and recent events have debunked the idea that trade liberalization would undermine the resiliency of the U.S. infant formula market. While openness to trade and global markets might increase exposure to foreign competition, last year’s crisis showed how a highly concentrated and closed U.S. market—where trade barriers caused domestic suppliers to satiate 98 percent of domestic demand—turned a single domestic shock into one of the deepest and longest supply chain crises of the last decade. Since domestic production remains highly concentrated and the underlying policies remain largely unchanged, a future shock to any domestic producer would likely cause widespread shortages again. Openness to international trade, by contrast, would mitigate this risk by diversifying the pool of suppliers that can service the market, and thereby increase the resiliency of the infant formula supply chain in the face of future disruptions. Indeed, both the White House and Congress recognized this fact by lifting trade restrictions and flying in formula from overseas to alleviate the formula crisis.

5. Stock levels are almost fully recovered, if not better than before Abbott’s recall.

While the fact that stock levels are returning to pre‐​crisis levels is certainly a welcome development, it does not by itself assuage concerns that a future shock to domestic supply would again lead to nationwide shortages.

Aggregate stock levels may also obscure the fact that access to formula post‐​crisis continues to be relatively unequal. According to the latest iteration of the U.S. Census Bureau, 26 percent of households with an income below the median (i.e., $75,000) reported having difficulties in finding infant formula within the previous week, a rate slightly higher than the 20 percent of above‐​median income households that responded similarly. Moreover, 34 percent of Hispanic/​Latino and 27 percent of Black households reported such difficulties compared to only 15 percent of White households. While importing more formula alone would not solve inequality, it appears illogical to oppose trade liberalization, which would help ensure adequate levels of supply. Further, liberalizing trade guarantees a reduced risk of another crisis by providing American consumers with more options and allowing new supply and distribution relationships to develop before another crisis could occur.

Conclusion

The legislation introduced by Senators Mike Lee (R‑UT), and Bob Menendez (D‑NJ), and Representatives Adrian Smith (R‑NE), and Don Beyer (D‑VA), is a refreshing change from the seemingly ubiquitous political messages for onshoring and isolationism. Last year’s formula crisis was a glaring reminder of the risks of protectionism and American parents should not have to continue paying the price to protect a handful of dairy farmers.

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