The Infant-Formula Market Is Still Bottled Up

The culprit isn’t the free market but a combination of protectionism and excessive regulation.

By Scott Lincicome and Gabriella Beaumont-Smith. Excerpts:

"The market was hardly free or overly dependent on imports, as some claimed during the crisis. In fact, the federal government imposed two different barriers to imported formula from almost every country in the world.

First, high and complicated “tariff rate quotas” dating back decades subjected most infant-formula imports to an effective tax of more than 25%; even most “free-trade agreement” partners, such as Canada and Australia, faced these or similar restrictions. Second, FDA regulations—governing everything from formula recipes to labels and scoop size and subjecting foreign producers to registration and inspection—further discouraged imports and authorized government officials to seize noncompliant shipments at the border."

"the U.S. market was closed to large, popular and safe formula brands from Europe, the U.K., New Zealand and elsewhere."

"American manufacturers accounted for more than 98% of U.S. formula consumption in 2021."

"effectively ensuring that a handful of large formula producers continue to dominate the market."

"the U.S. regulates formula more strictly than any other food and more strictly than most other countries. Heavy regulatory burdens can discourage new market entrants, and 2022 saw the first new U.S. formula manufacturer since 2007—the process to set up production and secure regulatory approval took the new player, ByHeart, more than five years and $190 million."

"Special Supplemental Nutrition Assistance Program for Women, Infants, and Children, or WIC, which has grown to cover almost half of U.S. infant-formula sales each year, demands steep discounts from participating formula producers in exchange for sole access to a state’s WIC market and prime shelf space at participating retailers. This, in turn, automatically boosts winning bidders’ sales in the non-WIC market, making them the dominant player in the state."

"Since only large producers have the resources to offer upfront discounts on such large quantities, it’s no surprise that three large corporations—Abbott, Reckitt/Mead Johnson, and Nestlé Gerber—hold all WIC contracts and accounted for more than 83% of total market share in 2021."

"The combination of high trade barriers, onerous domestic regulations and restrictive government contracts has created a concentrated and sclerotic U.S. formula market"

"the federal government’s emergency actions to alleviate the formula crisis targeted these very policies. Congress suspended baby-formula tariffs through the end of 2022. The FDA exercised its “enforcement discretion” to approve eight new foreign manufacturers to sell formula until 2025 without meeting all U.S. regulations. The Agriculture Department allowed WIC recipients to use their benefits to buy noncontract formula brands, including imports"

"the federal government implicitly recognized how freer markets can boost economic resilience and how protectionism and excessive regulation undermine it. Yet Congress and the executive branch haven’t made these reforms permanent."

"eggs and children’s medicines, which are less regulated than infant formula, both bounced back quickly from recent supply shocks. A relatively free and open market not only lowers costs today but protects against long-term shortages tomorrow."