How the U.S. got into this baby formula mess

By Scott Horsley of NPR. Excerpt:

"The federal government not only regulates formula makers. It's also their biggest customer. About half of all formula sold in the U.S. is paid for by the Department of Agriculture, through its Special Supplemental Nutrition Program for Women, Infants and Children (WIC).

Each state signs an exclusive contract with one of the formula manufacturers to supply subsidized product for low-income families. The government gets a big price break. In exchange, the formula maker gets a large, captive market.

The USDA's own research found that whichever company gets the WIC contract in a state enjoys a powerful market advantage there, with a monopoly over WIC sales and "spillover" effects in the non-WIC market as well.

Supermarkets tend to give preferential shelf space to the formula maker with the WIC contract. And pediatricians may be more likely to recommend that brand to their patients.

"Because the WIC program is such a large purchaser — it buys about half the formula on the market — once a company has an exclusive deal to service a state, competitors don't have a financial incentive to compete in that state," Kelloway says.

Abbott — the company behind the shuttered Michigan plant — has the WIC monopoly in about two-thirds of all states. The administration has asked states to relax those rules temporarily, so WIC recipients can use their benefits to buy any brand of formula.

Typically, the U.S. buys almost no infant formula from other countries. There are steep, 17.5% tariffs on most formula that is brought in. And regulatory barriers make it almost impossible for formula makers outside the country to sell to the customers in the United States.

"It's clear that the U.S. has basically closed off its market to imports," says Mary Lovely, a senior fellow at the Peterson Institute for International Economics.

Regulations governing the manufacture and labeling of formula are ostensibly designed to protect the safety of U.S. infants. But they also serve to protect the domestic formula companies from overseas competition.

"There's really no reason we should be blocking perfectly nutritional formula coming out of high-quality, sanitary plants in the European Union," Lovely says. "There is no reason why we can't be importing baby formula from Canadian plants, which could very easily be inspected by FDA."

To address the current formula shortage, the FDA has relaxed its rules to allow for imported formula — a tacit admission that foreign supplies can be sold safely, with adequate precautions.

Lovely says the formula shortage illustrates the pitfalls of believing that an entirely domestic supply chain is necessarily more secure.

"Having one or two factories in the U.S. or suppliers in the U.S. is not a way to be resilient," she says. "In fact, it's a recipe for being vulnerable."

Security comes from having a variety of suppliers — at home and in friendly foreign countries. In other words, don't put all your eggs in one basket, or all your baby formula in one bottle."