Dossier

The Harmonized System, 30 years old and still going strong!

By Kunio Mikuriya, Secretary General, WCO

The Harmonized Commodity Description and Coding System, generally referred to as “Harmonized System” or simply the “HS”, is seldom mentioned in the pages of this magazine. It is, however, one of the WCO’s flagship instruments. One can even say that it is the backbone of the WCO. Being a nomenclature of transportable goods, it has become over the years a universal language for identifying and coding merchandise being traded internationally, with almost all the world’s economies using it as a basis for their Customs tariffs and for the collection of trade statistics.

Governments use it to assess duties and taxes, and for the application of Customs laws and regulations. Businesses use it to manage their trade regulatory obligations, and to oversee their supply chains. Trade negotiators use it when formulating multilateral and regional trade agreements. International organizations working on topics as diverse as food security, environmental protection, and even world security depend on HS coded data to report progress in achieving goals or to monitor trade in goods that are regulated or prohibited.

Although the HS is a technical subject that readers may find difficult to grasp at first, it is a fascinating one. As the HS celebrates its 30th anniversary this year, we decided to gather together a number of articles explaining how the HS is managed and used, and questioning how it can be improved and whether a structural revision is now necessary. In this article, I briefly introduce the history of the HS, as well as its maintenance system, achievements, and challenges, which I hope will be enlightening.

History

The concept of a nomenclature for goods is the outcome of a long process rooted in the ancient world. According to Professor Hironori Asakura of Japan, the first Customs tariff known to us was established by the Customs authorities of the Roman Empire. Roman senators in the oasis city of Palmyra in the Syrian desert invented a system of Customs tariffication, which listed different merchandise with different rates of duty, known as the Customs tariff of Palmyra.

In his book, World History of the Customs and Tariff, Professor Asakura says that, “although Customs duties had certainly existed before the time of Rome, for example, in ancient Egypt and ancient Greece, they had generally been levied at a single rate applied across the board to all kinds of merchandise.” Where a single rate is applied, there is no need for a Customs tariff in which different kinds of merchandise are assigned different rates of duty.

The Customs tariff of Palmyra as well as almost all the nomenclatures in the West that were drawn up before the 18th Century were alphabetical. But in the 19th Century, some countries switched to a nomenclature based on systematic classification. The French Customs tariff of 1822, for example, grouped goods mainly according to their nature (live animals, flours, stone, earth and other minerals, etc.). Thus, the basis of the international Customs tariff nomenclature, developed at a later date, was born.

The post-World War I period marked the opening of the age of international cooperation in respect of Customs and tariffs. A need for the simplification and unification of tariff nomenclatures was seen as essential to improve revenue collection, facilitate trade, and improve trade statistics. The first international Customs tariff nomenclature, known as the Geneva Nomenclature, was developed under the League of Nations, and incorporated the structure of certain 19th Century tariffs, including, in particular, the French tariff.

Later, the drive for economic reconstruction and the desire for greater freedom of trade following World War II created favourable conditions for the standardization of Customs tariffs, and the need for an internationally recognized common goods nomenclature. This resulted in the adoption of the Convention on Nomenclature for the Classification of Goods in Customs Tariffs in 1950, which was strongly influenced by the basic structure of the French tariff and that would also shape various other tariff and/or statistical nomenclatures, such as the United Nation’s Standard International Trade Classification, as well as those that would follow.

Finally entering into force in 1959, the text of the 1950 Convention was initially known as the Brussels Tariff Nomenclature (BTN), but later renamed the Customs Co-operation Council Nomenclature (CCCN). The CCCN gave a set of four-digit headings for international use, but the need for more granularity led many actors to go beyond the four digits in light of the fact that, in some instances, a commodity could be designated up to 17 times in the course of a single trade transaction from the moment it left the manufacturer to its arrival at the importer’s destination. The HS, which defined goods at six-digit level, solved this problem.

Birth of the HS

Early in 1970, it was agreed internationally that the Customs Co-operation Council (now known as the WCO) should conduct exploratory studies around the issue of a new nomenclature. The preparatory work carried out since 1973 resulted, some 13 years later, in the completion of the HS, and the establishment of a new international convention for its implementation. The WCO Council, the Organization’s highest decision-making body, adopted the HS Convention in June 1983, and its Explanatory Notes in June 1985.

On 22 September 1987, 26 countries participated in the signing ceremony, including the European Economic Community (EEC), the forerunner to today’s European Union (EU). The HS finally came into force on 1 January 1988 with 37 Contracting Parties. The number of countries using the HS has continued to grow. Today, it counts 157 Contracting Parties and, if we add the countries and Customs and/or economic unions using the HS while not having ratified the Convention, one can with certainty say that it truly is an instrument of global application.

Maintenance and updates

When a nomenclature remains unchanged, i.e. not taking into account the evolution of technology and changes in consumer habits, there is a serious risk of having difficulties, if not disputes, when classifying products. Only Contracting Parties can take part in the administration and maintenance of the HS and its related materials and propose amendments to the nomenclature. Let me quickly explain how this is done.

To ensure the relevancy of the HS, since 2002 it has been revised every five years to take into account changes in technology and in patterns of international trade. This has served the WCO well, and HS users even more so. Headings and subheadings for which there is a low trade volume would generally be deleted (Gramophones are just one example), but exceptions do occur (records seemed to be on their way out, but the tide seems to be turning as consumers find a new interest in collecting them once again). In addition, newly developed products that cannot be identified in the structured nomenclature are also added, as their trade has to be monitored too.

After being amended six times, the seventh amendment of the HS is currently underway, and will enter into force on 1 January 2022. In this regard, the WCO is extremely busy with its preparations for HS 2022, preparations that not only include a revised nomenclature, but also the revision of all its “help” instruments such as the Explanatory Notes among others. This is no easy task, but I am proud to say that the WCO soldiers on in its usual focused fashion with a view to producing a nomenclature that can serve international trade until the next revision cycle.

Achievements

A lot of work has been done over the past 30 years within the different committees involved in managing this global tool. The undermentioned statistics don’t only speak for itself, they clearly demonstrate the amount of work that goes into maintaining and reviewing the HS:

  • 61 meetings of the HS Committee (HSC) and of its preparatory body the HS Working Party have been held (each of a two-week length, which is a record high for an international meeting), 4,224 agenda items discussed, 10 WCO Council Recommendations on the application of the HS Convention produced, 2,555 classification decisions made, and 906 Classification Opinions adopted to ensure uniform application of goods classification at a global level.
  • 54 meetings of the Review Sub-Committee (RSC) have contributed to maintaining and updating the HS to keep it responsive and relevant to current needs.
  • 33 meetings of the Scientific Sub-Committee (SSC) supported HS work mainly in the chemistry area and in Customs laboratory work.

Moreover, tools and instruments have been developed to assist Customs administrations and traders with the classification of commodities in the HS. Another body of work that demonstrates the complexities of the HS and what is needed to make it continuously work successfully:

  • The Explanatory Notes contain technical descriptions of goods and practical indications for the classification and identification of products.
  • The Compendium of Classification Opinions includes a list of the most significant and/or difficult classification decisions taken by the HSC and adopted by the WCO Council.
  • The Alphabetical Index lists all the products cited in the Nomenclature and the Explanatory Notes in alphabetical order, and includes the legal notes to the section, chapter or subheading in which the product is cited, and the relevant pages of the Explanatory Notes where the product is mentioned.

An online HS Database groups all these tools, and allows users to access information contained therein in an easy and “friendly” way, thereby assisting the classification of goods tremendously.

Joining the conversation

During meetings of the various HS committees, delegates represent their countries and advocate their countries’ views, but I would like to share a remark that one former delegate made to me recently. He said that the committees were also a place to get ideas, and that it was important not only to share one’s thoughts, but also to learn, listen, sit back and try to understand how others think. He mentioned that good conversations that took place during these meetings helped one to become better at what one did, which in turn made one a better asset back home. Indeed, sometimes it even made one change one’s point of view.

Delegations attending the HSC range from those that are active to those that are far less active. Some delegates may feel that they do not have enough expertise to take the floor. To build their capacity, the WCO provides technical assistance to countries, while encouraging them to attend the HSC and actively participate in its deliberations. A sense of pride is instilled when delegates who have benefited from WCO training activities take the floor and express their views with confidence. So while they would have generally remained “silent” prior to the training, now they feel better equipped and more knowledgeable to take part in the conversation at the committee level.

Cooperation

Representatives of intergovernmental or other international organizations and experts from the business world whose participation is considered desirable can attend meetings of the HSC ad the RSC as observers. These stakeholders have helped us to take the HS forward, ensuring that it remains useful and relevant, and that it meets the needs and expectations of the broader Customs and trade community.

Security considerations also recently led to changes in the HS. For example, new subheadings for specific chemicals controlled under the Chemical Weapons Convention (CWC) in order to facilitate the collection and comparison of data on the international movement of these substances were introduced into HS 2017 at the request of the Organisation for the Prohibition of Chemical Weapons (OPCW).

In addition, with environmental issues now being of major global concern, HS 2017 provides new codes for hazardous chemicals controlled under the Rotterdam Convention and for certain persistent organic pollutants (POPs) controlled under the Stockholm Convention.

Furthermore, at the request of the International Narcotics Control Board (INCB), new subheadings have been introduced for the monitoring and control of pharmaceutical preparations containing ephedrine, pseudoephedrine or norephedrine, and for alpha-phenylacetoacetonitrile (APAAN), a pre-precursor for drugs.

Most of the recent changes have been broached by the Food and Agriculture Organization of the United Nations (FAO), and the HS now covers more fish and fishery products as well as forestry products in more detail, enabling the FAO to monitor developments in the area of food security and the sustainability of forest exploitation for example. I invite you to read the article by the FAO on the important role that the HS plays for the organization.

The International Chamber of Commerce (ICC) and the International Federation of Customs Brokers Associations also contributed to this edition, highlighting the challenges emanating from the uniform application of the HS, best practices to enhance compliance, and the way industry can engage on classification matters at the WCO. Let me stress here that HSC decisions are based on technical information, including crucial information provided by manufacturers, but that commercial interest is not taken into consideration.

Challenges and perspectives

The HS is a “living” document. Unlike many international instruments, it has a clear and relatively simple process for amendment to keep it up-to-date and relevant. This type of incremental improvement will, of course, continue. Yet, the expectations of the international trading community remain high for a speedier decision-making process and binding HS decisions to give answers and certainty to business. These two points were examined by the HS Contracting Parties through the High-Level Working Group on HS Matters, but the meetings of the Group yielded no fruitful results.

With a view to speeding up the decision-making process for the HSC by limiting the number of reservations in respect of its decisions, the WCO Council adopted, in July 2017, a Recommendation concerning the amendment of Article 8 of the HS Convention. One WCO Member, however, entered a reservation and discussions in this regard are continuing. If accepted, this Recommendation will go a long way in facilitating the work of the Committee.

Another issue is the consideration of whether the structure of the HS could be simplified and rendered more user-friendly for the business community. On this, I invite you to read the article by the WCO Secretariat that is included in this dossier. It looks at the structure of the HS, its changing uses, whether it is still a sufficient solution, how it can be improved, and whether a structural revision is now necessary.

Ensuring compliance when it comes to the HS is equally important. Having a modern classification infrastructure and accurate HS codes means having reliable information on what is traded internationally. Not only do they inform policy areas as diverse as economics, security, health and wellbeing, political stability and environment and resource management, they are also crucial to risk management.

Moreover, with the help of information technology (IT), we should be able to analyse and use data and information with a scope and sophistication that has never before been matched. And yet the usefulness of that information is dependent on the quantity and quality of data we feed into the process.

One of the key measures for a modern Customs administration is to implement a programme for binding pre-entry classification information to enable the administration to issue advance rulings. Advance rulings are used to enhance the predictability and transparency of the Customs clearance process, and are instrumental in the success of an effective, informed Customs compliance programme.

Through advance rulings, the trader benefits from greater certainty with respect to Customs requirements and any duty liabilities, as well as a greater chance of less Customs intervention. Customs, on the other hand, receives advance information of anticipated transactions that can be fed into its risk management engine.

While advance rulings have been on the WCO’s agenda for many years, the World Trade Organization’s (WTOs) Agreement on Trade Facilitation (ATF) puts a new emphasis on the procedure by introducing an obligation on its Members to issue binding advance rulings on the classification of goods.

In wrapping up, I would like to sincerely thank all the contributors to this dossier, as well as all the other contributors to the magazine who took the time to share with us their experiences on various Customs and trade related issues. It has been our pleasure to produce another edition of the WCO’s magazine, and we trust that you will enjoy reading all the insightful articles.