Leibowitz: Formula, Chips, Steel and a New Deal on Trade

Last week, the Biden administration shifted its strategy on specific trade-related policies in important industries. These shifts are, on their face, inconsistent with one another, demonstrating either pragmatism or disorganization (maybe both). Are there differences in these sectors (steel, semiconductors, infant formula) that suggest different responses, or are the inconsistencies due simply to politics?

The Formula Crisis

The first example is the crisis involving infant formula. Store shelves are empty all over the country, and the administration has only recently acted to address it.

The infant formula crisis has several causes. First, because of the pandemic, supply chains for infant formula have been stretched. Then in February, Abbott, the leading domestic producer of infant formula, closed a major infant formula production plant in Michigan due to fears of contamination by a bacterium that could be fatal to infants.

The bacterium was found at the plant, but no contamination was found in any formula. Abbott recalled certain lots of the formula on a voluntary basis. The plant remains closed pending review and approved reopening by the Food and Drug Administration. That process could take months.

The resulting supply shortage spread across the country. More than 98% of infant formula consumed in the United States is produced here, so ramping up import sources is a major headache. The FDA is reviewing whether imports can be stimulated, presumably by waiving extremely high tariffs, while the Abbott plant is out of action.

Abbott has flown in formula from its plant in Ireland to help meet the shortfall, subject to FDA approval. Another plant in Columbus, Ohio, is being repurposed to make formula. All these steps require regulatory approval.

Why is the US nearly totally dependent on domestic production of infant formula? At first glance, the Biden administration and Congress are constantly reminding us that dependence on imports is risky because imports could be interrupted by wars, terrorism, or the whims of dictators. But infant formula reminds us that the real risk is dependence on a single source.

Another factor is protectionism. Because there is milk in baby formula, and because protecting dairy products from international competition is a core policy of the federal government, tariffs on baby formula are high. The duty rate on infant formula is at least 17.5%, or in between Section 232 tariffs on steel (25%) and aluminum (10%). And the tariffs are even higher above strict quantitative limits.

The second industry in the news this week is steel. As many readers know, the Trump administration imposed steel tariffs of 25% in 2018. The Biden administration has continued them with modifications, such as replacing the blanket tariffs with tariff rate quotas for the European Union, Japan and the United Kingdom. But the quotas are complex, with very low quota ceilings for many products.

The Limits of Steel Tariff Politics

Last week, Commerce Secretary Gina Raimondo announced that steel imports from Ukraine would be exempted from steel tariffs for one year. This measure showed support for the valiant struggle of Ukrainians against the invasion from Russian forces. It also had an economic logic: Steel production in Ukraine employs one in 13 Ukrainian workers. (By comparison, steel producers in the US employ fewer than 1 in 1,000 workers.)

Still, the move to exempt Ukrainian steel imports from US tariffs is largely symbolic, as many steel production facilities are casualties of the Russian war on Ukraine. Notably the Azovstal plant in Mariupol, which has been all but destroyed and which will not be sending steel to the US in the near term. Secretary Raimondo noted that “Despite nearby fighting, some Ukrainian mills have even started producing again.” Yes, but it will probably be more than a year before significant imports of steel from Ukraine resume.

Brother, Can You Spare a Chip?

The third example is semiconductors. For years, both Democratic and Republican administrations have talked for years about increasing US production of semiconductors. Today, according to a recent government report, fully 75% of global semiconductor production takes place in East Asia –  mostly in Taiwan, Japan and the People’s Republic of China. The most advanced chips – which power everything from cars and appliances to complex machinery and electronics – are from Taiwan. Taiwanese producers are at the cutting edge of semiconductor technology. The result: American industry is at the end of a 9,000-mile supply line from Asia, and consumers of these tiny marvels are at the mercy of supply chain disruptions. The auto industry in the US and in other countries has stalled because chip supplies are tied up in transit. But any solutions are a long way off. Government initiatives on this issue are still in their infancy.

The US economy and US security are inextricably linked with the global economy. Interdependence is here to stay. Back in the day, the US was self-sufficient in many vital commodities. But those “good old days” never really existed. Just ask Woodrow Wilson (WWI) and Franklin Roosevelt (WWII). We live in a world that is hopelessly interdependent.

Taking just these three very recent examples, what are the right responses to supply disruptions?

The New Deal: Friends Trade With Friends

First, can government encourage more production in the US? It is not going to be easy: infant formula is already almost entirely domestically produced. And yet we are still just one factory closing away from a crisis. Like any business, we need contingency supplies – stockpiles or backup suppliers. Making imports easier for infant formula and for steel are positive steps. Ukrainian steel is a step in the right direction, but it clearly will not be enough for American industry.

Steel production in the US is not sufficient to meet domestic demand. Production chronically falls far below consumption and has for more than forty years.

Steel production capacity, as estimated by the American Iron and Steel Institute (AISI), is about 95 million short tons. Domestic consumption in 2021 was about 98 million tons, according to industry surveys. However, the steel capacity figure includes a number of plants that are not currently running and would be inefficient if they did run. New capacity is coming on line, which may increase total capacity. But due to the permanent closure of obsolete assets, the increase will not catch up to demand.

Moreover, steel is not a single product but thousands of products. Some specialized grades and sizes of steel products are not made at all in the US. (That is the reason behind a quarter of a million steel product exclusions from the Section 232 tariffs.) Many such products are only made in one factory worldwide, and that one factory may not be located here. So total self-sufficiency in steel is not realistic for the United States. Government policy does not require steel producers to increase the variety of the products they make to satisfy domestic demand, and it would not be effective even if it did. Even heavy government subsidies would not produce that result. International trade will thus continue to be necessary.

In semiconductors, the Biden administration just announced a plan aimed at building relationships between large manufacturers in the US (GE Aviation, Lockheed Martin, Honeywell, Raytheon, Siemens Energy) and small companies that could supply them with components. These efforts at increasing cooperation between large and small businesses can help—but they will not result in a major increase in domestic manufacturing anytime soon.

As I’ve written before, there are major strategic and security reasons to trade internationally. Trade is a key to peaceful relations. Although we’ve had a few recent painful lessons about the limitations of that theory, peaceful trade clearly helps avoid conflict.

Our trading system needs to adapt to the new reality that some countries do not share our values and our economic structure. Opening up the trading system to those countries wholeheartedly can be a mistake. Perhaps, at least until humanity figures out how to live together, we must concentrate on fostering interdependence with our friends who can help us while achieving independence from our adversaries who can hurt us.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz

5335 Wisconsin Avenue, N.W., Suite 440

Washington, D.C. 20015

Phone: (202) 617-2675

Mobile: (202) 250-1551

E-mail: lewis.leibowitz@lellawoffice.com