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HS Code Classification Freeway: Take Your Exit

hs code

HS Code Classification Freeway: Take Your Exit

Since the introduction of the Harmonized Tariff System (HTS or HS) in January of 1988 and its global implementation in following years (for example, in the U.S. on January 1, 1989), classifying products (i.e., associating the tangible product to its related HS code) has been a global party. Used on import (and export) declarations, HS codes identify the duty rates applicable to the specific goods, relate to statistics, give regulators an opportunity to link Anti-Dumping Duties (ADD) and Countervailing Duties (CVD) to products, dictate how to qualify for preferential treatment, and can govern document and license requirements. Quite a laundry list—and that makes the correct HS code classification an important piece of information, especially when using an incorrect classification can lead to penalties and delays upon import.

In the U.S., with roughly 16,000 HS codes to choose from, a customs ruling database for U.S. classifications only (CROSS) that is 206K classifications strong, ongoing changes to import tariffs, and a massive World Customs Organisation-initiated overhaul every five years (2022 here we come), it is no wonder classification is evergreen on trade compliance professionals’ list of concerns that demand a significant amount of attention.

To make it more complicated—although harmonized globally at the six-digit level, local authorities are allowed to differentiate down to a local nth digit (usually eight or 10) and have not been hesitant to do so. For example, the U.S. and European Union both support HS codes that have 10 digits, but few are the same or represent the same products. As import declarations are filed locally, this implies that, for each importing country, a different HS code must be identified and then maintained for any product shipped into that country. Do the math: a product catalog of 50,000 parts that ship to 50 different countries adds up to a solid 2.5 million classifications. Not something to maintain on the back of an envelope—unless it’s a really, really big one, erasers are cheap, and pencils are free.

With widely diverse needs for classification (e.g., from a B2C ecommerce shipment of two cotton T-shirts that need an HS code for a quick landed costs calculation, to raw materials and semi-finished products for manufacturers, to a single unique import of a $10 million factory engine), it is no surprise that any self-respecting Global Trade Management (GTM) solution or consultant is happy to assist companies in desperate need for those classifications. And no wonder that, since around 2000, numerous software companies have been trying to solve the mystery of auto-classification.

The diversity in the initial reason for classification comes with different parameters for success. For an ecommerce retailer, an autoclassification tool can solve many challenges (e.g., quick returns, high volume of items are immediately classified), but accuracy can be a challenge. A lack of accuracy is not something importers can afford when, for example, the classification determines whether the import is subject to ADD, is heavily restricted from a license perspective, or is subject to quotas. Basically, (auto-) classification is like a freeway and, depending on the exact needs, companies take a different exit.

There are three key components to a successful (auto-) classification project—other than, of course, the hopefully not superfluous statement that a decent amount of classification expertise comes in handy when either classifying or building a tool.

First, the quality of the product description. ‘Garbage in, garbage out’ also applies to classifying. Poor descriptions, lack of product detail, or even incorrect specifications will likely lead to an incorrect HS code with all related consequences. For quality descriptions, product managers or developers may get involved to provide the necessary technical detail as some classification decisions are made based on those elements.

Second, the classification logic. Whether the classification is assigned by a person or a tool, classification logic cannot lack, well, logic. This means many things: rules that decide to classify a piece of clothing that is not gender-specific as textiles for female or male (and the U.S. handles it differently from the EU); rules-based classification that guides the correct classification in a decision matrix fashion; the ability to ignore information not relevant to the classification (e.g., color); or the ability to observe characteristics that may be needed in one case but not for another (e.g., weight), including material compositions that are usually very important. The logic must also account for a way to ‘smart search’, or search across different references to generate results from, such as synonyms, natural language, industry jargon, and even from images. In addition, classification logic means integrating Artificial Intelligence (AI) and Machine Learning (ML) into the application so results can automatically improve, which enhances both the number of items classified and the quality of the classifications without human intervention.

Third, the classification reference database. The classification logic must look to match a description with an HS code not only by matching it with a ‘word in the tariff’ but also with the explanatory notes and, preferably, for broader context a natural language reference. This might include a shipping manifest reference or information gained via access to previous imports and classification repositories of identical products. Regardless, all types of references need to be reviewed before the final classification is determined. The logic is only as sound as the foundation on which it is built.

It’s important to keep in mind that references are also where, as an industry, companies should actually assist one another. Data privacy concerns notwithstanding, there must be a way to ‘crowd source’ references, which could reduce the efforts made and resources spent on classification in sensational fashion—engineering a classification freeway that is even more well-marked and efficient to traverse.

Blockchain

Where Have You Been? Blockchain for Tracking Goods in Trade.

Why is it so hard to track the origin of a diamond, or take longer than we’d like to trace the source of a food safety outbreak? It turns out that we’ve been tracking the supply chain in some really antiquated ways, but that’s about to change thanks to blockchain.

Origins and Travels

The “provenance” of a good refers to its origin as well as a chronological record of its ownership, location, and other important information as it moves along a supply and distribution network.

Many companies are exploring the use of blockchain technologies to help track this information much deeper into their supply chains than previously feasible. A retailer, for example, might require detailed information about materials, components, and ingredients as would manufacturers sourcing from a variety of suppliers.

Using blockchain technologies to track the origins of raw materials and follow domestic and international supply chains can also help meet the increasing demand for consumer information about globally produced goods, providing more transparency and accuracy about a product’s long journey to the store.

How Blockchain Can Help

Blockchain works to track the provenance of a good thanks to digital tokens that are issued by each participant in the supply chain to authenticate its movement. Every time the item changes hands, the token moves in lockstep. The real-world chain of custody is mirrored by a chain of transactions recorded in the blockchain.

The token acts as a virtual “certificate of authenticity” that is much harder to steal, forge or hack than a piece of paper, barcode or digital file. The records can be trusted and greatly improve the information available to assure supply-chain quality.

Blockchain technology can also make the audit process more efficient. The ledger distributes responsibility to the owners of pieces of information while ensuring verification along the way. The transactions are transparent to parties on a permission basis.

Consumers Want to Know

Surveys show that consumers in the United States and around the world are becoming more aware and interested in the origins of the merchandise they buy and the food they consume. Many also want to know how production processes of the goods they consume impact the environment and society.

The Pew Research Center found that 75 percent of Americans are “particularly concerned” for the environment, and 83 percent make an effort at least some of the time to live in ways that protect the environment. Nearly three out of four Millennials surveyed by Nielsen say they would pay extra for “sustainable” products and brands with a reputation for environmental stewardship. When it comes to food products, 71 percent of people surveyed by Label Insight said they want access to a comprehensive list of ingredients when deciding what food to buy.

Sustainable Coffee, Genuine Brand Purses and Conflict Diamonds

Retailers are concerned that brand loyalty is on the decline. But with some products, high consumer demand for product information is associated with higher expenditures, meaning people might pay more for a product they believe is ethically or sustainably sourced or manufactured. Blockchain can be used by companies to verify the claims their customers care about.

Take Starbucks, for example. Since 2004, the company has worked to support farmer livelihoods through its Coffee and Farmer Equity (C.A.F.E.) program. In 2015, they announced that 99 percent of their coffee was “ethically sourced,” complying with a set of principles and practices at each step of the supply chain from farm to cup. Last year, they took traceability to the next level by piloting the use of blockchain to create a transparent and direct connections with tens of thousands of coffee farmers. Customers can now see up close a supplier’s sustainability practices.

Worried your designer handbag isn’t the real deal? The luxury goods industry is seeking to use blockchain to verify the authenticity of its product. Brand name shoes, dresses or purses would have specific codes that retailers and consumers could use to track changes in ownership. Given the decentralized blockchain platform and multiple authentication processes to update the ledgers, fraudulent entries will be nearly impossible. The auditable and tamper-proof records produced through blockchain technology could help combat trade in counterfeit goods, which is a $1.77 trillion problem for manufacturers according to the International AntiCounterfeiting Coalition.

Blockchain is a promising development for the diamond industry, which struggles to prevent so-called “conflict diamonds” from entering their value chains. A United Nations panel reportedly found that 140,000 carats of diamonds were still being smuggled out of the Central African Republic between 2013 and 2015 and traded illicitly to finance armed conflict despite an export ban. De Beers, which controls 37 percent of the global diamond market, reported earlier this year that it was able to track 100 high-value diamonds from mine to retailer using blockchain technology.

Food Safety and Quick Recalls

The Centers for Disease Control and Prevention estimate that each year roughly one in six Americans, or 48 million people, becomes ill as the result of a foodborne pathogen (e.g., salmonella, listeria, or E. coli). Blockchain technology will not necessarily prevent outbreaks but could be used to track their source more quickly and prevent outbreaks from becoming epidemics. Retailers and regulators could use the distributed ledger technology for accurate and rapid information about potentially contaminated food.

Walmart is pioneering the use of blockchain to maintain easily accessible records of food provenance. In a simulated recall, The company was able to trace the origin of a bag of sliced mangoes in 2.2 seconds compared with the 6 days, 18 hours, and 26 minutes it would take using a standard approach of working with suppliers.

Australian exporter InterAgri is experimenting with using blockchain to track the production and global delivery of its Black Angus Aussie Beef. Teaming up with JD.com, a major e-commerce site in China, InterAgri aims to detect and eliminate food fraud such as counterfeit Aussie beef illegally marketed in China. By some cost estimates, food fraud affects approximately 10 percent of all commercially sold food products, creating food safety concerns for the consumer and liability issues for producers.

Coming to a Shelf Near You

In principle, blockchain could be applied to tracking provenance information for virtually any good, from agricultural commodities to luxury goods. Although blockchain technology is still not prevalent or the industry standard, more producers and retailers are exploring ways to track their own supply chains to increase quality assurance and their ability to communicate information about their products to consumers.

It will take trial and error and significant work with suppliers to ensure interoperability and efficiencies, but such experimentation will be essential if the U.S. and global economies are to realize the benefits of blockchain in international trade.

This is the first in a three-part series by Christine McDaniel for TradeVistas on how blockchain technologies will play an increasing role in international trade.

ChristineMcDaniel

Christine McDaniel a former senior economist with the White House Council of Economic Advisers and deputy assistant Treasury secretary for economic policy, is a senior research fellow with the Mercatus Center at George Mason University.

This article originally appeared on TradeVistas.org. Used with permission.