And capital will flow to the more ethical shops that don't lie to their customers.

An interesting hypothesis, but I would guess not an accurate one on average, due to difficulties in the information-transmission process.

Well, judging by the fact that this particular group switched to a more ethical factory, I don't know what you are talking about.

The question is whether the unethical factory would go bankrupt. Information inefficiency and asymmetry prevents stories like this from being widespread to other potential product companies. So other product companies don't know what to expect and then have to experience the same mistakes. Even if an online directory and feedback mechanism were created, those are horribly easy to game if one wanted (see Yelp). My friend who used to work at Alibaba said fraud was rampant among the vendors listed on the website. I expect that the large demand for production facilities from abroad, coupled with information inefficiency and asymmetry, will allow the unethical factory to continue to make money.