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Though the infant formula shortage that struck American families in 2022 has mostly abated, it lives on in the memories of the parents who went through that harrowing supply-chain failure, which began when a major formula factory shut down because of reported bacterial contamination. And the industry is still under pressure from federal regulators, as recent news of a Federal Trade Commission investigation of possible collusion among the main formula suppliers suggests. As first reported May 23 in the Wall Street Journal, the FTC is trying to determine whether leading manufacturers coordinated what are supposed to be competitive bids for contracts to supply states with formula under the Special Supplemental Nutrition Program for Women, Infants and Children program (WIC) that serves low-income families.

Any illegal conduct must of course be rooted out and appropriately punished. Yet the search for regulatory infractions can be a distraction from what should be the main lesson of last year’s crisis: Ill-conceived or excessive government rules and regulations were themselves among its causes. Unless and until those are fundamentally reformed, the infant formula supply chain will remain vulnerable to another devastating rupture.

As is so often the case, the dysfunctional regulatory structure around infant formula got started with good intentions. Since 1989, Congress has required each state to contract with a single supplier for its WIC program, which provides funds so low-income mothers can purchase formula from stores. The idea was that, in return for a monopoly on the WIC business, which makes up roughly half of all sales, companies would sell to WIC clients at a discount, saving the government money. The advantageous position this provided the company in a given state helped boost sales from non-WIC clients, thus making up for lower revenue on the roughly half of all sales that go through WIC. Just three companies — Abbott, Reckitt/Mead Johnson and Nestlé/Gerber — hold all the state WIC contracts. And most U.S. formula comes from seven factories, because other government policies subject formula imports to stiff tariffs and because non-tariff barriers make it expensive and time-consuming for new firms to enter the market. The upshot, as a recent report from the pro-market Cato Institute think tank demonstrated, was an infant formula supply chain incapable of responding nimbly when the Abbott factory at Sturgis, Mich., suddenly went offline in February 2022.

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The best proof that this market is over-regulated came from the measures government took to alleviate the crisis, almost all of which involved, well, deregulation. Congress suspended tariffs, allowing imports to come in from Europe and elsewhere; the Agriculture Department, which administers WIC, allowed states to offer a wider variety of formula brands and packages than their current contracts covered. These measures helped ease shortages until the resumption of production at Abbott’s factory.

Importantly, there was no reported harm to health from the introduction of foreign-made formula, contrary to the ostensible concern behind the tariffs, which is the need to uphold U.S. health and safety standards. This was to be expected, given that regulations in Europe are on a par with those in this country. However, the tariff suspension expired at the end of 2022, and the last of the state waivers for WIC purchases will end on June 30. Formula manufacturers and the U.S. dairy industry, which produces milk proteins for infant formula, lobbied for a return to the precrisis status quo.

There’s widespread recognition of the United States’ vulnerability to industrial supply chains that rely heavily on imports from abroad, especially from geopolitically problematic countries such as China. Yet the infant formula case shows that, under certain circumstances, a protected market dominated by domestic producers can be just as fragile. Attempting to hold down spending on state WIC programs by manipulating price and supply, the United States created situations in which, frighteningly, all parents — rich or poor — had a hard time getting formula. A better policy would open the United States to appropriately regulated imports, make it easier for new domestic producers to enter the market and let all qualified suppliers sell in all states, counting on competition to temper prices. Then the government should spend what’s necessary to help poorer families afford what their babies need.

The catch phrase du jour for this approach is “supply-side progressivism,” and the infant formula market could use a healthy dose of it.

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