Harmonized System: Benefits and Challenges in Product Classification

This report delves into the Harmonized System (HS), an international product nomenclature developed by the World Customs Organization (WCO) to classify traded goods. The HS system is a universal language of economics, essential for international trade, and is used by over 200 countries. The report outlines the two primary classification methods: an algorithm linking HS codes to SIC codes and the use of HS codes for classifying U.S. manufacturing production. It highlights the benefits of the HS system, such as harmonizing customs and trade procedures, and minimizing international trade costs. The report also addresses challenges in classifying parts and accessories, including determining appropriate tariff terms, classifying articles covered by multiple item numbers, and classifying new products. These challenges can lead to incorrect classifications, border penalties, and economic impacts. The report concludes by emphasizing the ongoing challenges in product classification and the need for companies to seek ways to minimize these challenges in an ever-evolving trade environment. The report uses multiple sources to support its arguments.

Running Head: HARMONISED SYSTEM 1
Harmonized System-Nomenclature and Classification of Parts and Accessories
Name:
Institution Affiliation:

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Abstract
Harmonized system is an international multipurpose product nomenclature that was developed
by World Customs Organizations (WCO) to classify the traded goods. It is thus a universal
language of economics and the code for goods, and an essential tool in the international trade.
The harmonized system uses two major ways in the classification of the products which include
an algorithm which provides concordances between ten-digit Harmonized System codes and the
SIC, and the other way is the HS codes and the SIC product or good used for the classification of
United States manufacturing production. This work focuses of revealing how the HS system
benefits majority of the states that have implemented it especially in their trade matters be it local
or international trade. The challenges that surround the classification of parts and accessories in
the goods classification process are real and need to be dealt with accordingly early enough
because these affect the international financial and the economy of the country and these effects
are strongly felt especially on the economy of the region.
Introduction
Harmonized system is an international multipurpose product nomenclature that was
developed by World Customs Organizations (WCO) to classify the traded goods (WCO, 2017).
The parts and accessories are products of metallic in nature. For instance, when referring to
automotives are the non-essential parts that add to the functionality of the automotive according
to (World Customs Organization, 2017). Goods like the parts and accessories must always be
classified under a specific tariff by choosing the item numbers that should be accompanied by
language descriptions that are the most appropriate and more specific to that particular product.
The item number that is selected gives the amount of the duty that is to be put on goods. Despite

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the fact that several merchandise descriptions are provided in the available tariff statutes
disputes, do arise in the classification process of goods (HS 2002 Classification by Section
(Classifications, Commodity Codes, Commodity Description, HS 2002, HS code search), 2017).
The conflicts do arise from three major issues that include the determination of the appropriate
tariff term meaning, deciding on the classification of the article that is covered by several item
numbers. These items are more than one, and the final problem that arises in the classification of
goods is the classification of the new product that was initially not in existence now that tariff
was adopted (What is a tariff code?: UPS, 2017). Incorrect classification usually results in the
imposition of border penalties or the seizures and the non-compliance penalties.
Classification systems of Harmonized Systems
In the process of approaching the issues that make the classification of goods a head,
tools have been provided to improve the data that exists in two major ways (Harmonized
Commodity Description and Coding Systems (HS) (Classifications, Commodity Codes,
Commodity Description, HS, HS code search, WCO), 2017). An algorithm which provides
concordances between ten-digit Harmonized System codes that are used in the classification of
goods in the international trade in the United States and SIC industry codes to classify the
economic activities which are domestic. The other concordance is that between the HS codes and
the SIC product or good used for the classification of United States manufacturing production.
Importance of the Harmonized system
200 countries and more as the basis for the customs tariffs and the purpose of collection
of the international statistics of trade use the HS system, and more than 98% of the merchandise
in the international trade uses the HS as the classification terms. The other benefit of the HS

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system is that it contributes positively to the harmonization of the customs and the trade
procedure, as well as non-documentary trade interchange of data in connection with the
procedures and therefore minimizing the costs that are related to the international trade
(Harmonised System 2012, 2017). Harmonized systems are used by the private sector,
international organizations and the government for the purposes that include trade policies,
internal tax, origin rule, controlled goods monitoring, freight tariffs, price monitoring, transport
statistics, economic research as well as analysis.
Challenges encountered in the classification process of parts and accessories for companies
Harmonized system classification is not always simple and easy, as it appears when
people talk about it especially when it comes to the classification of the parts and accessories
during the process (Memorandum D10-0-1 - Classification of Parts and Accessories in the
Customs Tariff, 2017). The first challenge that is encountered in the classification is deciding on
the classification of the article that is covered by several item numbers more than one. For
instance, when it comes to the classification of the automotive parts, they are not classified under
the 87.08 heading that provides for the parts and the accessories of most motor vehicles of 87.01
to 87.05 headings (Concepts and basics of Harmonised or HSN Codes for GST, 2017). The
automotive parts are instead classified as furniture articles under the 94.01 headings that provides
for the seats whether they are convertible to beds or not, and specifically, they are put under the
9401.20 subheading, which provides for the seats of that kind used for the motor vehicles.
Because of this, the classification of parts and accessories becomes so challenging.
The classification of the new product that was initially not in existence now the relevant
tariff was adopted is another big issue that surrounds the classification process. This might be

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due to the inadequate description that is present on the invoice and the supporting information
that can help in the whole process of the classification of the parts and accessories (HS 2002
Classification by Section (Classifications, Commodity Codes, Commodity Description, HS 2002,
HS code search), 2017). Some resources might also be limited or unavailable for instance
technical information, literature, as well as the classification data among others.
Categorization of the relevant stock keeping units (SKUs) to facilitate the decision-
making process with respect to forecasting and stock control and to help the managers to focus
on important SKUs is yet another challenge. Despite the fact that this is a great challenge in the
classification, it has been overlooked and it contributes significantly to the increase in the
availability of the parts and accessories thus reducing the inventory costs (Harmonised System
2012, 2017).. The determination of the appropriate tariff term meaning is another big challenge
that companies do face in during the classification of the parts and accessories because they need
a specific tariff for the particular product by choosing the item number (World Customs
Organization, 2017). The item number that is selected is the one that gives the amount of the
duty that is to be put on goods.
Conclusion
Besides the customs tariff codes constituting the international trade language, they are
used commonly for domestic taxes purposes like the sales and the consumption taxes of the
company. In the current complex environment surrounding trade, classification of products
remains to be a big challenge for majority of the companies, and this is because new products are
being developed on a daily basis and their classification is becoming very difficult. Companies

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shouldlook out for new ways through which these challenges may be minimized to cut on the
costs.

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References
Concepts and basics of Harmonised or HSN Codes for GST. (2017). Gst4u.in. Retrieved 6
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What is a tariff code?: UPS. (2017). Ups.com. Retrieved 6 October 2017, from
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