The dairy industry is keeping a close eye on legislation aimed at permanently ditching tariffs on infant formula exports to the United States.
The US suspended its 17.5% tariff last year to help fill a shortfall in domestic production following the shutdown of one its largest manufacturing plants in February.
The Food and Drug Administration (FDA) restored the tariff on January 1 but now a new bill sponsored by a handful of Republican and Democrat lawmakers wants to make the tariff reduction permanent.
“Now that those tariffs have returned, the availability of formula has become strained once again,” Republican Congressman Adrian Smith of Nebraska said.
Fellow Republican and co-sponsor of the bill Utah Senator Mike Lee said the US domestic formula market remains “fragile” and “extremely vulnerable to another supply shock”.
Before last year’s shortages the US infant formula market was 98% reliant on domestic production.
However the closure of dairy giant Abbott’s Michigan plant due to a bacterial contamination led the FDA to suspend the tariff and waive approvals for 11 foreign infant formula sellers, including NZ’s A2 Corporation.
A2’s share price, which has been in the doldrums ever since the crackdown on China’s so-called grey channel trade midway through 2020, surged 7% on the day the US measures were announced.
The bill to permanently scrap the tariff was heavily criticised by US dairy producers when it was introduced to the trade committees of both the Senate and the House of Representatives last month.
“This bill would make American families more reliant on foreign companies for their infant formula supply and puts in place new one-way-street trade conditions that would harm dairy farmers, co-operatives and processors,” the president of the US National Milk Producers Federation, Jim Mulhern, said.
“Instead of weakening our domestic infant formula sector and putting American jobs at risk we ask that Congress work with us to reinforce and expand our domestic production.”
Dairy Companies Association of NZ executive director Kimberly Crewther said it is not unusual for bills to disappear into the US congressional system, never to re-emerge.
However, last year’s shortages have given the bill momentum and a tailwind to its chances of successfully passing into law despite strong opposition from the powerful US dairy lobby.
“It is in response to a very high profile and significant supply issue and it has bipartisanship support, which suggests it would pass but it is very hard to judge,” she said.
Crewther said while the tariff’s removal was helpful, the US needs to reform its “onerous” FDA approval system if it is serious about attracting more imports.
In response to the shortages the FDA provided “enforcement discretion letters” to 11 global suppliers waiving the usual approvals, but these are due to expire in 2025.
“The FDA registration process is one of the contributing factors to why there are so few suppliers of infant formula in the US market.
“It is a really onerous and expensive process to move through.
“If you have got lower tariffs the cost of navigating that non-tariff barrier may stack up more.
“But if they want to achieve the intent of the bill they really have to address both the tariff and the non-tariff barrier side by side.”
Fonterra’s US manager of trade strategy, sustainability and stakeholder affairs, James McVitty, said the co-operative has not been able to take advantage of the supply shortages in the US market last year directly but did supply ingredients to some of those who did.
“For enforcement discretion last year we understand the FDA had limited resources and prioritised some companies with larger retail volumes available and existing distribution networks.
“Fonterra reallocated the volumes it offered for demand in other markets.
“Our strength is … ingredients to support customers who are approved for the US infant formula market.”
The dairy industry will be eager to get a foothold in the US infant formula market after exports fell from a peak of $1.8 billion in 2020 on account of a slowdown in its largest market, China.
Demand for infant formula in the world’s second largest economy is increasingly being met by domestic suppliers gradually re-establishing themselves after the 2008 melamine contamination crisis.
The contamination of local infant formula killed a number of Chinese babies, hospitalised many more, and for a time saw A2 become the NZX’s largest company by market capitalisation as it helped meet a surge in Chinese demand for imported infant formula.