Why governments and Customs continue to need their own classification system for goodsBy Gael Grooby, Deputy Director, Tariff and Trade Affairs Directorate, WCO
The WCO’s Harmonized System, or HS, is a vital element of Customs. But classification systems are common, so what makes a specialized Customs classification system so important that Customs administrations continue to put much work and time into having their own classification system? The HS does not just classify goods based on what they are; it classifies goods to meet the needs of governments and Customs alike.
There are a multitude of classification systems in use: SITC, CPC, CPA, NAPCS, NICE, GPC, GHS, and ATC. Between international, national and private classification systems, any acronym you can think of is likely to be a classification system for goods somewhere. Any particular good may be classified in multiple systems, and will have numerous codes to represent this from part numbers to disposal codes. The multitude of systems are testimony to the usefulness and ubiquity of classification.
Some of these systems are regulatory in nature: they exist in order to apply conditions. Some are commercial: they exist to facilitate marketing, inventory or other aspects of commerce. Others are statistical: their entire purpose is to provide data for analysis. With so many systems, what makes the HS special for Customs administrations? The answer is clear: it is created by, and exists for, Customs.
Purpose and evolution
The purpose of the HS is to be a practical tool for the implementation of governmental policy. While it has been increasingly used by industry and academia due to its role in collecting trade data, it is built and maintained so that governments can know what is crossing borders. That information is used to implement an incredibly wide range of policies. Regardless of whether the policy relates to revenue, trade, security, public health, environment, industry or any other aspect of government, if the import or export of goods is part of it, then the HS comes into play in its implementation. From duties to support revenue or give effect to trade agreements through to identifying imports and exports of restricted or monitored goods, the HS has a direct and intrinsic role in many governmental programmes.
It is also the instrument for most trade agreements, ensuring a common understanding of goods among the parties to an agreement. Through its provision of data for statistical analysis, it has an indirect, but essential role in many more policy areas. Some HS updates are specifically made to assist industry, but again this is in line with the role of governments in developing policy for economic development and industry assistance. Its priority is policy, not commerce. In particular, it enables Customs administrations to carry out their functions. If they have to monitor, report, regulate, stop, inspect or collect revenue on any subset of goods, the HS, and the domestic tariff subheading added on to it, are used. Customs controls the update and evolution of the HS so that it continues to serve this purpose.
Some classification systems do not need to cover all goods, such as those targeting a specific sector (e.g., regulatory classification systems for chemicals or pharmaceuticals), and others are only interested in goods with certain attributes (e.g., dangerous goods or parts). Moreover, some classification systems are linked to another system; being only for goods using that scheme, and are not universal, such as the Global Product Classification system (GPC) for the types of products that are assigned Global Product Identifiers (GTIN).
For Customs however, if a good arrives at a border as part of a legitimate trade transaction, even if it is a brand new invention, never seen before, Customs must be able to classify it so that they can apply proper legal treatment for the good, including, if required, the collection of duty and indirect tax. For this reason, the HS is designed to cover all traded goods, including those not yet known. In addition to how wide the coverage is, the level of granularity is also an important aspect related to the purpose of the nomenclature. For a commercial nomenclature, it may be very important to have different classifications for “branded outerwear aimed at the 18 to 24 year old female market” and “branded outerwear aimed at the 55 to 64 year old female market,” but a Customs nomenclature is very unlikely to need such a distinction.
Customs nomenclatures may include some divisions that are not of particular interest to Customs, but are wanted by industry or statisticians. However, the level of detail of many commercial classifications would be beyond the ability of people outside a particular industry to competently and consistently identify and use. So, in deciding whether to make a classification because of its usefulness to industry, or indeed in making any classification, a Customs nomenclature takes into consideration the capability of administrations to apply or enforce a classification.
The other aspect in regard to the scope is the handling of residual provisions. In any classification system, there will be the largely invisible goods, i.e. goods classified as ‘other’ or ‘not elsewhere specified or included.’ The number, location and wording of such provisions are important in determining if regulations will be applied to all appropriate products. For example, the requirements for the import or export of non-specified vessels, medical devices, live plants and meats for human consumption are significantly different.
A blanket residual 9999.99 style classification is not appropriate to a regulatory classification system that covers such a broad range of goods. Taking vessels, a single ‘other vessels not elsewhere specified or included’ is not appropriate for a Customs nomenclature as the import/export requirements around passenger and cargo vessels, for example, are generally different from those for recreational vessels. A Customs nomenclature needs far more time spent considering how to treat unknown or low trade goods than most other nomenclatures.
Stability and predictability
The HS is intended as a legal instrument to be implemented in the individual legal systems of its Contracting Parties. Laws are not optional. Therefore, it is vital that changes to the HS are the result of comprehensive consideration and are known well in advance. A new HS edition is a major event for affected industries. Depending on the range of trade agreements and other measures affected and how many reporting systems need to be changed, assessing the impact and getting ready to implement it may take considerable time. Therefore, it is important that sufficient notice be given to those that may be affected.
From a government and administration viewpoint, this is even more important. In any country, creating legislative amendments is generally a long and complicated process. This is not something done, or taken, lightly. Even with a two year lead cycle from confirmation of HS changes to the required implementation date, some countries struggle to implement on time. Another factor is the body of case law that generally evolves in each jurisdiction applying the HS. So, it is also important that there is as much consistency as possible between new provisions and existing provisions in how they are worded and their underlying principles: this enables established precedents and acquired knowledge to be used as a guide, ensuring correct implementation and reducing disputes.
Commercial classification systems are generally only for the benefit of their users. There is little incentive or benefit to misclassifying or trying to construe a classification to mean something other than intended. Unfortunately for regulatory classification systems, they are often linked to measures that users would prefer to avoid. For the HS, these measures may include the application of duties, indirect taxes, dumping and countervailing measures, import or export restrictions, and requirements for examinations or documents. While the majority of traders simply accept that this is part of the legal requirements, there is that minority who will work very hard to confound any intent not in their favour.
In other words, in a commercial classification system, users are usually quite happy to classify an apple as an apple, but in a regulatory classification system, they may go to great lengths to prove that an apple is classified as a pear. This means that a regulatory classification system like the HS, needs to have classifications that can withstand challenge and misuse, even when translated into different languages and under varied jurisdictions.
As a result, the wording of regulatory classification systems may seem somewhat strange in comparison to the more natural language of some commercial systems. Their structure can look too complex, and the number of rules and conditions can seem ridiculous. Sometimes it can feel as if they are being deliberately difficult. The reality is that this formality, complexity and pedantic wording is just an unfortunate outcome of the litigious nature of classification. It is harder to argue in court that you were legally correct in importing a ‘Panthera Tigris Altaica’ under a provision for ‘Felis Catus’ than it is to argue that a Siberian tiger is classified as a cat.
Given their different roles, multiple classification systems are necessary in the trade world. The HS is not going to give you sufficient information to do something like classifying your parts inventory so that customers can locate the right part, and, as discussed earlier in this article, commercial classification systems are not designed for regulatory purposes. In addition, usually they are far too specific and detailed for officers trying to effect the timely facilitation of cargo. Generally, Customs administrations are not overly concerned if your shovels are round points or square points and they are certainly not in a position, at the wharf side, to make a determination whether butter is ‘organic fair-trade.’
However, having system administrators working together creates a better trade environment. Creating correlations between major commercial and regulatory systems is of great benefit: particularly for manufacturers and traders who can increase their understanding of their products’ positioning in a system like the HS through their places in the more familiar and industry-specific systems they work with. For a trade regulation system like the HS, one of the largest benefits is increased knowledge of what is important in the industry sectors and how the differences between goods are defined. As one of the goals of governments is to support trade, the goal of the HS, within the practical and regulatory constraints on governments and administrations, is to assist industry in both facilitation and statistical information.
Growing through adversity
Having introduced a few of the issues and problems that the HS faces, it is hoped that readers will appreciate more why the HS is so remarkable, and why it is an absolutely essential tool for Customs administrations to do their work. And yet within the congratulations, a note of caution needs to be sounded. Trade is changing: distributed manufacturing and global value chains, integrated products, faster innovation, and product development time. In many ways trade has outstripped the ability of regulatory systems, including the HS, to keep up.
Furthermore, as a system ages the attacks on its integrity generally grow in sophistication and variety. The number of contradictory legal judgements on the same provisions shows some of the ambiguities in the system that are vulnerable to exploitation. So, just because it has been a good system for many years, this does not mean the HS is immune from the need for improvement and rejuvenation. Rather, the Customs community simply needs to ensure that it keeps the purpose and strengths of the HS in focus during any review.