Understanding the global classification system - what traders need to know

Making certain that imported goods are classified correctly is an essential task for any international trader. This ensures that you're paying the correct tariffs and duties when items are brought into a country or territory, and that you're in compliance with any local quotas or other import restrictions.

Failure to classify products correctly can mean businesses end up paying incorrect duties on entry to a country. Using the wrong codes can also lead to financial penalties and delays at borders as goods are held until the correct codes can be applied. In some cases, goods may even be seized or import licenses revoked, so it is important to get this right.

What is the Harmonized System?

The global classification systems aim to streamline this activity by offering a consistent process for imports across multiple territories. This should cut down on confusion and duplication and ensure all products follow the same guidelines. This can address issues such as different people within a business reaching their own conclusions about exactly how a specific shipment should be categorized.

To solve potential inconsistencies within global classifications, the majority of countries use the Harmonized System (HS) to manage their classification process. Developed by the World Customs Organization to solve the problem of each nation having its own unique classification system, the HS is used by over 200 countries and territories, accounting for 98 percent of international trade.

More than 5,000 commodity groups are covered by HS, each with a unique six-digit code arranged in a clear, consistent manner. Some countries then opt to add additional numbers to this to further categorize items. The US, for example, adds four more digits to the code for greater clarity.

Processes for classification for US importers and exporters

For businesses moving goods to and from the US, there are three standard classifications that may apply. As well as the Harmonized System, there is the North American Industry Classification System (NAICS), and Standard International Trade Classification (SITC).

The US' implementation of the HS includes commodity classifications in two publications, one for exports and one for imports.

For exports, the US uses a ten-digit code known as a Schedule B number, which incorporates the HS number as the first six digits. This results in approximately 8,000 commodity classifications. For imports, the required classification can be found in the Harmonized Tariff Schedule (HTS).

If businesses are unsure which Schedule B number applies to their items, the Census Bureau offers an online search tool to help. For items that are difficult to classify, firms can turn to the Customs Rulings Online Search System (CROSS) database. This contains official rulings from other exporters' and importers' requests for Schedule B codes that can be used as guidance for similar products.

Companies working within the USMCA free trade area may also need to use NAICS, which is a consistent six-digit hierarchical coding system that groups items into industries according to similarities in the processes used to produce goods or services.

Finally, the SITC is a classification of items entering external trade developed by the UN used for statistical purposes to make international comparisons of commodities and manufactured goods.

Best practices for global classification

Managing these various regulations can be a complex and time-consuming process, and one that may be prone to errors if you're still completing these tasks manually. Therefore, in order to ensure compliance with customs regimes around the world, it pays to invest in global trade management (GTM) software such as MIC's Central Classification System (MIC CCS) that can automate and standardize the classification process for you.

As well as this, there are a few key practices that businesses should follow. For instance, a thorough knowledge of all your products is essential, so employee training and a clear, written description of your internal classification processes is a must.

Having a dedicated classifications team, which may include outside experts, who can maintain a comprehensive database of your classifications that is regularly updated is also highly useful.

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