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Many Sing the Praises of the Harmonized System for Import-Export Business — But Vigilance is Key

By Megan Doyle

The Harmonized Commodity Description and Coding System – colloquially known as the Harmonized System (HS) – is a "universal economic language and code for goods"1 used by more than 200 countries worldwide. At least 98 percent of import-export business is classified in HS terms, making it an "indispensable tool for international trade," according to the World Customs Organization (WCO).2 The HS allows participating countries to trade goods "on a common basis for customs purposes," thanks to its six-digit code system that classifies approximately 5,000 groups of commodities.3,4

Accomplishments of the Harmonized System

 

Before the Harmonized System, a lack of uniformity among commodity classification systems around the globe had become a major concern.5 Since its implementation in 1988, the HS has helped ease the complexity of conducting import-export business by categorizing goods in a globally unified and structured manner. As a result, the system has helped reduce "the efforts required by the trading parties for documentation of the carried goods."6

 

According to the WCO, unified customs and trade procedures have helped import-export businesses reduce the costs associated with international trade.7 In addition, the breadth of the HS can help ensure businesses pay the right tariffs, which means companies will pay accurate duty, thus avoiding fines that can reach seven figures.8

 

In addition, the detailed scope of the HS can help import-export businesses stay organized. International organizations, governments, and the private sector use the system as a reference for adhering to trade policies, freight tariffs, and rules-of-origin requirements.9

 

Using the Harmonized System for Import-Export Business

 

The HS can be "relatively complex and difficult to implement without very extensive training," according to the United Nations Statistics Wiki.10 If the HS is not properly understood, import-export businesses can face legal penalties or have goods seized.11 Since tariffs are typically imposed based on the HS classification code, it's imperative that the code is accurate.12 Similarly, the WTO emphasizes that in order to help prevent discrepancies, "countries should avoid the use of simplified classification decisions as much as possible even if certain customs procedures and thresholds allow this."13

 

Luckily, there are resources to help determine the right HS code for products, such as the U.S. Census Bureau Schedule B Search Engine and the U.S. Customs Rulings Online Search Engine.14 What's more, commercial products, such as Tradiance, offer trade-automation solutions that use AI to manage HS-code classification.15

 

It's also important to note that many countries have their own extensions to the HS. The Harmonized Tariff Schedule (HTS) system is the U.S.'s addendum to it, for example. Like the HS, the HTS describes import-export goods for tax, quota, and statistical purposes.16 Based on the HS, the HTS takes the former's initial six digits and adds four more, resulting in an even more granular classification system.17

 

The Future of the Harmonized System

 

During the recent 30th anniversary of the HS, the WCO called for the international customs and trade communities "to continue to be proactive and pursue its efforts to develop and maintain the HS."18 The WCO stresses that the maintenance of the HS is prioritized to combat inevitable changes in technology and trade patterns. As such, the WCO continually monitors the HS and makes amendments every five to six years.19

 

Nevertheless, the WCO also acknowledges that "frequent revisions of the HS result in discontinuation or merging of some codes every five years," which can contribute to confusion or disturb statistics and analytics.20 The organization, therefore, advises countries to work towards building on the strength of the HS while minimizing its weaknesses, such as by providing more detailed commodity breakdowns beyond the six-digit level – as with the HTS.21

 

But depth of detail within the classification system can quickly get complicated – a trait often considered a hallmark challenge of the HS. Despite its comprehensive nature, the system is not always straightforward. For one thing, it's not unusual for import-export businesses and auditors to interpret goods differently. Such gaps of interpretation have, as of late 2017, "resulted in error rates of 30 percent according to several government sources."22 Additionally, since many countries have their own taxonomy beyond the international, harmonized six-digit code, it's not uncommon for packages to be wrongly classified – errors which can lead to excess taxes or penalties.23

 

The

Takeaway:

The Harmonized System has helped import-export businesses conduct trade more efficiently with fewer fines since its introduction in 1988. While the WCO has made it a priority to amend the system to keep up with changing times, the inherent complexities within the fine details of the HS still result in discrepancies. However, many believe that, if businesses and the WCO take the time to build on the strengths of the HS, it will continue to positively impact international trade.

Megan Doyle - The Author

The Author

Megan Doyle

Megan Doyle is a business technology writer and researcher based in Wantagh, NY, whose work focuses primarily on financial services technology.

Sources

1. What is the Harmonized System (HS)?,” World Customs Organization; http://www.wcoomd.org/en/topics/nomenclature/overview/what-is-the-harmonized-system.aspx
2. Ibid.
3. Ibid.
4. “Harmonized Commodity Description and Coding Systems (HS),” UN Trade Knowledgebase; https://unstats.un.org/unsd/tradekb/Knowledgebase/50018/Harmonized-Commodity-Description-and-Coding-Systems-HS
5. “The Harmonized System – A Brief History,” Global Tariff; http://www.globaltariff.com/hshistory.cfm
6. “Harmonized Commodity Description and Coding System or Harmonized System (HS) Code,” Bluewhale; http://www.blue-whale.in/customs/harmonized-commodity-description-and-coding-system-or-harmonized-system-hs-code/
7. What is the Harmonized System (HS)?,” World Customs Organization; http://www.wcoomd.org/en/topics/nomenclature/overview/what-is-the-harmonized-system.aspx
8. “Global Trade is Powered by Artificial Intelligence,” Forbes; https://www.forbes.com/sites/stevebanker/2017/10/07/global-trade-is-powered-by-artificial-intelligence/#6c4e4b6f3d34
9. What is the Harmonized System (HS)?,” World Customs Organization; http://www.wcoomd.org/en/topics/nomenclature/overview/what-is-the-harmonized-system.aspx
10. Ibid.
11. “A Layman’s Guide To HS and HTS Codes,” Floship; https://www.floship.com/laymans-guide-to-hs-and-hts-codes/
12. Ibid.
13. “Benefits and challenges associated with the use of the HS,” UN Statistics Wiki; https://unstats.un.org/wiki/pages/viewpage.action?pageId=7405716
14. “A Layman’s Guide To HS and HTS Codes,” Floship; https://www.floship.com/laymans-guide-to-hs-and-hts-codes/
15. “Solutions,” Tradiance; https://www.tradiance.net/solutions.html
16. “About Harmonized Tariff Schedule (HTS),” United States International Trade Commission; https://www.usitc.gov/tariff_affairs/about_hts.htm
17. “A Layman’s Guide To HS and HTS Codes,” Floship; https://www.floship.com/laymans-guide-to-hs-and-hts-codes/
18. “30th Anniversary of the Harmonized System (HS),” British International Freight Association; https://bifa.org/news/articles/2018/jan/30th-anniversary-of-the-harmonized-system-hs
19. What is the Harmonized System (HS)?,” World Customs Organization; http://www.wcoomd.org/en/topics/nomenclature/overview/what-is-the-harmonized-system.aspx
20. “Benefits and challenges associated with the use of the HS,” UN Statistics Wiki; https://unstats.un.org/wiki/pages/viewpage.action?pageId=7405716
21. Ibid.
22. Ibid.
23. Ibid.

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