Anatomy of HS Codes.
What are they? Is it 6 digits or 10? Does it matter?
Let’s answer the easy one first — HS codes are six digits. No more, no less.
Now for the difficult questions.
What are HS codes and how did they come about
HS codes came about in 1988 when most members of the World Trade Organization (WTO) adopted a new uniform system of tariff classification called Harmonized System (HS).
The work to get there had begun nearly three decades ago. In 1950, the Customs Cooperation Council had developed a classification system known as the Customs Cooperation Council Nomenclature. However, in a rapidly globalizing world they realized the need to be compatible with more countries and updated to the Harmonized Commodity Description and Coding System which eventually became the much more palatable Harmonized System (HS) codes.
The HS codes system is currently signed by all members of the WTO (over 180 countries) and in use by nearly 200 countries. According to WTO, over 98% of goods in international trade are classified using HS codes. The codes make a whole slew of things much easier to do — apply import duties, collect trade statistics, implement trade agreements and control regulated goods.
Essentially the Harmonized System is the lynchpin of global trade, which is valued at $15.46 trillion for exports alone.
The digits in HS codes
HS codes consist of 6 digits. So why are almost all codes more than six digits? That’s because the universally agreed bit is only the first six digits after which countries are free to attach their own further modifications and clarifications to HS codes. We will come back to that but first let’s take a look HS codes themselves.
What does each digit in an HS code stand for?
The HS codes system has 21 sections covering 97 chapters. Each code consists of 3 pairs. The pairs are referred to as Chapter, Heading and Subheading respectively
The order of arrangement in based on their degree of manufacture. Within each chapter, the headings are also arranged based on the same principle.
Chapters are broad level categories which categorize products by type such as coffee, cocoa, tea or wine. Heading and Subheading provide further specifications of the product.
An illustrative example given by IMF clearly illustrates the complexity of the classification system. Deciding how to classify a drink that is marketed as wine colloquially but is actually a mixture of rum and grape juice (alcohol strength greater than 0.5% volume) involves multiple layers of complexity:
1) First, Chapter Note 3 to Chapter 22 determines what is an “alcoholic beverage” (i.e. a beverage of an alcohol strength by volume exceeding 0.5% vol), and under which headings alcoholic beverages must be classified, i.e. headings 22.03 to 22.06 and 22.08 as appropriate.
Okay! Seems simple enough, let’s dive in.
2) Heading 22.03 for “beer made of malt” can be disregarded;
3) Heading 22.04 covers inter alia “wine of fresh grapes, including fortified wines”. The Explanatory Notes hereto indicate that the term “wine” (cf. GRI 1) refers to a production process. This indicates that a mixture of rum and grape juice is not “wine” for HS classification purposes.
So not fermented means can’t be wine. Maybe the next section is where it’s at..
4) Heading 22.06 covering “other fermented beverages (for example, cider, perry, mead); mixtures of fermented beverages and mixtures of fermented beverages and non-alcoholic beverages, not elsewhere specified or included” can also be disregarded on the basis of GRI 1, i.e. the beverage at issue is not a fermented beverage, nor is it a mixture of fermented beverages or a mixture of a fermented beverage and a non-alcoholic beverage.
Right, so now that we have ruled out almost every drink that sounds remotely palatable, and continuing on with our method of elimination, we arrive at the last category:
5) Finally, that leaves heading 22.08, which is structured as follows: Undenatured ethyl alcohol of an alcoholic strength by volument of less than 80% vol.
Yum! Undenatured ethyl alcohol. Who wouldn’t want to drink that?!
That was the process for one ambiguously named drink. Customs brokers, logistics companies and retailers have to categorize such mixed goods constantly.
The best part? HS codes aren’t the end of it. Then there come HTS codes.
What is an HTS code?
HTS code is the US specific extension of HS codes. Many countries append further classification digits to the right of HS codes to add their own classification levels.
The implications for global trade is that even though your supplier might provide the correct HS codes, if they are based overseas, say China, then they have most likely provided Chinese HS codes which would need to be converted to HTS codes during import into the United States.
Are there other codes?
Oh yes! There are many more. European Union uses its 8-digit CN (Combined Nomenclature) and 10-digit TARIC codes. China has 13-digit HS codes and Indian HS codes are called the ITC-HS codes (ITC standing for Indian Trade Clarification).
Understanding the complex world of HS
Navigating the complex world of tariff codes in a rapidly changing legislative landscape is a tough proposition. Customers expect international shipping to be faster and faster while the regulations only seem to get more volatile.
Semantics3 has been working on solving a part of this complex problem with AI.
To learn more about how our engineers are coming up with a solution watch Ramanan Balakrishnan’s excellent talk — A study in classification.
Looking for automated HS codes classification solution? Checkout our Categorization API here.
Published at: August 02, 2018