Harmonized System Codes: Why Should You Care?

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Properly classifying your products will help your customers avoid nasty delays in customs and help drive your global ecommerce growth. If you want to sell internationally, you simply have to get on board and at least be well aware of the rules and intent. The Harmonized System (HS) was developed by the World Customs Organization in 1988 to improve import/export efficiency. Every item transferred between member countries has a 4 to 10-digit code.

Although implementation the Harmonized System (HS) or the Global Harmonized System (GHS) is voluntary (countries choose to implement pieces of the recommendations), every major player uses a variation of it. This includes all the BRIC (Brazil, Russia, India and China) markets, the Eurozone, Australia, South Africa, and the US. In other words, if you want to go global and drive growth, complying with HS is required.

The first four digits point to a broad category like apparel, the next two digits a subheading like hats. So the first 6 digits are for product classification. To ensure harmonization, businesses from participating countries must employ all 4 and 6-digit provisions and the international rules and notes without deviation, but are free to adopt additional subcategories and notes.

The next 2 to 4-digits denote a tariff code depending on country.1 The last 2 digits are optional and can be added for statistical reporting, if needed, for a total of 10 digits to be listed on entry documents. In the United States, this is referred to as a Schedule B code.2 The level of complexity increases with more sensitive materials such as chemicals, food and plant material.

Why Should You Care?

Do you want to grow globally ecommerce? Do you have a lot of SKUs? Ramping up for global distribution?

If any of those apply to you it’s simply crucial.

Tax and duty is highly variable based on market, with minimums and categories that vary by country (and thus, not harmonized). For example, the US and Germany wouldn’t charge under $200 for a used laptop; but India, on the other hand, has both a per-item Rupee rate and ad valorem (percentage of total price) rate.

Automate, Automate

Third-party harmonization is available, which save retailers time by accessing vendor codes in the cloud, automatically classifying stock and applying tariffs in accordance with International trade agreements. Some of the smarter global ecommerce software also has the capability to recognize forbidden items, either to import or export. In addition, it automatically generates a notification for certificate of origin based on shipment price.

Succinctly, a proper classification in the GHS is hugely beneficial both short and long-term. The upside is increased safety (reduced employee casualty) and compliance with international trade rules (potentially reducing litigation costs).

In the short-term, expect to spend some capital to get rid of old, non-conforming and non-uniform documentation and re-train employees in the new process to properly classify your products. Improper classification in the long-term yields unwanted scrutiny from regulatory agencies and fines that may be levied by customs regulators, but the upside of driving growth through becoming a global ecommerce seller are well worth it.

Restricted Categories

Changes to the global harmonization system (GHS) in 2009 primarily affected the hazardous materials industry. Material safety data sheets are expensive to review and develop. Improving language and signage was absolutely necessary to reduce workplace casualty – and the Occupational Safety and Health Administration estimates $500 million USD in cost savings due to reduced review time. The new legislation is expected to prevent death and reduce injuries, and affects 43 million employees worldwide. OSHA has also revised its Hazard Communication Standards to align with the United Nations’ GHS of Classification and labeling of chemicals.

The Bottom Line

The good news is that manual classification may work well for small businesses with very few SKUs, vendors or target import/export countries. The other good news is that each government provides the required codes for free online, and most have a trade division tailored to answer customs questions. For US businesses going global, for example, additional information, including case studies, are available free and include the US Department of Commerce’s “Prepare Your Business for Global Ecommerce”.

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