Exposing the myth that ‘consumer demand for low prices’ causes dangerous working conditions in third world factories

by David L. Wilson

Consumers are ultimately the ones responsible for dangerous conditions in garment assembly plants in the Global South, Hong Kong-based business executive Bruce Rockowitz told the New York Times recently. The problem is that improved safety would raise the price of clothing, according to Rockowitz, who heads Li & Fung Limited, a sourcing company that hooks up retailers like Macy’s and Kohl’s with suppliers in low-wage countries like Bangladesh. “So far,” he said, “consumers have just not been willing to accept higher costs.”

Rockowitz isn’t alone in blaming consumers in Europe and the United States for sweatshop conditions in the apparel industry. The idea pervades popular culture. When 1,129 Bangladeshi sweatshop workers died in the Rana Plaza collapse in April, a lawyer in the United Kingdom proposed raising money for the victims by having consumers pay a voluntary “T-shirt tax” on clothing stitched in Bangladesh. “This isn’t just the fault of companies who supply cheap clothes,” barrister Victoria Butler-Cole explained.

But people rarely ask whether the facts support this idea. How much money do we really save because of cheap labor in the Global South?

Calculating the “T-Shirt Tax”

The quick answer is: nickels and dimes. Although estimates of the percentage of labor costs in clothing’s retail price “vary by product and location of production,” World Bank senior economist Zahid Hussain wrote in 2010, “it is clear from published academic research that labor costs typically constitute 1-3 percent for a garment produced in the developing world. Hence, large increases in labor costs do not require correspondingly large increases in retail price.” The Worker Rights Consortium, a group monitoring sweatshop conditions, came to a similar conclusion in 2005.

Significant wage increases and improvements in conditions at Bangladeshi apparel plants would probably add 40 or 50 cents to the price of a $10 T-shirt, at most. And this is assuming, as Bruce Rockowitz does, that manufacturers and retailers would pass the extra cost on to us.

The assumption might have been valid in the time of Adam Smith. In the eighteenth century there were many small capitalists competing with each other; any savings they made in production, either by cutting wages or adopting new technologies, they would use to reduce prices and undersell their competitors. But as leftist economists Paul Baran and Paul Sweezy showed almost 50 years ago in their book Monopoly Capital, pricing methods are very different now. By the beginning of the twentieth century the most successful companies had succeeded in swallowing up the others, and it didn’t make sense for the remaining giant corporations to engage in protracted price wars among themselves. Instead, they started holding prices steady while increasing sales through other means, with an emphasis on marketing.

Companies occasionally revert to the practice of underselling their rivals, and they often take advantage of new technologies to cut prices and generate an increase in sales, as has happened with personal computers since the early 1980s. But there’s no automatic connection between lower labor costs and lower prices. The price of a commodity is set by a complicated formula with many different factors, and labor costs are often a minor one.

This is especially true in an industry like apparel, where changing fashions and brand name prestige have a disproportionate effect on pricing; the difference between a $120 pair of Nike sneakers and the $30 shoes at a discount store doesn’t come from high wages for workers at Nike’s Indonesian suppliers.

Choosing Between Profits and Workers

To get a sense of the relative importance of labor costs, we just need to look at advertising. It’s not easy to find exact information on advertising costs, but the staff of the magazine Ad Age made an effort in 2007. They estimated that spending on advertising was equal to 5.1 percent of total sales in the apparel industry, while for apparel stores the number was 4.5 percent. In other words, the cost for advertising the clothes can be as much as five times the cost of stitching them.

Other forms of marketing, such as telemarketing, email marketing, and junk mail, may account for an even larger share of an item’s cost. In 2009 writers for Monthly Review calculated that advertising might represent as little as 30 percent of the total cost of marketing.

Suppose we were to cut marketing down to the minimum that consumers really find useful — information on product availability and prices, for example. The savings would certainly be enough to allow for doubling the wages of many assembly workers and creating safe conditions in their factories, all at no extra cost to consumers.

If we had a say in the matter, it’s not likely that we’d choose to let workers die in Bangladesh so that we can have our lives cluttered with ads, junk mail, and celebrity endorsements. After all, the workers, mostly young women and teenage girls, actually stitch our clothes, while the main purpose of advertising is just to get us to buy more products from one company than from another, or to create an artificial demand so that we’ll buy more than we need.

But the sweatshop system isn’t about what consumers want, and it’s certainly not about what the workers want; the goal is to increase profits for manufacturers and retailers, to make the superrich even richer.

While blaming consumers for sweatshop conditions, Li & Fung CEO Bruce Rockowitz has done quite well from the business of sourcing sweatshops for multinationals. His company had some $20 billion in revenues in 2012, and owners Victor and William Fung are each worth about $3 billion. Businessweek estimates that Rockowitz’s personal compensation last year was $6.955 million, and his net assets have been put at $33 million or more. In October 2011 Rockowitz married Hong Kong pop star Coco Lee in a ceremony that reportedly cost $20 million.

This article was first published in MRzine.

David L. Wilson is co-author, with Jane Guskin, of The Politics of Immigration: Questions and Answers, Monthly Review Press, July 2007. He also co-edits Weekly News Update on the Americas, a summary of news from Latin America and the Caribbean.