EU decarbonization and industrial export competitiveness in a small open economy: A surprising resilience

Research background: The competitiveness of the EU and its position in international trade have declined significantly, while the massive, unprecedented decarbonization of European industry has brought another challenge. Examining the impact of strict European decarbonization on the export competitiveness of European producers is not only a necessary indicator for setting appropriate policy design, but also a useful lesson for other countries in the fight against the climate crisis through proper policies. Purpose of the article: This study evaluates the impact of stringent decarbonization on the export competitiveness of industrial producers within a small open economy, using Slovakia as a representative case study. Specifically, the authors analyse the effects of substantial renewable energy sources (RES) financing—mediated through feed-in tariffs—and investigate the causal relationship between export dynamics and higher electricity bills. Methods: Based on data from Eurostat (energy prices, value-added) and Prodcom (export flows), the authors examine the impact of EU decarbonization measures on the competitiveness of Slovak industrial exporters within energy-intensive industries using Error Correction Models (ECM). Findings & value added: In their research, the authors did not confirm the negative impact of decarbonization in a small open economy on the export of energy-intensive products. Among several factors explaining the finding, the Porter Hypothesis might be a possible explanation. The authors identified imported capital (investment) goods containing innovative technologies from multinational companies as a possible dominant factor. Finally, demanding decarbonization policies might not automatically be harmful to the internal and external competitiveness of domestic companies. Innovation policies and targeted stimulation measures (incentives and foreign trade measures) can be prerequisites for maintaining export competitiveness of industrial production. These findings from Slovakia serve as a useful representative case for the design of decarbonization policies—particularly in export-oriented countries implementing feed-in tariffs to support RES—and may guide managerial decisions in companies within energy-intensive industries in the CEE region and in a broader international context.