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Supply Chain Lessons from the Baby Formula Debacle. Protectionism builds weaknesses into supply chains. This was demonstrated vividly by the baby formula shortage, which may have peaked in 2022 but remains an ongoing concern.

Domestic baby formula producers benefit from a decades-old tariff that averages 17 percent, which is effectively high enough to shut imports out of the market. As if tariffs were not enough, other requirements also help to keep competition out of the market: ever-evolving labeling requirements and nutritional standards that (conveniently for domestic manufacturers) are always just slightly different from international standards. As a result, before the formula shortage in 2022, approximately 98 percent of the country’s baby formula was produced domestically.

With foreign competition out of the way, other government policies helped to concentrate almost the entire domestic formula industry into four firms. Roughly 40 percent of baby formula purchases are made by state-level food assistance programs, which typically do not let families choose their own formula brands. Instead they must buy from a single producer, which guarantees producers large market shares in states where they win contracts. This situation gives incumbent producers a cozy existence but puts consumers at risk. Like all protectionist policies, the benefits are concentrated in the hands of a few producers while the costs and risks are widely distributed.

With so many eggs in so few baskets, whenever something goes wrong—which is inevitable even when nobody is at fault—families find themselves scrambling. That happened early in 2022 when contamination entered a Michigan facility that makes about 40 percent of America’s baby formula. Trade protectionism all but eliminated other options for many parents, who suddenly found empty shelves and sky-high prices for an essential item that many of them were already struggling to afford—while families in other countries were unaffected.

In response, Congress passed the Formula Act® in the summer of 2022. The act eased formula tariffs and loosened never-needed labeling requirements and other import restrictions, but it was temporary. It expired at the end of 2022, leaving families still vulnerable to the cascading consequences that ensue if one thing goes wrong at only one plant.

The baby formula debacle has two lessons for the next Administration.

• The Administration needs to attack the root of the problem. Temporary fix-it bills are better than nothing, but they leave the rot in place. The President needs to encourage bold liberalization.

• Strength comes from openness. In the real world, markets fail. Factories will get contaminated, and health inspectors will not always be as thorough as they should be. The baby formula market is essentially a natural experiment in self-sufficient industrial policy. When something went wrong, that single