The harmonized system of tariff classification: how it will help U.S. exporters

The Harmonized System (HS) is a multi-purpose international goods classification system designed to be used by manufacturers, transporters, exporters, Customs officials, statisticians, etc. It was developed under the auspices of the Customs Cooperation Council (CCC) in Brussels, Belgium, over a period of 12 years and was approved by the CCC at its plenary session in June 1983. It is based on the Customs Cooperation Council Nomenclature (CCCN), formerly known as the Brussels Tariff Nomenclature (BTN), but is more detailed and contains many new subdivisions to reflect changes in technology, trade patterns and user requirements. If approved by the Congress and the President it would replace both the Tariff Schedules of the United States (TSUSA) as the United States' import code and the Schedule B as the export code as early as Jan. 1, 1987.

If the United States adopts the Harmonized System it will replace the TSUSA and Schedule B through the first six digits, giving us the same export and import code through six digits. It will result in our using the same goods classification system as our major trading partners for the first time. It will provide U.S. exporters with a procedure for raising goods classification disputes they may have with other countries before an international customs council, and it will do all of this while preserving existing judicial rights for all U.S. businesses, whether importers or exporters.

The need to have a common language for goods moving in international trade has long been recognized. An International Economic Congress held in Paris in 1889 recognized the interest of all nations in adopting comparable classifications and uniform vocabularies in Customs tariffs and trade statistics. The League of Nations Draft Customs Nomenclature of 1931, which came to be known as the "Geneva Nomenclature," was one of the earliest attempt to formulate a truly international goods classification system. The CCCN was developed by the European Customs Union Study Group after World War II. It was completed in 1950 and when it entered into force after having been accepted by seven countries it became the first Customs Tariff Nomenclature to receive wide legal acceptance.

Today there are 52 countries that are contracting parties to the CCCN from every continent except North America, and it is used as or forms the basis of the customs tariffs of approximately 100 other countries. Some 75 percent of world trade is classified under the provisions of the CCCN at one time or another when moving in international commerce. The major countries which do not use the CCCN as the basis for their import and/or export tariffs are the United States, Canada, the Soviet Union, East Germany, and North Korea.

The international trading community, both government and the private sector, has for years had to confront diverse classification systems covering good moving in international trade. This has complicated the preparation of documents, hampered the analysis of trade data, created uncertainty in the negotiation and interpretation of trade agreements, impeded the development of standardized forms, and slowed the use of electronic data processing in international transactions. The use of one common system could go a long way towards obviating the problems caused by this multiplicity of classification systems. And, of course, being able to use one common system would result in not having to redescribe goods as they move through various classification systems, would speed up the movement of goods and the associated paperwork, and would save time, thereby saving money. This is the bottom line, for the government and for the private sector.

Origin and Development

of the Harmonized System

In June 1973 the Customs Cooperation Council accepted the recommendations of a Study Group which had been meeting for over two years and decided that it was not only feasible but desirable that work commence as soon as possible on the development of an international goods classification system, and it established a Harmonized System Committee (HSC) to develop the new system.

The Harmonized System Committee was truly an international group, consisting of many countries and international organizations, and this enabled it to take into account the interests of various countries, organizations and industries, in developing the Harmonized System.

Many proposals by the United States were adopted by the HSC and are now found in the Harmonized System. As is the case in most international negotiations, there was some give and take on the part of all parties to the work. There are some headings and subheadings in the Harmonized System which are of little or no interest to the United States. Conversely, there are some headings and subheadings which are of great interest to the United States but of little or no interest to certain other countries. The intent behind the drafting of the Harmonized system was not to restate the Tariff Schedules of the United States or any other classification system but to develop a truly international goods nomenclature which would serve the needs of as many users as possible.

The amount of time and energy expended by the U.S. Government as well as the U.S. private sector in developing and preparing the U.S. comments on the various chapters of the Harmonized system was considerable. The International Trade Commission (ITC) held three separate hearings on groups of draft chapters. Approximately 270 written comments were submitted to the ITC from numerous industries, associations and individuals providing general and specific advice, information and suggestions. Comments were also submitted by various government agencies, including the Departments of the Treasury (International Trade Administration and the Bureau of the Census), and Agriculture (Foreign Agricultural Service). The U.S. Delegations to the Harmonized System Committee Sessions were chaired by U.S. Customs and included officers from other government agencies as necessary, including the Departments of Agriculture and Commerce (both the Bureau of the Census and the International Trade Administration), the U.S. International Trade Commission, and the Office of the U.S. Trade Representative. Experts from the private sector also participated as memebers of the U.S. delegation in the work of the Harmonized System Committee, including the electronics, footwear, glass, paper, steel and textile industries.

The Harmonized System Convention and Annex

The Harmonized System, that is the code itself, is an Annex to the Convention on the Harmonized Commodity Description and Coding System. The Convention was opened for signature in June 1983 and will enter into force when at least 17 countries have become contracting parties thereto, but not before Jan. 1, 1987. The Convention sets out the obligations of the Contracting Parties, e.g., to use all the headings and subheadings, to apply the General Rules of Interpretation, and to follow the numerical sequence of the system. The Convention also provides for the establishment of a Harmonized System Committee to aid in the aplication and interpretation of the system by studying classification issues nd making recommendations regarding the classification of goods in the system; proposing amendments to the Convention based on the needs of users and changes in technology or trade patters; and furnishing information or guidance on any matters concerning the classification of goods in the system. The Convention also permits developing countries to accept the system at less than the six-digit level under certain circumstances; specifies that individual countries retain the right to assign the rates of duty to be charged on goods; and provides procedures for the settlement of disputes between countries in the classification of goods under the system.

The Harmonized System, which as previously noted, is the Annex to the Convention on the Harmonized Description and Coding System, is designed as a core system which can serve as an entire goods classification system for a country or, as in the case of the United States and most developed countries, as the basis for an expanded national goods classification system. It is divided into 21 Sections and 97 Chapters, with Chapters 98 and 99 being reserved for national use. In the United States, Chapter 98 will contain special U.S. classification provisions such as those currently found in Schedule 8 of the TSUSA and Chapter 99 will contain temporary legislation, temporary modifications pursuant to trade agreements, and additional import restrictions proclaimed pursuant to Section 22 of the Agricultural Adjustment Act, as amended. As with the present TSUS, it starts with agricultural products and ends with industrial and high-technology products. It attempts to group together all goods of a single industry in a single chapter or group of chapters. It follows the principle of classifying in the same chapter all goods obtained from the same raw materials and arranging them progressively within each chapter, i.e., starting from the raw material and progressing to the finished product. There are exceptions to this principle, particularly where an industry uses a variety of raw materials, such as in the case of textiles. In this case the principle applies to the Section of the Harmonized System, with all Chapters dealing with textiles structured hierarchically within the Section.

Coding of the Harmonized System

The Harmonized System will consist of 1,241 four-digit headings and subheadings. As previously pointed out, developing countries will be able under certain circumstances to adopt the system at the four-digit level, but developed countries adopting it must use all six digits. The first two digits represent the chapter in which the goods are found, the next two digits represent the place within the chapter where the goods are described, and the next two digits represent the international subdivisions within the heading. The United States will further subdivide the 5,019 six-digit international headings into approximately 8,500 eight-digit rate lines, or classification lines, and into approximately 10,500 ten-digit statistical reporting numbers. This represents an increase in rate lines of about 1,300 and a decrease of about 3,200 in the statistical reporting numbers from the present system.

The Harmonized System Convention also obligates its signatories to use the six-digit system for reporting export trade. This means that the United States' import and export codes must be the same at least through the first six digits and that, for the first time in our history, the United States will be using the same classification system through six digits as our trading partners for goods moving in international trade. This should be of tremendous benefit to those involved in international trade.

The U.S. International Trade Commission published a conversion of the Tariff Schedules of the United States Annotated (TSUSA) into the format of the Harmonized System in June 1983. This conversion was reviewed by the Trade Policy Staff Committee, chaired by the Office of the U.S. Trade Representative, and a revised conversion of the TSUSA into the format of the Harmonized System was published in September 1984. The public was allowed 60 days in which to comment on the revised version of the conversion and numerous comments were submitted. Conversion of the TSUSA into the format of the Harmonized System was not intended to affect duty rates either up or down, in the converted tariff. Thus, while a few tariff rate changes were inevitable, every effort was made to keep them to a minimum, also bearing in mind the need to avoid complicating the new tariff.

It may still be possible to obtain a copy of the revised conversion (September 1984) by writing to the U.S. International Trade Commission, 701 E St., NW., Washington, D.C. 20436, or by telephoning 202-523-5764.

The Explanatory Notes

The Harmonized System proper will consist not only of the four and six-digit headings, but Chapter and Section Notes as well as General Rules of Interpretation. All of these will be part of the legal system and will be legally binding in countries accepting the Harmonized System Convention. They must be followed in determining how goods are to be classified in the system, whether it be for export or import purposes. These legal notes and interpretative rules are similar to the Head-notes to the current TSUSA.

In addition to the legal notes and rules of interpretation, there are a number of useful, although not legally binding, aids to interpreting the Harmonized System and in classifying goods therein. The Explanatory Notes, consisting of four volumes totaling over 1,800 pages, are of great importance in understanding the meaning and intent behind the various headings and other provisions of the Harmonized System. While the Explanatory Notes are not legally binding on contracting parties to the Harmonized System, they do constitute the official interpretation of the various provisions of the Harmonized System at the international level by the Customs Cooperation Council and its member countries. The Explanatory Notes are not intended to be exhaustive nor unchangeable and they must always be viewed as supplementing the legal texts.

In addition, there will also be an alphabetical index to the Harmonized System. While it, too, is not legally binding on users, it is a good place to start when attempting to classify goods under the Harmonized System. One unique feature of the alphabetical index is that it indicates not only where a particular product is mentioned in the Harmonized System or the Explanatory Notes, but whether the product is included in or excluded from the heading.

All of the above aids, both legal and advisory, used in interpreting and applying the Harmonized System, apply to the international system in all countries which are contracting parties to the Harmonized System, whether they accept four or six digits. In the United States we will also have additional legal notes and explanatory notes which will apply to the eight and ten-digit subheading unique to the United States. Most other developed countries adopting the Harmonized System will also utilize an expanded Harmonized System and will have their own additional legal notes and explanatory notes to cover almost anything beyond the six-digit international system.

One special feature of the Convention on the Harmonized System is Article X, which provides an international dispute settlement procedure when countries disagree on the classification of goods. This could come into play when a U.S. exporter ships goods to Norway and the goods are not classified by Norwegian Customs under the heading in which the importer and U.S. Government think the goods should be classified. Article X provides that any dispute between two or more contracting parties shall, so far as possible, be settled by negotiations. Any dispute not settled by negotiation shall be referred to the Harmonized System Committee (in which the United States would be a voting member), which shall consider the dispute nd make recommendations. If the Harmonized System Committee is not able to settle the dispute, it shall refer the matter to the Customs Cooperation Council, which shall consider the matter and make recommendations. Thus, disputes between U.S. exporters and the Customs authorities of countries to which their goods are shipped can be taken up by the respective governments and then, if necessary, by the CCC in Brussels. The same applies to goods being imported into the United States where the foreign shipper disagrees with the U.S. Customs classiification. In such instances the exporter takes up the matter with the Customs authorities in his country and they in turn attempt to resolve the issue with other Customs Administration, and failing that, raise it before the Harmonized System Committee and the Customs Cooperation Council.

Judicial Review of Classification Decisions

Notwithstanding the acceptance by a country of the Harmonized System Convention and its Annex, and not-withstanding the dispute settlement procedures contained in Article X, importers and exporters will have the same rights of judicial review they currently have. An importer will still be able to litigate a U.S. Customs classification decision before the U.S. Courts and an exporter will still be able to have his agent in the importing country take the case before the courts of that country in the same manner as now. Adoption of the Harmonized System will neither circumscribe nor enlarge the judicial rights of importers and exporters. The Harmonized System Committee and the Customs Cooperation Council can only make recommedations under Article X. It is up to the individual country as to whether to accept the recommendation. In most cases the recommendations will be acceptable because they will be based on technical considerations and will have been prepared by experts in the particular field. But, in the final analysis, it will be the courts of the country concerned which interpret the provisions of the Harmonized System.

COPYRIGHT 1985 U.S. Government Printing Office
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