Is It Better to Outsource or Insource T-shirts?

A Tale of Two “T-Shirts”

Feb 14, 2012 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Thinkers, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically, Uncategorized • 107 Views    No Comments

What if the cost of producing a woman’s polo shirt is $29.57? Its manufacturers would sell it to retailers for $65.00 who then mark it up to a $155.00 selling price.

According to the Wall Street Journal, the land, labor and capital for an upscale green (sort of like Crayola’s Caribbean green crayon) polo primarily take us to France and the U.S.  Using cotton/rayon cloth from Paris, the shirt  is made in Brooklyn, NY.  Its $29.57 wholesale cost includes the fabric ($7.79), 4 buttons ($.12), labor ($11.05) and other shirt ingredients like thread ($.09).

The story of a $5.99 Walgreen’s t-shirt is very different. Told in in The Travels of a T-Shirt in the Global Economy by Pietra Rivoli,  a typical t-shirt starts as cotton in Texas. Traveling by truck or train to California, it continues moving westward until it reaches China. In China, the cotton becomes yarn which is made into cloth which is made into a t-shirt. With a “made in China” label, the t-shirt leaves China, headed for a screen printing plant in Florida. Perhaps months later, after it has been sold and worn, the shirt winds up in a used clothing bin, destined once again to travel thousands of miles to a clothing bazaar in Tanzania where it is sold.

The price the screen printer pays for the shirt? In 1998, it was $1.42–which now would be $1.96 (using the BLS inflation calculator).

The Economic Lesson

And this takes us to David Ricardo’s principle of comparative advantage. Worldwide productivity increases when nations specialize and export the good or service for which they sacrifice the least to make.

The cost can be high when we do not listen to David Ricardo’s wisdom. At the end of a 2002 report from the Dallas Federal Reserve Bank called “The Fruits of Free Trade,” is a chart that conveys the cost of policies that save domestic jobs. For apparel and textiles, 168,786 jobs are saved. The cost though, is $33,629,000,000 or $199,241 per job. Why is the cost so high? Because consumers are paying more when there is no competition.

An Economic Question: How would you assess the cost and benefit of importing the $9.00 t-shirt from China? Of producing the $155 polo in Brooklyn?

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