What is Harmonized System

The harmonized system, or as it is more formally known, the harmonized commodity description and coding system, is an international classification system designed to facilitate the collection of trade statistics as well as to assist in the collection of tariffs and customs duties. For decades, individual nations used their own systems for classifying goods and services. Without a universal standard, it was difficult or impossible to categorize correctly merchandise for collecting tariffs, customs duties, or for reporting purposes. To resolve this problem, the World Customs Organization (WCO) developed the harmonized system. In this system, the WCO describes all products through a standardized six-digit harmonized system (HS) code. The six-digit number classifies goods by chapter, heading, and subheading. The United States and other developed countries have added additional commodity codes increasing the number to 10 digits. The system is quite complex; the complete harmonized tariff schedule has approximately 5,000 item descriptions grouped into 22 sections and 97 chapters (the U.S. version has 99 chapters). In addition to customs use, HS codes provide a data set for international market research. HS codes are not the only system for comparing data on industry structure and trade. In the United States, the Standard International Trade Classification (SITC) and North American Industry Classification are also used. For purposes of trade documentation and trade data, however, the harmonized system is the world standard.
History
Prior to the development of the harmonized system, each country maintained its own system. Exporters needed specialized staff whose role was to properly code goods for entry into different markets. Specialty publishers created concordances that linked one country’s system to another. The complexity of the system made it difficult for small companies to trade without employing customs brokers or other intermediaries.
In 1970 a group known as the Brussels Tariff Nomenclature Group published a study that found that a uniform system of coding was both desirable and possible. That original group became the Customs Cooperation Council (CCC) and, with the help of more than 45 countries, implemented the first Harmonized Commodity Description and Coding System. In 1994 the CCC changed to its current name, the World Customs Organization. The WCO engages representatives from its nearly 200 member countries to maintain and update the HS code system and to provide advice and policy recommendations for national customs services.
System Organization
The 10-digit HS code number classifies goods by chapter, heading, subheading, and commodity codes. Each chapter begins with a domain statement that describes goods that are included in the chapter and then goods one would exclude. As an example, Chapter 92 of the code describes musical instruments and accessories. The domain indicates the instruments are acoustic (not amplified), are not toys, would not be considered collectibles or antiques, and do not include any instrument cases. Under Chapter 92 are discrete four-digit headings (e.g., HS 9201 for pianos, HS 9202 for stringed instruments, HS 9205 for wind instruments).
The WCO refers to the six-digit HS code as the subheading a classification that provides more information. If we consider the heading HS 9202 for stringed instruments, we discover that HS 9202.10 describes instruments played with a bow (violin, viola, cello), where HS 9202.90 describes non-bowed instruments (guitars). The last digits help provide very specific information for use with the importing country’s tariff schedule. For example, HS 9202.90.20 informs a customs official that the acoustic guitar in question costs less than $100.
Commodities from the same chapter (same 2-digit HS chapter) can have differing tariffs depending on its country of origin or its value. Consider the importation of guitars to the United States. Acoustic guitars (HS 9202.90.20 00) at a value of less than $100 excluding the cost of the case (HS code, 4202.92.50 00 for cases not made of leather or plastic) have a tariff of 4.5 percent for most countries. If the guitars originate in Mexico or Canada as part of the NAFTA agreement, they enter free of tariffs. If the guitar is more than $100, the HS Code is 9202.90.40 00 and the guitars have a tariff of 8.7 percent (again, zero for NAFTA countries). Electric guitars (HS code 9207.90.00) regardless of price enter the United States from non-NAFTA countries at a tariff of 5 percent. The subtle differences in tariffs are important when you realize that over the past six years, the United States has imported more than $1 billion in acoustic guitars.
Since countries base tariff revenues on imports, most countries have more specific import codes than those for exporters. In the United States, that ratio is about two to one; there are approximately 9,000 export codes and more than 18,000 import codes. To keep from confusing businesses with different exporting and importing codes, the United States calls the export classification system Schedule B and names the import codes the Harmonized Tariff Schedule of the United States. The United States bases all import and export codes explicitly on the harmonized system. The U.S. Census Bureau manages Schedule B while the U.S. International Trade Commission manages import codes.
Research
Market researchers have found HS codes to be a powerful source for international market research. Firms can access publicly available databases like the United Nations “Comtrade” system to track imports and exports for all member countries by four-digit HS code. A researcher can enter an HS code for any country and determine how much of a particular commodity that nation imports. The source of imports provides the researcher with a proxy for competition. While further research is often necessary in many cases this information alone can help firms rank market entry prospects.
In addition to HS codes, researchers employ two other common trade data classification systems: the Standard International Trade Classification (SITC) and North American Industry Classification (NAICS). The need to classify commodities precisely to match tariff schedules can make the harmonized system unwieldy for comparing trade data. The SITC system allows for easier aggregate analysis of commodity trade data. While closely related to HS codes, the SITC classifies data into fewer code numbers than the harmonized system.
In order to manage the economic analysis required by the North American Free Trade Agreement (NAFTA), Canada, Mexico, and the United States jointly implemented the North American Industrial Classification System (NAICS). Unlike the harmonized system that focuses upon trade and customs compliance, the developers built NAICS around a production supply-chain model. NAICS groups businesses into industries based on the processes firms use to transform materials and assemblies into goods and services. The advantage of the NAICS system is that it allows the three member countries to compare information on employment, labor costs, productivity, industry performance, and other measures of political economy. All three systems SITC, NAICS, and HS codes undergo additions and changes to accommodate the exponential growth of new technologies and their related industries.