Yesterday, I testified before the Senate Judiciary Committee’s Subcommittee on Competition Policy, Antitrust, and Consumer Rights on the topic of “Baby Formula and Beyond: The Impact of Consolidation on Families and Consumers” and — given today’s troubling news about continued production problems at Abbott Laboratories’ plant in Michigan — the hearing couldn’t have been more timely. Everyone at the hearing agreed that shortages in the United States have been caused in no small part by the current concentration of U.S. infant formula production among Abbott and three other companies: when Abbott initiated a voluntary recall and shut down that Michigan factory, there were no easy or immediate replacements to fill a gaping hole in the U.S. market.

However, while some at the hearing sought to blame “unregulated capitalism,” free trade, and a lack of expansive government antitrust powers for the crisis, I explained that “today’s producer concentration and any resulting problems therefrom are primarily the result of federal government policy, not any sort of natural, private market failure” that might warrant new antitrust action. In particular, several U.S. policies have worked to all‐​but‐​ensure that the infant formula market here is stagnant, dominated by a few large, domestic corporations, and highly vulnerable to an economic shock. These policies include:

  • Trade barriers. U.S. tariffs, trade agreements, and FDA rules effectively block almost all foreign‐​made infant formula from the U.S. market—contributing to market concentration. In fact, as my Cato colleague Emily Ekins and I wrote in the Wall Street Journal recently, shipments from Europe have been routinely seized and destroyed by U.S. Customs and Border Patrol because they did not comply with FDA labeling and other rules — even in the middle of the current crisis. Both the White House and Congressional Research Service estimate that 98 percent of the U.S. infant formula market is annually serviced by domestic production — a domestic market share that’s among the highest of any major food product.
  • Government contracts. The expansion and design of the Special Supplemental Nutrition Program for Women, Infants and Children (“WIC”) effectively ensures that the U.S. market remains concentrated. WIC provides vouchers for low‐​income Americans to buy pre-determined brands of formula at approved retailers. Since the program’s inception in 1974, WIC participation has grown dramatically: today the program accounts for more than half of all domestic formula sales. This buying power allows the government to demand that producers offer steep discounts; and in exchange, state WIC agencies offer big, sole-source contracts to winning bidders. The system undoubtedly saves U.S. taxpayer dollars but, when combined with WIC’s sheer size, creates competition problems. First, only large, established producers have the capacity, capital, and regulatory expertise to navigate the WIC contracting process and to offer steep, up-front discounts on large volume government contracts. Second, research shows that WIC’s large, exclusive contracts help winning bidders gain market share and raise prices in the non-WIC market and thus become the dominant supplier in the state at issue. This is a recipe for concentration – disrupted only by the current crisis. But as one industry expert recently told the Wall Street Journal, “If the government doesn’t change [the WIC] system, things will go back to the way they were—a forced duopoly.”
  • Regulation. Finally, stringent FDA regulations specific to infant formula are also likely amplifying domestic market concentration. Since 1980, the United States has regulated formula more strictly than other foods here and more strictly than formula in most other countries. Regardless of whether one believes this level of regulation is justified, it likely contributes to concentration in the infant formula market. Recent research finds, for example, that increases in regulation are associated with decreases in the number of firms in a market and lower startup rates, and anecdotal evidence supports these findings for the highly regulated formula market. Until a few weeks ago, there hadn’t been a new formula manufacturer in the United States since 2007, and it took the new player, ByHeart, more than $190 million and five years to start production. The company’s CEO recently attributed the lack of market entrants to the time and expense of needed to “study and understand FDA regulations.” The head of another startup, Bobbie, said much the same.

As I’ve explained elsewhere, the infant formula crisis is a stark lesson in the perils of economic nationalism and industrial policy: “making everything here” might insulate us from foreign shocks, but it makes us far more vulnerable to domestic shocks and less able to adapt when problems arise (as they always do). It’s also a lesson for those seeking to use antitrust and competition policy to attack “concentration” in the U.S. market: to the extent there is concentration and stagnation in an industry, it’s usually caused by government action, not some sort of “market failure.”

As I conclude in my testimony, learning this lesson for infant formula also points us to real solutions:

[The crisis has] been caused in no small part by government policies that restricted competition from abroad, bolstered the dominance of a handful of large domestic corporations, and stifled new market entrants. Policymakers looking to improve the U.S. infant formula market should therefore reform these policies, not add another layer of government regulation atop the numerous ones we already have. Reforms could include:

  • Eliminating all tariffs and tariff rate quotas on imported infant formula;
  • Revising the USMCA to allow for the free movement of infant formula between the United States, Canada, and Mexico;
  • Requiring the FDA to permit the importation, marketing, and domestic sale of any infant formula approved by a competent regulator abroad, such as those in Australia, Canada, the European Union, the European Economic Area, Japan, New Zealand, and Switzerland;
  • Reducing the size (and thus influence) of the WIC program, while also eliminating the sole source contracting model so that participants may purchase any infant formula lawfully sold in the U.S. market; and
  • Streamlining the FDA approval process for new market entrants and reconsidering whether Congress has struck the proper balance between public health and market competition under the Infant Formula Act of 1980 and its amendments.

Creating a freer market for baby formula will not immediately resolve the current crisis, but doing so would ensure that our domestic market is more competitive and more resilient when the next crisis hits.

I was pleased to see Senators on both sides of the aisle express support for some of these reforms, such as automatically admitting European baby formula and reforming the WIC program. These and other reforms have been proposed — albeit only temporarily — in legislation sponsored by the Committee’s ranking member, Sen. Mike Lee. Given the continued crisis in the U.S. market, Congress will hopefully act soon.

You can watch the whole committee hearing here.