Warning: Long Post, if you want to skip through to the sections you want, you can always refer to the tables of content section below
We want to provide an all-in-one encompassing guide to the Harmonized System Code (HS Code) or HTS Code.
We plan to articulate this topic by briefly describe what an HS Code is, what sort of trade incentives and tariff barriers are used based on the HS Code, provide a glance at the history of the HS Code, and finally describe the structure of the HS Code and how to classify an article, product or commodity into those HS Codes.
If you are here just to know how the HS Code works or how the HS Code classification works, do skip to that section. Hope this helps!
What is an HS or HTS Code?
We always like to use the analogy of a passport to describe the function of an HS or HTS Code. The first thing a tourist needs when traveling overseas is their passport. Now, what does a standard passport detail contains?
It contains the description of the person, such as his/her name, address, height, weight, age, and among others, the most important detail is the image of the person and where has that individual been. One individual cannot go through customs immigration without a valid passport at hand.
This is very much the same for any article, merchandize, or cargo going through the customs border. It needs a way to identify itself to the customs what it is, and that is what an HS Code is for.
Short for Harmonized Tariff Code, the HS Code has 9 to 10 digits that tell the customs officer what exactly is shipped to-and-fro the country.
Everything animate or inanimate you see in front of you, your laptop, your phone, the bowl of snacks you are eating, the bowl that contains that snack, your pet dog… Even a dead corpse has an HS Code assigned to it.
We will get to how does a HS Code work further below, the motivation that compelled the creation of HS code are:
- To determine what merchandize is coming in and out of a country.
- To impose trade barriers, non-trade barriers or trade incentives on articles or merchandise.
- To collect economical and statistical data of cargos transported.
- To collect tariff tax and duty revenue from cargoes and merchandise transported.
It would not be physically possible for any customs border officer to inspect all the containers coming in or out of the port.
Hence, to ease the customs officer’s job and to speed up the transportation process, the customs implements a declaration policy for exporters and importers to declare the right HS code on the cargo transported, albeit with a level of risk assessment that determines the accuracy of the HS Code declared.
It is a similar situation you would find when you are purchasing an insurance policy, you will fill the proposal form with an accurate description of your health condition, and base on the insurance’s risk assessments, the insurance adjusters will tabulate an insurance premium to charge you, base on in house statistics as a guide.
An HS code also serves as an economic tool for policymakers to impose trade barriers or trade incentives on articles or merchandizes traded. There are a plethora of methods a nation can impose a trade barrier or a trade incentive.
Tariff Barriers come in the form of monetary or non-monetary restrictions placed upon the imported/exported goods or commodities.
Customs duties that are specific to the article or merchandise imported. As we all know, A nation’s economical growth is determined by its Gross Domestic Product (GDP), and international trade contributes a large portion to a nation’s GDP.
Generally speaking, a trade surplus is more desirable than a trade deficit, which means that the nation’s net export is relatively higher than the nation’s net import. Ultimately, a trade surplus will increase the GDP of a country.
Equally important is sustaining local businesses, where a country can keep unemployment rates low and ensure local products are contributing to a country’s productivity.
This is a tight rope that policymakers have to maneuver, a trade surplus or a trade deficit that is too extreme can be destabilizing to the economy.
A Customs Duty can be imposed as:
- A percentage on the invoice value
- An amount per unit of quantity (per kg/per liter)
Non-Tariff Barriers essentially are tools to restrict or promote international trade that does not include any monetary duty or tax imposed on the article or merchandise.
Barriers to trade such as this make the international traders jump through additional hurdles to make the trade. The underlying reason why non-trade barriers are imposed is similar to the reasons that trade barriers are imposed, here are some of the methods a nation utilize as a non-trade barrier:
- Import licenses
- Export licenses
- Import Quotas
- Trade Subsidies
- Trade Embargo
- Trade Restriction
These are the responsibilities of Partner Governing Agencies. Recently, partner governing agencies are a part of Executive Order 13656, which streamlines the Export/Import process for the American Businesses. As part of the “Single Window” concept, the Border Interagency Executive Council (BIEC) was established that involves all partner governing agencies that work hand-in-hand with the U.S. Customs Border Protection (US CBP).
The US Customs Border Protection is the executioner, as they do not have the authority to implement license requirements that other Partner Governing Agencies do. They include:
- U.S. Department of Agriculture
- U.S. Department of Commerce
- U.S. Department of Health and Human Services
- U.S. Department of Interior
- U.S. Department of Treasury
- U.S. Department of Transportation
- U.S. Environmental Protection Agency
- U.S. Consumer Product Safety Commission
Understandably, each partner governing agencies play different roles in regulating the relevant import items, as they work together with the US Customs Border Protection unit to impose import licenses to articles or merchandise.
As an example, for the importation of plant or animal ingredients that could jeopardize the health and safety of the national population, the U.S. Department of Agriculture requires all imports of that sort to have a USDA import permit. Among others, the permits required include:
- Veterinary Service Permit
- Plant Protection and Quarantine Permit
The import permit document is then presented to the US CBP when the cargo is declared for importation.
According to trade.gov, 95% of items exported from the U.S.is free from any export limitations.
For the remaining cargo that requires export permit, the Bureau of Industry and Security (BIS) administered the Export Administration Regulation (EAR) which lists cargos that requires specific export permits.
There is a total of 10 categories in the EAR files which include: –
- Category 0 – Nuclear Materials Facilities & Equipment [and Miscellaneous Items]
- Category 1 – Materials Chemicals Microorganisms and Toxins
- Category 2 – Materials Processing
- Category 3 – Electronics Design Development and Production
- Category 4 – Computers
- Category 5 – Part 1 – Telecommunications, Part 2 – Information Security
- Category 6 – Sensors and Lasers
- Category 7 – Navigation and Avionics
- Category 8 – Marine
- Category 9 – Aerospace and Propulsion
Additional Reading: https://www.trade.gov/us-export-licenses-navigating-issues-and-resources
Under the umbrella of the U.S. Customs Border Protection, the Quota Enforcement and Administration (QEA) is established to regulate the number of cargos that can be imported into the U.S.
Once again, the U.S. CBP website has provided all the necessary information here, that will classify which products fall into the import quota restrictions.
Yes, you’ve guessed it, their imposition of import quotas is strictly based on the HS Code or HTS Code that was declared.
Trade subsidies can be implemented on cargos imported or exported, but it is more likely to be implemented on exported cargos as the country benefits more in general when exporting goods.
A trade subsidy is the opposite of a trade barrier, as it promotes local manufacturers or producers of goods to export articles, merchandizes or commodities overseas.
Concurrently, promoting export subsidies also can serve as a way to reduce domestic sales. It makes sense when a country has a surplus of commodities such as wheat that are perishable, which the country’s population is overproducing to meet local demands.
Trade subsidies also act as a catalyst for business entrepreneurship, which will invariably increase local production, and in turn, translate to a higher GDP.
Trade Embargo and Trade Restriction
Trade embargoes are more motivated by national security and international peace, where they both outweigh the potential economic gain.
A trade embargo is a form of economic sanction that is implemented by an international governing agency such as the United Nations (UN), where any economical trade between the embargoed country with other nations is restricted.
Participating Countries of the United Nation have to comply with the sanctions set by the trade embargo, failure of which will lead to strict penalties for non-compliance.
In recent times, those countries that are currently in the list of sanction regimes are: –
Southern Rhodesia, South Africa, the former Yugoslavia, Haiti, Iraq, Angola, Rwanda, Sierra Leone, Somalia and Eritrea, Eritrea and Ethiopia, Liberia, DRC, Côte d’Ivoire, Sudan, Lebanon, DPRK, Iran, Libya, Guinea-Bissau, CAR, Yemen, South Sudan and Mali, as well as against ISIL (Da’esh) and Al-Qaida and the Taliban.
With a trade embargo and trade restriction, the HS Code or HTS Code is crucial for customs control officers to determine what cargo is transported to those listed countries, and whether those commodities traded are against the trade sanctions and embargoes.
Brief History of the HS Code
In the past, foreign trade statistics weren’t a key concern. There wasn’t a need for a unified method of collecting trade data on an international level. It is not until 1938 where the League of Nations, the first worldwide intergovernmental organization, drafted a Minimum List of Customs Nomenclature.
As time pasts, there is a need for the Minimum List to be structured to reflect an increasingly global trade demand and the need for international statistics.
In 1950, the United Nations drew up the Standard International Trade Classification (SITC), where a corresponding heading of HS (Harmonized System) and CCCN (Customs Cooperation Council Nomenclature Business) is provided.
The SITC classification was adopted by some countries of Latin America, and countries and territories of the British Commonwealth.
At the same time, several other European countries and other visceral countries adopt a different customs tariff nomenclature, that was based on the 1955 Tariff Nomenclature (BTN)
There is a total of four revisions of the SITC codes, each revision with the purpose of adding more items to reflect the traded goods. One of the revisions combined both the BTN and SITC, every revision is adopted by the participating nations of the U.N.
1988 marked a significant year where the SITC was revamped and was replaced by the Harmonized Commodity Description and Coding system, it was tabled during the Revised Kyoto Convention. Some industry practitioners may call it the HS Code, the HTS Code, the HTSUS Code, the HSN Code. All of which are referring to the same nomenclature.
Some also may refer an HS Code to a Tariff Code, while widely accepted as the same meaning, the term “Tariff” has an entirely different meaning, a tariff is referring to a list of duty and tax schedule on applicable items, and the HS Code is a way of identifying which tariff measures to adopt in that country.
Components of HS Code
Now we have learned that what an HS Code is, if not click here to read about it, let’s get to understand the structure, and format of an HS Code.
In totality, HS Code is not merely just item description associated with a numbered code, it comprises Section Notes, Chapter Notes, Headings and Subheadings, as well as the general interpretation rules that guide the process of classification of goods.
HS Section Codes
The section code broadly categorizes the article or products into 21 sections, all HS Code classification process starts here.
Some sections are easily identifiable, for example, articles under Section V: Mineral Products can not possibly be mistaken with articles under Section II: Vegetable Products. Therefore, by process of elimination, we only need to concern ourselves with the chapter headings listed in Section V to determine the proper HS Code.
On the other hand, some articles can be logically placed in more than one section.
For example, if you were to classify “Hair” for transportation, there are 2 applicable sections.
- Section XII: Footwear, Headgear, Umbrellas, Sun Umbrellas, Walking Sticks, Seatsticks, Whips, Riding-Crops and Parts Thereof; Prepared Feathers and Articles Made Therewith; Artificial Flowers; Articles of Human Hair
- Section I: Live Animals; Animal Products
Section XII is for hairs from humans whereas the Section I is to categorize hairs from animal origins.
As you can see from that example, having just a broad description of the article such as “Hair” may not be sufficient, as more information will land the article in an entirely different HS Code classification.
HS Chapter Codes
The front two numbers on the HS Code denotes the is the chapter codes, each chapter code is strongly correlated with the sections that chapter is categorized into.
Within each chapter, a chapter note will be available to describe what products fall into the chapter heading and what does. It also provides definitions of what the HS Codes are describing.
As an example, for Chapter 64:-
Footwear, Gaiters, and the like; Part of such articles.
The chapter note explains that it does not cover disposable foot or shoe coverings, regardless of the material.
Among other things, it also excludes worn footwear, as there is another chapter code that is tailored for that. It describes what “welt footwear” is meant for this chapter.
HS Headings Code
The second two numbers in the HS Codes are the heading code, which further describes an article that falls in that chapter.
There are only legal notes for the sections and chapters provided, from herein, there are no heading notes that will elaborates that heading. This is where we have to determine the most suitable heading that accurately describes the article.
As a rule of thumb, when classifying goods, do not move on further until you are confident that the heading code you chose is believed to be suitable.
The HS Code allocated chapter 64 for footwears, gaiters, and its parts. Heading “03” under that chapter is allocated for “Footwear with outer sole of rubber, plastic, leather or composition leather and upper of leathers”.
In other words, HS Code 6403.xx.xxxx is allocated for leather shoes, and the shoe’s outer sole is made of rubber, plastic or leather.
HS Subheadings Code
We are drilling down to the finer details of the article imported now, similar to the heading code, the subheading also does not have any notes or guidance to refer to.
Once we ascertain that the commodity falls under chapter 6403, we refine our search further by identifying the primary use of the articles imported.
Let’s say we want to look for Golf Shoes, made with a leather-uppers. We glance through the cascading table of chapter 64 heading 03 to reach a subheading number of 19
For HS Code 6403.19.xxxx, although it is not a complete HS Code number, we would have a very detailed view of what it represents still.
With only the first 6 numbers of the HS Code, we know that the article is: –
- Footwear (Chapter 64)
- Made of leather uppers (Heading 03)
- Sports Footwear (subheading 19)
HS Country Statistic Reporting Code
Up to this point, the first 6 numbers of the HS Code is the same internationally, the final 2 to 4 digits are tailored by the local government.
This gives a level of flexibility for local customs officers to tailor its HS Code list to meet local demands, as well as track a specific kind of product or a number of products that the first 6 digit may not be able to.
It could be the case where a specific type of shoe is a country’s major exporting article, and the government is interested to know:
- the average invoice value per pair of shoes
- the quantity exported
- the exporting country
- the name of companies that export that type of shoe
With that in mind, the government can preset a specific HS Statistic Code to track that. Sticking with the shoe example, the U.S. government is interested to know the trade statistics for golf shoes, from there we have a number of HS Codes that we can use: –
- 6403.19.1000 – For Men, youth or boys, made with Welt
- 6403.19.3030 – For Men, youth or boys, with pigskin uppers
- 6403.19.3090 – For Men, youth or boys, made with other material
- 6403.19.5031 – For Women, with pigskin uppers
- 6403.19.5061 – For Women, made with other material
- 6403.19.5091 – Other golf shoes not specified above
Now, this is specifically a U.S HS Code or HTS Code, other countries may not be as interested to track golf shoe trade statistics.
For the EU Nation, we can refer to the TARIC (Integrated Tariff of the European Union) system, there is no specific statistic code that is tailored for golf shoes.
HS Code Classification Guide
First and foremost, classifying articles, and commodities into merely 5000 over classifications of goods may not be as straight forward as it seems. Imagine that everything tangible has to be declared under only one HS Code, it’s not hard to fathom that over 5000 classifications would leave some level of ambiguity in the process of classification.
That is why there are general rules of interpretations in place as a guide for users and licensed customs brokers to classify goods into HS Codes. We will go through each General Interpretative Rule, as well as providing some examples.
Step 1 – Information Gathering
The Information Gathering stage is arguably the most crucial aspect of classifying goods into HS Codes.
A slight misunderstanding of the primary use of the commodity or article imported or exported may result to a high duty tax rate that is unjustifiable or even missing documents such as import permits.
Worse still, it may be misconstrued as a deliberate attempt to misrepresent information declared to the customs.
Hence, a total understanding of what the cargo is will help to determine the most suitable HS Code to apply. We have to know all the descriptive terms of the commodity, its physical attributes, the quantities imported, the material composition of the goods, the chemical characteristics, and most importantly the primary use of the article at the time of import.
The exporter or the cargo owner is the most qualified person to provide the source of documents that will assist to classify the goods. Here are the document sources which licensed customs broker will refer to in order to gather information.
|Invoice and Packing List||Cargo Description and Quantity|
|Commodity Catalogue||Used to determine the article’s primary use/essential character|
|Material Safety Data Sheet (MSDS)||Material components of goods; Chemical classification of goods|
|CAS Number||Directly correlated to the applicable HS code for the chemical compound|
|Ingredient List||List of ingredients in the food|
Step 2 – Identify All Possible HS Code Classification
Here is where we can refer to the HS Code to see all the possible HS Code that is relevant for that particular cargo commodity.
One way of identifying possible HS Codes is with the use of the Alphabetical Index.
For example, you are given all the necessary information for the import of cereal, but before drilling down to the most suitable HS Code, you refer to the Alphabetical Index and you find there are a few possible HS Codes.
As you can see there are several descriptions that a cereal can fall under.
Another great way to hone in on the accurate HS Code is by referring to the top-level Table of Contents of the HS Code.
Recall in this article above that there are 21 sections, 96 chapters, 1222 headings, and approximately 5387 subheadings. Well, sifting through the HS Code from the subheadings level may not be the most efficient way.
The HS Code has systematically categorized the cargos into 21 sections, by process of elimination, we can only look at the applicable section, therefore, forfeiting the other 20 sections that would be irrelevant to the cargo commodity.
At this point, the section notes and chapter notes are very important, to determine which chapter, heading, or subheading is the most suitable HS Code.
Let’s refer back to the example of Breakfast Cereals as an example, there are 2 possible sections that is relevant to breakfast cereal, we had ascertained that using the Alphabetical Index such as above: –
- Section II: Vegetable Products – Chapter 10 Cereals
- Section IV: Prepared Foodstuff; Beverages, Spirits, and Vinegar; Tobacco and Manufactured Tobacco Substitutes – Chapter 19 Preparation of Cereals, Flour, Starch, or Milk; Bakers’ wares
For Section II, Vegetable Products, Chapter 10 we can refer to the chapter notes to gain more insight into the chapter classification: –
And for Section IV, Chapter 19, the chapter notes are: –
Judging from the chapter notes, we can conclude that the HS Codes under section II chapter 10 are specific to raw cereal such as wheat, or grains that haven’t been processed, whereas HS Codes under section IV are specific for processed foodstuff that is made of cereal.
By process of elimination, for the importation of breakfast cereal is more suited for chapter 19 under the section IV.
Step 3 – Refer to the General Interpretative Rule
The General Interpretative Rule sets a guideline on how the HS Code is applied. First and foremost, we need to know that the GIR is applied in a hierarchical fashion. Meaning, if you cannot classify the HS Code with GIR 1 rule, we can move on to GIR 2. If GIR 2 cannot satisfactorily classify a HS code, we move on to GIR 3, and so on…
General Interpretative Rule 1
GIR1 stipulates that “Classification shall be determined according to the terms of the headings and any relative Section or Chapter note.” And the complementing tables of content, index, titles of sections and chapter notes are for ease of reference only.
In other words, the GIR 1 method of classification is generally what we have described above, which requires us to refer the commodity to the section notes, chapter notes, heading, subheading, and finally the statistical code to derive the suitable HS Code.
Most of the HS Code can be ascertained with GIR 1, but if we still come to a conclusion that we can use more than 1 HS Code, we will have to move on the GIR 2 to gain more clarity.
General Interpretative Rule 2
GR2 – “any reference in a heading to an article shall include a reference to that article incomplete or unfinished, provided it has the essential character of the complete or finished article at the same entry. In addition, reference in a heading shall include relevant articles unassembled”
General Interpretative Rule 2 helps to classify articles that is not the finished good, chiefly unassembled parts.
General Interpretative Rule 2a
Parts that are to be classified under GIR 2a requires an understanding of the article’s “essential character”.
An unassembled bicycle that contains all the necessary parts retains the “essential character” of a bicycle. Determining the nature and the intended use of the article at the time of import or export is important to lend some insight to affix the “essential character” of the article.
Articles that come unassembled, such as the unassembled bicycle, do not require an HS Code for each individual part such as the pedals, wheels, gears, seats, etc.
So, if a bicycle is imported, where the wheels of the bicycle are packed separately in the same shipment, the “essential character” of the bicycle is still apparent, there is no other discernable purpose or unintended use for that unassembled bicycle.
Therefore, the appropriate HS Code under GIR 2a will be the HS Code for bicycles.
In contrast, the unassembled wheel of the bicycle can be classified with GIR 1 rule, consequently, we need to place a separate HS Code for bicycle wheels during customs declaration
Essential character looks to the nature and the intended use of the article.
Other factors determining “essential character” include (especially when an article is a combination of function): –
- Nature of the material or component
- The primary use of the article
- Quantity, weight, and value.
- Role of a constituent material in relation to those goods.
- The “attribute” which strongly marks or serves to distinguish what the article is.
- The attribute which is indispensable to the structure, core, or condition of the article.
General Interpretative Rule 2b
GIR 2b – “any reference in the heading to the material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material. The classification of goods consisting of more than one material or substance shall be according to the principles of Rule 3.”
In simple terms, if the article transported is either:
- Mixtures or combination of mixtures
- Part of or whole of any given material
Then, GIR 2b states that you have to consider all relevant headings that may be suitable and move on to GIR 3 to determine an HS Code.
It is not a classification rule per se, GIR 2b rule is more of describing the criteria for you to move on the GIR 3. We can gather a list of relevant HS codes with the use of the Alphabetic Index that we prescribed above.
General Interpretative Rule 3
It is given that, by the application of GIR 2(b) or for any other reasons goods are prima facie classifiable under two or more headings, classification shall be as follows:
- The heading that provides the most specific description, unless it refers to only part of mixed substances or part of the item put off in sets for retail sales.
- Mixtures, composites and goods put up in sets for retail sale which cannot be classified according to the heading with the most specific description are classified as “if they consisted of the material or substance which gives them their essential character”.
- If the goods cannot be classified according to (a) or (b) then classify them in the heading that occurs last in the HTSUS code.
In GIR 3(a), the higher the requirement for the product to be described under that HS Code, the more specific the HS Code is, therefore the product that meets the higher requirement is the more suitable HS Code.
In GIR 3(b), if GIR 3(a)’s rule of specificity is not enough to determine the HS Code, we need to revert back to the “essential character” and “primary use” criteria. Whether there is a mix of chemical composition or a combination of products that forms a kit such as a medical kit, we still need to refer to the “primary use” of the article.
For GIR 3(c), if still, we cannot reach a conclusion of which HS Code to use, we will refer to the HS Code that occurred last, as an example, if HS Code 0407 and 0408 are both equally suitable, we will use the 0407.19.0000 HS Code.
General Interpretative Rule 4, 5, 6
GIR 4 – Goods which cannot be classified under GRIs 1-3 are to be classified in the heading subheading applicable to the goods “To which they are most akin”
Which means that if the article or goods do not have a HS Code to refer to, we will use the HS Code that has the closest approximation of the “essential criteria” of the goods.
GIR 5 – Cases “specifically made or fitted” for an article, “Suitable for long term use” and imported with the article shall be classified with the article unless the case or containers provides the article “essential character”
GIR 5 is more for classifying HS Codes for packing materials and containers. Packing materials and containers are classified with the article (camera cases, violin cases) “if they are normally of a kind” for packing such merchandise, unless they are stated “Clearly suitable for repetitive use” (food containers).
GIR 6 – Classification of merchandise determined according to the terms of the subheading and section, chapter and subchapter notes.
Insofar, GIR 1 to 5 are used to determine the first 4 digits of the HS Code, for the remainder of the HS Code, we will repeat the application of GIR 1 to 5 once more.