The Harmonized System

The harmonized system, or as it is more formally$100. Commodities from the same chapter (same
known, the harmonized commodity description and2-digit HS chapter) can have differing tariffs
coding system, is an international classification systemdepending on its country of origin or its value.
designed to facilitate the collection of trade statisticsConsider the importation of guitars to the United
as well as to assist in the collection of tariffs andStates. Acoustic guitars (HS 9202.90.20 00) at a value
customs duties. For decades, individual nations usedof less than $100 excluding the cost of the case (HS
their own systems for classifying goods and services.code, 4202.92.50 00 for cases not made of leather or
Without a universal standard, it was difficult orplastic) have a tariff of 4.5 percent for most
impossible to categorize correctly merchandise forcountries. If the guitars originate in Mexico or Canada
collecting tariffs, customs duties, or for reportingas part of the NAFTA agreement, they enter free
purposes. To resolve this problem, the Worldof tariffs. If the guitar is more than $100, the HS
Customs Organization (WCO) developed theCode is 9202.90.40 00 and the guitars have a tariff
harmonized system. In this system, the WCOof 8.7 percent (again, zero for NAFTA countries).
describes all products through a standardized six-digitElectric guitars (HS code 9207.90.00) regardless of
harmonized system (HS) code. The six-digit numberprice enter the United States from non-NAFTA
classifies goods by chapter, heading, and subheading.countries at a tariff of 5 percent.
The United States and other developed countriesThe subtle differences in tariffs are important when
have added additional commodity codes increasingyou realize that over the past six years, the United
the number to 10 digits. The system is quite complex;States has imported more than $1 billion in acoustic
the complete harmonized tariff schedule hasguitars. Since countries base tariff revenues on
approximately 5,000 item descriptions grouped intoimports, most countries have more specific import
22 sections and 97 chapters (the U.S. version has 99codes than those for exporters. In the United States,
chapters). In addition to customs use, HS codesthat ratio is about two to one; there are
provide a data set for international market research.approximately 9,000 export codes and more than
HS codes are not the only system for comparing18,000 import codes. To keep from confusing
data on industry structure and trade. In the Unitedbusinesses with different exporting and importing
States, the Standard International Trade Classificationcodes, the United States calls the export classification
(SITC) and North American Industry Classification aresystem Schedule B and names the import codes the
also used. For purposes of trade documentation andHarmonized Tariff Schedule of the United States. The
trade data, however, the harmonized system is theUnited States bases all import and export codes
world standard.explicitly on the harmonized system. The U.S. Census
Prior to the development of the harmonized system,Bureau manages Schedule B while the U.S.
each country maintained its own system. ExportersInternational Trade Commission manages import
needed specialized staff whose role was to properlycodes.
code goods for entry into different markets.Market researchers have found HS codes to be a
Specialty publishers created concordances that linkedpowerful source for international market research.
one country's system to another. The complexity ofFirms can access publicly available databases like the
the system made it difficult for small companies toUnited Nations "Comtrade" system to track imports
trade without employing customs brokers or otherand exports for all member countries by four-digit HS
intermediaries. In 1970 a group known as the Brusselscode. A researcher can enter an HS code for any
Tariff Nomenclature Group published a study thatcountry and determine how much of a particular
found that a uniform system of coding was bothcommodity that nation imports. The source of
desirable and possible. That original group became theimports provides the researcher with a proxy for
Customs Cooperation Council (CCC) and, with thecompetition. While further research is often
help of more than 45 countries, implemented the firstnecessary, in many cases this information alone can
Harmonized Commodity Description and Codinghelp firms rank market entry prospects. In addition to
System. In 1994 the CCC changed to its currentHS codes, researchers employ two other common
name, the World Customs Organization. The WCOtrade data classification systems: the Standard
engages representatives from its nearly 200 memberInternational Trade Classification (SITC) and North
countries to maintain and update the HS codeAmerican Industry Classification (NAICS).
system and to provide advice and policyThe need to classify commodities precisely to match
recommendations for national customs services.tariff schedules can make the harmonized system
The 10-digit HS code number classifies goods byunwieldy for comparing trade data. The SITC system
chapter, heading, subheading, and commodity codes.allows for easier aggregate analysis of commodity
Each chapter begins with a domain statement thattrade data. While closely related to HS codes, the
describes goods that are included in the chapter andSITC classifies data into fewer code numbers than
then goods one would exclude. As an example,the harmonized system. In order to manage the
Chapter 92 of the code describes musical instrumentseconomic analysis required by the North American
and accessories. The domain indicates theFree Trade Agreement (NAFTA), Canada, Mexico,
instruments are acoustic (not amplified), are not toys,and the United States jointly implemented the North
would not be considered collectibles or antiques, andAmerican Industrial Classification System (NAICS).
do not include any instrument cases. Under ChapterUnlike the harmonized system that focuses upon
92 are discrete four-digit headings (e.g., HS 9201 fortrade and customs compliance, the developers built
pianos, HS 9202 for stringed instruments, HS 9205NAICS around a production supply-chain model.
for wind instruments). The WCO refers to theNAICS groups businesses into industries based on the
six-digit HS code as the subheading- a classificationprocesses firms use to transform materials and
that provides more information. If we consider theassemblies into goods and services.
heading HS 9202 for stringed instruments, weThe advantage of the NAICS system is that it allows
discover that HS 9202.10 describes instrumentsthe three member countries to compare information
played with a bow (violin, viola, cello), where HSon employment, labor costs, productivity, industry
9202.90 describes non-bowed instruments (guitars).performance, and other measures of political
The last digits help provide very specific informationeconomy. All three systems-SITC, NAICS, and HS
for use with the importing country's tariff schedule.codes-undergo additions and changes to
For example, HS 9202.90.20 informs a customs officialaccommodate the exponential growth of new
that the acoustic guitar in question costs less thantechnologies and their related industries.