At a time when Sri Lanka's apparel sector is already seeing its exports hit by the slowdown in consumer spending, the industry appears surprisingly bullish over the possible loss of trade benefits to its largest customer, the European Union (EU).

A final decision is expected in the next few weeks on whether the European Commission will recommend that Sri Lanka loses its status as a GSP+ (Generalised System of Preferences) beneficiary, which has given the country's apparel exports zero duty access to the EU since 2005.

The end of preferences would mean exports revert to a duty of up to 9.6% - effectively a 9.6% price hike - which is a blow most firms would find hard to take.

And not surprisingly there are reports that some retailers and brands are already moving business from Sri Lanka to China, India and Bangladesh over the uncertainties surrounding the GSP+ issue.

That said, executive opinion seems to suggest it's unlikely the trading preference will be removed.

"We feel we have a chance of keeping the GSP+," Mahesh Hirdaramani, director at the Hirdaramani Group of Companies, told just-style, citing unfairness in a Commission report on its investigation.

He confirmed that some buyers have already asked factories to absorb the duty component partially or in total.

"Everything is price-sensitive at the moment," he said, adding that any price will be "very difficult because the margins are so slim right now."

Many in the industry also believe believe the government has been working behind the scenes to allay the fears of the EU, and that Sri Lanka may well be handed an action plan or roadmap that outlines changes it needs to implement during the six-month period before the GSP+ is withdrawn.

This could lead to its extension, they say.

And just-announced presidential elections on 26 January are also seen as positive.

Current incumbent Mahinda Rajapaksa has already hinted he will work with the EC to comply with its demands, while his nearest rival, former army chief Sarath Fonseka is understood to be pro-trade.

Critics say any suspension of GSP+ would unfairly punish the garment industry which is responsible for 1m indirect and 270,000 direct employees, mainly women.

The GSP+ privilege is currently hanging in the balance after the EU accused the Indian Ocean island of alleged human rights violations during the last stages of the 25-year civil war against the Tamil Tigers, which finally ended in May this year.

The duty-free concession has helped the apparel industry maintain its status as the nation's largest foreign exchange earner, generating US$43.47bn worth of exports in 2008 - accounting for 67% of Sri Lanka's industrial exports.

It has also helped build a roster of global customers that includes retailers such as Marks & Spencer, Tesco and Next.

The timing of the issue comes as Sri Lanka has seen its textile and garment exports fall 4.8% year-on-year to $2.4bn in the first nine months of this year, according to the most recent figures.

However, while exports were down 19.5% in the month of September, shipments to the EU rose 8.6%. 

But the six-month notice period before any potential suspension comes into force means no garments currently in production or under negotiation will have their duty concession withdrawn.