The House’s tariff holiday on infant formula won’t be enough
Hoping to re-stock shelves with infant formula, Congress voted last Friday for a temporary suspension of tariffs on imports. This is a step in the right direction, but it won’t do much to boost imports. That’s because nontariff barriers do more than tariffs to keep imports of infant formula out of the hands of American consumers.
The situation has grown dire. In May, 10 states and 14 metropolitan areas reported that over 90 percent of store shelves were empty, up from 31 percent in April. The Centers for Disease Control and Prevention (CDC) says that the problem owes to supply chain issues and the recall of several of Abbott’s products, followed by a flood at one of the company’s plants.
Enter the Formula Act, which passed the House by a vote of 421-2. The bill, introduced by Reps. Earl Blumenauer (D-Ore.) and Suzan DelBene (D-Wash.), provides tariff relief on imported formula, but only until Dec. 31. The expected payoff is big. On average, the estimate is that American consumers could save as much as 27 percent the cash register on imports of formula.
The bill is intriguing for several reasons. First, it is surreal to think that tariffs add 27 percent to the cost of imported formula. All told, the bill tackles eight tariffs, hence the averaging. The eight tariffs come under two main headings, including formula for infants (HS 1901.10) and for children (HS 2106.90). Fully 93 percent of U.S. imports of infant formula comes from Ireland, Chile and the Netherlands, and 98 percent of U.S. imports of children’s formula comes from Mexico.
In truth, the U.S. doesn’t import much formula. From 2012 to 2021, domestic demand for infant formula has averaged $2 billion, of which $277 million has been imported. These imports, moreover, are hit harder by nontariff barriers than tariffs, which is really saying something given how sizable these import taxes get.
Consider that figure of 27 percent. This isn’t an easy calculation to make. The US’s applied most-favored nation (MFN) tariff is 13.7 percent on infant formula, and 6.3 percent on children’s formula. The bound MFN tariffs, or limits, are 16.9 percent and 8.4 percent, respectively. These tariffs are also complicated by the fact that there are triggers, meaning that when volumes hit certain thresholds, they go up more. On infant formula, for example, the Congressional Research Service estimates these triggers yield an average “effective rate” of 25 percent.
You’d thus think that a tariff holiday would amount to a substantial savings. But it’s highly doubtful that the bill will deliver on its promise.
To see why, take the case of Chilean exports of formula to the U.S. These are already duty free under a 2004 trade deal, and yet Chilean exporters are loath to sell more because of nontariff barriers. Indeed, the Congressional Research Service explains that nontariff barriers weigh “more heavily” on foreign producers than tariffs. They include the cost and time of testing for U.S. health and safety standards, country-specific labeling of specific ingredients and restrictions on retailers in the U.S. selling new products, for example.
To its credit, the bill also takes safeguards off the table, meaning that domestic producers wouldn’t be able to file for temporary tariffs if imports were to surge because of this tariff relief. But again, given nontariff barriers, the bill won’t result in a surge of imports. On the contrary, the fear has to be that the bill won’t do anything.
The National Milk Producers Federation has come out in support of the bill. But there’s a catch. The group likes the “temporary, short-term” nature of the tariff reprieve, insisting that this will prevent “a permanent dependence” on imports. As far a long-term solution is concerned, the group says the answer is more domestic production.
And there’s the rub: A brief tariff holiday will not boost imports because of the prevalence of nontariff barriers, but Congress won’t take up nontariff barriers if it’s just looking for a short-term fix.
Importantly, the Food and Drug Administration announced in May that it had put in place various “flexibilities” to help foreign producers, like shortening the of time it takes to show conformity with U.S. safety standards, and properly labeling “nutritional adequacy.” These flexibilities are useful. But like with a temporary tariff suspension, foreign exporters will be skeptical of flexibilities they fear could disappear as soon as the formula shortage ends.
Keep in mind that tariffs on formula, as on milk, are relatively high around the world. This poses a serious challenge for America’s farmers. The National Milk Producers Federation explains that gaining more access to foreign markets “is vital to the strength and continued growth of the domestic dairy industry.” When the Senate takes up the Formula Act, it should invite key U.S. trade partners to reciprocate. This, after all, is the lesson of COVID-19: Open commerce, not protectionism, is the answer to re-stocking store shelves with formula, and making America’s supply chains more resilient.
Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service at Georgetown University. Follow him on Twitter @marclbusch.