Coding of traded products by the World Customs Organization
The Harmonized Commodity Description and Coding System, also known as the Harmonized System (HS) of tariffnomenclature is an internationally standardized system of names and numbers to classify traded products. It came into effect in 1988 and has since been developed and maintained by the World Customs Organization (WCO) (formerly the Customs Co-operation Council), an independent intergovernmental organization based in Brussels, Belgium.
It is used by over 200 WCO member countries and economies as a basis for their Customs tariffs and for the collection of international trade statistics as well as many other purposes.[1]
Structure
Example of the hierarchical structure of the Harmonized System
The HS is organized logically by economic activity or component material. For example, animals and animal products are found in one section of the HS, while machinery and mechanical appliances are found in another. The HS is organized into 21 Sections, which are subdivided into 96 Chapters (Chapters 1 to 97 with Chapter 77 reserved for potential future use by the HS). The 96 HS Chapters are further subdivided into 1,228 headings and 5,612 subheadings in the current 2022 edition of the HS.
Section and Chapter titles describe broad categories of goods, while headings and subheadings describe products in more detail. Generally, HS Sections and Chapters are arranged in order of a product's degree of manufacture or in terms of its technological complexity. Natural commodities, such as live animals and vegetables, for example, are described in the early Sections of the HS, whereas more evolved goods such as machinery and precision instruments are described in later Sections. Chapters within the individual Sections are also usually organized in order of complexity or degree of manufacture. For example, within Section X (Pulp of wood or of other fibrous cellulosic material; Recovered (waste and scrap) paper or paperboard; Paper and paperboard and articles thereof), Chapter 47 provides for pulp of wood or of other fibrous cellulosic materials, whereas Chapter 49 covers printed books, newspapers, and other printed matter. Finally, the headings within individual Chapters follow a similar order. For example, the first heading in Chapter 50 (Silk) provides for silk worm cocoons while articles made of silk are covered by the Chapter's later headings.
The HS code consists of 6-digits. The first two digits designate the Chapter wherein headings and subheadings appear. The second two digits designate the position of the heading in the Chapter. The last two digits designate the position of the subheading in the heading. HS code 1006.30, for example, indicates Chapter 10 (Cereals), heading 10.06 (Rice), and subheading 1006.30 (Semi-milled or wholly milled rice, whether or not polished or glazed).
In addition to the HS codes and commodity descriptions, each Section and Chapter of the HS is prefaced by Legal Notes, which are designed to clarify the proper classification of goods.
To ensure harmonization, the Contracting Parties to the Convention on the Harmonized Commodity Description and Coding System, have agreed to base their national tariff schedules on the HS Nomenclature and Legal Notes. Parties are permitted to subdivide the HS Nomenclature beyond 6-digits and add their own Legal Notes according to their own tariff and statistical requirements. Parties often set their customs duties at the 8-digit "tariff code" level. Statistical suffixes are often added to the 8-digit tariff code for a total of 10 digits. If the number of digits are more than 6, additional digits are called as the national subdivision.
Chapter 77 is reserved for future use by the HS. Chapters 98 and 99 are reserved for domestic use for the Contracting Parties to the HS Convention.
Since its creation, the HS has undergone several revisions to reflect changes in trade. These revisions eliminate some headings and subheadings describing commodities with low volume of trade and create new headings and subheadings that address new needs, for example, to reflect technological advancements or monitor goods posing environmental concerns. The current edition of the HS became effective on 1 January 2022.
Classification
The process of assigning HS codes is known as "HS Classification". All products can be classified in the HS by using the General Rules for the Interpretation of the Harmonized System ("GRI") that must be applied in strict order. HS codes can be determined by a variety of factors including a product's composition, its form and its function. An example of a product classified according to its form would be whole potatoes. The classification will also change depending on whether the potatoes are fresh or frozen. Fresh potatoes are classified, under heading 07.01 (Potatoes, fresh or chilled), more specifically under subheading 0701.90 (Other), while frozen potatoes are classified, under heading 07.10 (Vegetables (uncooked or cooked by steaming or boiling in water), frozen), more specifically under subheading 0710.10 (Potatoes).
An example of a product classified according its material composition is a picture frame. Picture frames made of tropical wood are classified under heading 44.14 (Wooden frames for paintings, photographs, mirrors or similar objects), more specifically under subheading 4414.10 (Of tropical wood). Picture frames made of plastic are classified under heading 39.24 (Tableware, kitchenware, other household articles and hygienic or toilet articles, of plastics), more specifically under subheading 3924.90 (Other). Picture frames made of glass are classified under heading 7020.00 (Other articles of glass), the '.00’ at the end indicates the heading is not further subdivided.
An example of a product classified according to its form is personal hygiene soap. When in the form of a bar, cake or moulded shape, such soap is classified under heading 34.01 (Soap, among others), then under 1-dash subheading 3401.1 (Soap and organic surface-active products and preparations, in the form of bars, cakes, moulded pieces or shapes, and paper, wadding, felt and nonwovens, impregnated, coated or covered with soap or detergent), and under 2-dash subheading 3401.11 (For toilet use (including medicated products)). Conversely, liquid personal hygiene soap, depending on what is in the liquid, is classified under either subheading 3401.20 (Soap in other forms), or subheading 3401.30 (Organic surface-active products and preparations for washing the skin, in the form of liquid or cream and put up for retail sale, whether or not containing soap).
An example of a product classified according to its function is a carbon monoxide (CO) detector. If the CO detector captures and displays gas measurements, then it is properly classified under subheading 9027.10 (Gas or smoke analysis apparatus), under heading 90.27 (Instruments and apparatus for physical or chemical analysis (for example, polarimeters, refractometers, spectrometers, gas or smoke analysis apparatus; instruments and apparatus for measuring or checking viscosity, porosity, expansion, surface tension or the like; instruments and apparatus for measuring or checking quantities of heat, sound or light (including exposure meters); microtomes. If the CO detector does not capture and display gas measurements, then it is properly classified under subheading 8531.10 (Burglar or fire alarms and similar apparatus), under heading 85.31 (Electric sound or visual signaling apparatus (for example, bells, sirens, indicator panels, burglar or fire alarms), other than those of heading 85.12 or 85.30).
Although every product and every part of every product is classifiable in the HS, very few are explicitly described in the HS Nomenclature. Any product for which there is no explicit description can be classified under a "residual" or "basket" heading or subheading, which provide for Other goods. Residual codes normally occur last in numerical order under their related headings and subheadings.
An example of a product classified under a residual heading is a live dog, which must be classified under heading 01.06, which provides for Other live animals because dogs are not covered by headings 01.01 through 01.05, which explicitly provide for live equine, live bovine, live swine, live sheep and goats, and live poultry, respectively.
Applications
As of 2022, there were more than 200 countries or economies applying the Harmonized System worldwide,[2]
HS codes are used by Customs authorities, statistical agencies, and other government regulatory bodies, to monitor and control the import and export of commodities through:
Other areas of Customs controls and procedures, including risk assessment, information technology and compliance.
Companies use HS codes to calculate the total landed cost of imported products and parts, and to identify selling and sourcing opportunities abroad.
Challenges in classification for companies
HS classification is not always straightforward. Many automotive parts, for example, are not classified under heading 87.08, which provides for Parts and accessories of the motor vehicles of headings 87.01 to 87.05. For example, automotive seats are classified as articles of furniture under heading 94.01, which provides for Seats (other than those of heading 94.02), whether or not convertible into beds, and parts thereof, and more specifically under subheading 9401.20, which provides for Seats of a kind used for motor vehicles.
In many jurisdictions, traders alone bear the legal responsibility to accurately classify their goods. However, due to a lack of familiarity with the rules of HS classification traders may inadvertently determine erroneous HS codes for their commodities. Depending on the severity of the infraction, incorrect classification can result in the imposition of non-compliance penalties, border delays or seizures, or denial of import privileges.
There are multiple resources available to traders to assist in properly classifying their goods including the following.
The WCO Trade Tools (WCO online database for the HS, Valuation and Origin, containing both free and paid content, with the legal text of the Harmonized System freely available)
Integral System of Trade Information (SIICEX) by the Confederation of Associations of Custom Brokers of the Mexican Republic (CAAAREM). It provides updated information about tariffs and explanatory notes in order to import and export goods from/to Mexico. It compiles information of many national and international legal regulations.
Traders may sometimes resort to using HS code determination guides and other references to classify their traded commodities. These could include local databases published by authorities in other countries. However, such databases are not valid globally.
Many Customs authorities around the world allow traders to apply for an advanced HS classification ruling. Such rulings are legally binding in the countries they are issued in and give certainty to the trader. Provided the information supplied in the request was truthful and valid, they may also provide legal protection to the trader following the ruling if there are future questions on the classification of the goods.
A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and policy that taxes foreign products to encourage or safeguard domestic industry. Protective tariffs are among the most widely used instruments of protectionism, along with import quotas and export quotas and other non-tariff barriers to trade.
The World Customs Organization (WCO) is an intergovernmental organization headquartered in Brussels, Belgium. The WCO works on customs-related matters including the development of international conventions, instruments, and tools on topics such as commodity classification, valuation, rules of origin, collection of customs revenue, supply chain security, international trade facilitation, customs enforcement activities, combating counterfeiting in support of intellectual property rights (IPR), illegal drug enforcement, combating counterfeiting of medicinal drugs, illegal weapons trading, integrity promotion, and delivering sustainable capacity building to assist with customs reforms and modernization. The WCO maintains the international Harmonized System (HS) goods nomenclature, and administers the technical aspects of the World Trade Organization (WTO) Agreements on Customs Valuation and Rules of Origin.
Non-tariff barriers to trade are trade barriers that restrict imports or exports of goods or services through mechanisms other than the simple imposition of tariffs. Such barriers are subject to controversy and debate, as they may comply with international rules on trade yet serve protectionist purposes.
A common external tariff(CET) must be introduced when a group of countries forms a customs union. The same customs duties, import quotas, preferences or other non-tariff barriers to trade apply to all goods entering the area, regardless of which country within the area they are entering. It is designed to end re-exportation; but it may also inhibit imports from countries outside the customs union and thereby diminish consumer choice and support protectionism of industries based within the customs union. The common external tariff is a mild form of economic union but may lead to further types of economic integration. In addition to having the same customs duties, the countries may have other common trade policies, such as having the same quotas, preferences or other non-tariff trade regulations apply to all goods entering the area, regardless of which country, within the area, they are entering.
In international trade, market access refers to a company's ability to enter a foreign market by selling its goods and services in another country. Market access is not the same as free trade, because market access is normally subject to conditions or requirements, whereas under ideal free trade conditions goods and services can circulate across borders without any barriers to trade. Expanding market access is therefore often a more achievable goal of trade negotiations than achieving free trade.
The Harmonized Tariff Schedule of the United States (HTSUS), also referred to as the Harmonized Tariff Schedule of the United States Annotated (HTSA), is the primary resource for determining tariff classifications for goods imported into the United States. It can also be used in place of Schedule B for classifying goods exported from the United States to foreign countries. The Harmonized Tariff Schedule classifies a good based on its name, use, and/or the material used in its construction and assigns it a ten-digit classification code number, and there are over 17,000 unique classification code numbers. Although the U.S. International Trade Commission publishes and maintains the Schedule in its various forms, U.S. Customs and Border Protection is the only agency that can provide legally binding advice or rulings on classification of imports.
Intrastat is the system for collecting information and producing statistics on the trade in goods between countries of the European Union (EU). It began operation on 1 January 1993, when it replaced customs declarations as the source of trade statistics within the EU. The requirements of Intrastat are similar in all member states of the EU, although there are important exceptions.
The TARIC code is designed to show the various rules applying to specific products when imported into the EU. This includes the provisions of the harmonised system and the combined nomenclature but also additional provisions specified in Community legislation such as tariff suspensions, tariff quotas and tariff preferences, which exist for the majority of the Community’s trading partners. In trade with third countries, the 10-digit Taric code must be used in customs and statistical declarations.
Trade facilitation looks at how procedures and controls governing the movement of goods across national borders can be improved to reduce associated cost burdens and maximise efficiency while safeguarding legitimate regulatory objectives. Business costs may be a direct function of collecting information and submitting declarations or an indirect consequence of border checks in the form of delays and associated time penalties, forgone business opportunities and reduced competitiveness.
A Certificate of Origin or Declaration of Origin is a document widely used in international trade transactions which attests that the product listed therein has met certain criteria to be considered as originating in a particular country. A certificate of origin / declaration of origin is generally prepared and completed by the exporter or the manufacturer, and may be subject to official certification by an authorized third party. It is often submitted to a customs authority of the importing country to justify the product's eligibility for entry and/or its entitlement to preferential treatment. Guidelines for issuance of Certificates of Origin by chambers of commerce globally are issued by the International Chamber of Commerce.
Council Regulation (EEC) No 2658/87 of 23 July 1987, creates the goods nomenclature called the Combined Nomenclature, or in abbreviated form 'CN', established to meet, at one and the same time, the requirements both of the Common Customs Tariff and of the external trade statistics of the European Union. It is closely related to the Harmonized Tariff Schedule of the United States.
Rules of origin are the rules to attribute a country of origin to a product in order to determine its "economic nationality". The need to establish rules of origin stems from the fact that the implementation of trade policy measures, such as tariffs, quotas, trade remedies, in various cases, depends on the country of origin of the product at hand.
Global Classification is the process of classifying products for the purpose of complying with customs authorities, qualifying for free trade agreements and filing entries to customs during the importation or exportation of those products. A slight difference in classification can mean a huge difference in the duties that are paid.
Product classification or product taxonomy is a type of economic taxonomy which organizes products for a variety of purposes. However, not only products can be referred to in a standardized way but also sales practices in form of the “Incoterms” and industries can be classified into categories.
The United States imposes tariffs on imports of goods. The duty is levied at the time of import and is paid by the importer of record. Customs duties vary by country of origin and product. Goods from many countries are exempt from duty under various trade agreements. Certain types of goods are exempt from duty regardless of source. Customs rules differ from other import restrictions. Failure to properly comply with customs rules can result in seizure of goods and criminal penalties against involved parties. The United States Customs and Border Protection (CBP) enforces customs rules.
Comext is a statistical database on trade of goods managed by Eurostat, the Statistical Office of the European Commission. It is an important indicator of the performance of the European Union (EU) economy, because it focuses on the size and the evolution of imports and exports.
The Observatory of Economic Complexity (OEC) is an online data visualization and distribution platform for international trade data designed and owned by Datawheel. Through interactive visualizations, the OEC aims to make global trade data accessible and understandable.
The international trade of fine art is most precisely defined as the trade across nations of unique, non-reproducible works by an artist. The art trade contradicts typical international trade models since it is a culturally significant good. It is not treated by consumers the same way any other commodity would because of the aesthetic value that is unique to each piece. Despite existing as a finite physical piece, unique art is still considered intellectual property. This sparks the debate as to whether art exports should be restricted for nationalistic and cultural reasons, or liberalized for the sake of a healthier international market.
The General Rules for the Interpretation of the Harmonized System ("GRI") are the rules that govern the classification of goods under the Harmonized Commodity Description and Coding System (HS).
Trade data, or import and export statistics, consist of statistical data about international trade, typically organized by time period, country, and commodity.
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