When it comes to technology or electronics, knowing how the Harmonized System works is key. Customs around the globe use HS to identify products and assess tariffs and taxes, but also as a source of statistics to improve business. Currently, more than 200 countries use this technology to grow their businesses based on specific information and data.
Harmonized System (HS) refers to a structured nomenclature of 6-digit codes split into sections, chapters, headings, and subheadings. It was developed by the World Customs Organization (WCO) and came into effect in January 1988 by virtue of a Convention. In 2003, the United Nations started using HS to make product classification and labeling easier.
Today, customs trade would be unthinkable without HS, since it is used more than 98% of goods, allowing to reduce transactional and transportation costs. Each rule describes the nature or value of processing that must be carried out on any non-originating materials, so the final product meets origin requirements.
According to the WTO and the WCO, ‘The vast majority of technical assistance activities were in the area of customs valuation and trade facilitation. Activities (and budget) are currently focused on issues related to trade facilitation negotiations. Cooperation on technical assistance in the area of rules of origin may be required in the future as the number of countries negotiating free trade agreements increases. The coordination of these activities is carried out through contacts between the officials of the respective secretariats dealing with the relevant issue.’
Before HS was implemented, compliance for international shipping was virtually chaotic. Products were classified differently by each country or region. The global trade world spoke different languages, and translating them was complex, bureaucratic, and time-wasting. Today’s scenario is much clearer thanks to the 6-digit codes, but certain complexities remain. Many countries, including the USA, require additional classifications. In practice, HS codes can have up to ten digits depending on local legislation and product type.
There are reasons behind such complexity. For instance, each product under a free trade agreement follows specific rules, which must be the same in the countries of origin and destination for the product to get preferential customs treatment, such as reduced tariffs. Small details can trigger taxation or even leave products stranded at the destination’s customs.
In other words, HS represents a key step toward the standardization of foreign trade. ‘But it has an Achilles’ heel: countries have a lot of leeways to create tariff items in every category. Countries with closer integration to global trade tend to reduce tariff items (i.e., code variations for each product) to facilitate merchandise flows,’ explains Estefanía Sisatzky, Sr. VP of OPS & Customer Service at Aerodoc Inc, a leading importer of record services firm in more than 160 countries.
“On the other hand, countries with more barriers to international trade or higher levels of red tape tend to create dozens of tariff items for each variation of a single product,” adds Sisatzky, warning that “this creates a major headache for product shippers: getting a product stuck in a country’s customs due to wrong labeling.” For manufacturers and exporters of high added-value products such as laptops, mobile phones, smart TVs, as well as cryptocurrency mining equipment, this can be hard to understand.
Tech imports and exports are quite a challenge, as they are hit by specific restrictions from countries with more protectionist foreign-trade policies. To name an example, tariff items for certain devices – laptops (8517.62), mobile phones (8517.12), smart TVs (8528.72), consoles (9504.50), cryptocurrency mining equipment (8543.70), transceivers (8517.62), and Hard drives (8471.70) – look quite simple on paper, but these HS codes actually have hundreds of thousands of variations, which is why having partners with expertise in this field is essential for correctly labeling those products.
HS versions
HS is reviewed every five years. The latest review took place this year and entered into effect in January, reflecting the speed of technological change. Importer of Record companies needs to keep up with these changes to avoid problems and ensure that their package or product reaches its destination as smoothly as possible. The HS’ latest version is already available for free on the WCO’s database platform: www.wcotradetools.org.
The latest edition introduces important changes, with 351 sets of amendments covering a wide range of products moving across borders, including:
- E-waste: HS 2022 includes specific classification provisions to assist countries in their work under the Basel Convention.
- Nicotine-based products and unmanned aerial vehicles: New provisions shall simplify the classification of these products.
- Smartphones: They gain their own subheadings.
- Glass fibers and metal-forming machinery: This section has been heavily amended.
- Multi-purpose intermediate assemblies: there will be more products classified in their own right, such as flat-panel display modules.
KPMG explains that: ‘the new changes affect mostly companies dealing with agricultural, chemical, wood, textile, metal and machinery goods. However, every company dealing goods in cross-border transactions had to identify possible impacts to their database.’
Keep in mind that HS codes are for retail, which can bring its own risks, as any mistake can lead to over taxation and excess duties on a shipment.
Besides, WCO data alone is often not enough for importers and exporters to make HS-related decisions, as it only covers six digits. Before taking action, it is important to see how each country will implement the amendments. As each country has leeway on how to use the records, it is essential to have glocal experts like Aerodoc to know exactly which code to use. Aerodoc tackles the daily challenge of keeping up with how each country updates and uses those codes. We aim to create a perfect match between HS codes and the imports we manage in more than 160 territories.
