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AfCFTA’s potential impact on the HVAC&R sector

Compiled by Eamonn Ryan, derived directly from a presentation by Chris Hatton, head of policy analysis at the Center for Risk Analysis (CRA)

The following presentation was made at the second annual GCCA African Cold Chain Conference held on 2–4 August 2023, in Cape Town.

Chris Hatton, head of policy analysis at the CRA.
Chris Hatton, head of policy analysis at the CRA. All images supplied  by Cold Link Africa

Hatton emphasised that his presentation often left audiences “stony faced” at the depth of risks and challenges with cross-Africa trade, but noted that commensurate with the high risk, came the opportunity for high rewards for early movers.

Hatton, an expert in trade and economic policy, addressed the audience on the significance of the AfCFTA in the HVAC&R sector. Hatton is a member of the Advisory Council of the Initiative for African Trade and Prosperity, as well as a senior fellow at African Liberty and member of the executive board of the Global Trade and Innovation Policy Alliance. The following is his presentation:

The African Continental Free Trade Area (AfCFTA) has been hailed as a transformative agreement that has the potential to revolutionise trade and economic growth on the African continent. AfCFTA aims to lower barriers to trade, reduce tariffs, and facilitate the flow of goods, services, and materials, ultimately leading to increased economic growth, job creation, and an improvement in living standards for the people of Africa.

Hatton emphasised the transformative potential of the AfCFTA, stating that it could be the most significant change Africa experiences in the next 50 years. Currently, Africa only accounts for 2% of global trade, with 17% of African exports being intra- continental compared to 59% for Asia and 68% for Europe. Exporting within Africa is often more expensive than exporting to Europe, which calls for a change.

Connecting 1.3 billion people and with a combined GDP estimated at USD3.4-trillion, the agreement holds the potential to boost regional income by 7% or USD450-billion, lifting 30 million people out of extreme poverty by 2035. The trading under AfCFTA officially began on 1 January 2021, although implementation is being carried out in stages, and several policy barriers still need to be addressed.

The HVAC&R sector stands to benefit significantly from the AfCFTA. It is estimated that Africa’s exports could increase by USD560-billion, with a particular focus on manufacturing. Furthermore, intra-continental exports are expected to rise by 81%, and inter-continental trade by 19%. If successfully implemented over the next 20-30 years, AfCFTA could generate a combined consumer and business spending of USD6.7-trillion by 2040.

Thoroughly useless border posts were highlighted as a primary risk.
Thoroughly useless border posts were highlighted as a primary risk.

Hatton highlighted some of the key objectives of the AfCFTA, including the reduction of trade costs and the facilitation of border operations. By streamlining licensing, documentation and operations at ports and railways, AfCFTA aims to make trade more efficient. Additionally, the agreement aims to position Africa to take advantage of the current global environment, where there is a shift in supply chains and investment due to a ‘risk off’ sentiment. Hatton posed the question of whether – as global supply chains look for better returns on investment – Africa could potentially attract these investments and benefit from the relocation of value chains away from countries like China.

The agreement aims to eliminate 90% of tariffs, the existence of which can have both positive and negative effects on trade. Tariffs can be beneficial if used effectively by governments to support small businesses, but they also discourage the flow of goods and services between countries, making it more difficult and costly for goods to move. Non-tariff barriers are also a significant issue that AfCFTA aims to address. These barriers include delays at border posts and ports, which add costs to business operations. The Free Trade Area aims to create a single market with the free movement of goods and services, simplifying customs procedures and cutting red tape. This will help reduce costs and promote trade within Africa.

Part of the audience at the Cape Town GCCA conference.
Part of the audience at the Cape Town GCCA conference.

In addition to facilitating trade in goods and services, AfCFTA also addresses other important aspects of economic growth such as the movement of persons and labour, competition, investment, and intellectual property. Encouraging skilled individuals to come and invest in African countries is crucial for upskilling the local workforce and achieving inclusive growth.

He reviewed the five key instruments of the AfCFTA:

  • Rules of origin
  • Tariff concessions
  • The elimination of non-tariff barriers through an online mechanism
  • The Pan African Payment and Settlement system
  • The African Trade Observatory – a portal for trade within Africa

There has been a trickle of improvement under AfCFTA. Kenya, for example, has seen increased trade activities, including the export of coffee beans to various African nations. However, it is important to acknowledge that the process of fully implementing AfCFTA will take time due to the complex nature of the challenges it aims to address across the 55 countries. One of the key obstacles that must be overcome is the need for policy reforms to ensure the smooth flow of trade. Reforms must be implemented promptly, and the involvement of the private sector can bring much-needed expertise and accountability. Hatton described the pace of reform as ‘glacial, and that’s being kind’. Governments have a responsibility to implement necessary reforms. For instance, fuel subsidies need to be reformed to prevent the excessive burden of fuel taxes on businesses.

Complex export procedures and limited export requirements currently create uncertainty and hinder trade. High tariffs on imports further restrict the growth of the HVAC&R sector. Crucially for the cold chain, there is a lack of trade support infrastructure, such as cold storage facilities. This scarcity limits the sector’s ability to meet the growing demands of consumers. Lack of access to finance is another significant challenge faced by businesses in the HVAC&R sector.

Increased financing opportunities would enable them to expand their productive capacity and cater to larger scale demands. Complex border procedures and limited market knowledge of products add to the difficulties faced by businesses in the HVAC&R sector. Furthermore, the sector struggles with low production capacity and the absence of reliable and affordable electricity. These challenges hinder the ability of businesses to compete effectively in the market. The cost of logistics in Africa – which currently can load the cost of exports by 75% – can be significantly reduced by improving transportation networks and enhancing safety and security measures. For example, investing in rail transportation can lower costs and provide a safer alternative to road transport.

The condition of road networks in Africa has deteriorated over the years, leading to increased costs for businesses. Improving road infrastructure is crucial to reducing operational costs in the HVAC&R sector.

One of the top risks currently faced by businesses in South Africa is critical infrastructure blackouts, which can disrupt HVAC&R operations. Hatton listed one of the main concerns as being the issue of subsidies. While governments may want to stimulate local businesses through subsidies, it is crucial to ensure transparency and accountability  in the allocation of these subsidies. Businesses that receive subsidies should be held responsible for job creation and adherence to transformation standards. Furthermore, localisation efforts, such as South Africa’s pursuit of localisation, can inadvertently create higher trade barriers through tariffs on imported goods, negatively impacting consumers. Protectionism is also a global issue, as more advanced economies like the US and China turn inward to stimulate local manufacturing growth.

Alongside subsidies and localisation, vested interests and lobbying pose potential risks. Transparency and accountability are essential in regulating the influence of vested interests on trade policies. Likewise, corruption can undermine the effectiveness of the AfCFTA, particularly at border posts. Efforts must be made to combat corruption and ensure that ports operate at a high level. As global value chains and supply chains shift, Africa and South Africa can position themselves to take advantage of reshoring and ensure mutually beneficial trade relationships. However, trade policies must be carefully crafted on a case-by-case basis to maximise these opportunities.

He concluded that AfCFTA has the potential to drive inclusive economic growth and development in Africa. He re-emphasised that business should not rely on the pace at which governments move but make their own plans regardless of government, leveraging strengths in the private sector, and embracing innovation. Africa and South Africa can establish themselves as key players in the global economy.