A Harmonized Commodity Description and Coding System (HS Code) is a code used to describe merchandise that is shipped internationally. This code was developed to help identify commodities crossing international borders, to be accurately declared regardless of where they are from and where they are going. HS codes are also used to monitor controlled goods, freight tariffs, quota controls, and trade policies by government bodies and private organizations.
Technically, an HS code can be up to 10-digits long and is unique for each country. However, it is the first six-digits that are internationally “harmonized.” The HS code is a requirement for international shipping and must be included on all shipping notices and invoices. This universal “language” is important because it is used in:
- Custom tariffs
- International trade statistics
- Rules of origin
- Trade negotiations
- Transport tariffs and statistics
- Monitoring of controlled goods
- Areas of Customs controls and procedures
If a business wishes to import or export internationally, they must understand this code to correctly identify their goods, or they could face monetary or legal setbacks.
How Is the HS Code Used?
When products are shipped internationally, a specific tax, called a tariff, is put on the goods. Different goods have different tariffs, and the exported products must be labeled correctly so the business owner pays the correct tariff.
According to the World Customs Organization (WCO), the HS classifies 98% of all international trade. This helps save on the cost of international trade as there is no “translator” needed to read and understand the code. The code is used by various international organizations and governments for tax purposes, trade policies, and economic research and analysis, regardless of the mode of transportation.
This code is used by the WCO, a group consisting of more than 200 countries and is responsible for processing international commodities. They are divided into six regions:
- South America, North America, Central America, and the Caribbean
- The Far East, South, and Southeast Asia, Australia, and the Pacific Islands
- North Africa and the Middle East
- West and Central Africa
- East and South Africa
The WCO was created as an independent, intergovernmental body to enhance the effectiveness of international trade. The group’s priority is maintaining the HS Code and ensuring that all countries are interpreting the codes correctly. Every five to six years, the WCO will update the HS to represent amendments made.
How the HS Code Works
The HS code is organized by economic activity or material and has many segments that identify different commodities. First, the HS is organized into 21 sections, which are then divided into 99 chapters. Then, the codes are further subdivided into 1,224 headings and 5,224 subheadings.
These categories are generally arranged in the order of a product's degree of manufacturing, or complexity. For example, natural products appear first in the code while products that require more manufacturing appear later.
The first two digits of the HS code designate the chapter. The second pair of digits represents the heading, and the third pair represent the subheading. While these numbers try to specify the commodities as much as possible, it can be tricky to find the exact product category. To remedy this, each section and chapter of the HS code is accompanied by Legal Notes, which help to clarify the proper classification.
HS Code Examples
To fully understand HS codes, here is an example:
A business is trying to internationally ship cotton shirts to their customers. To find the code, they would first look under:
- Chapter 62, articles of apparel and clothing accessories
- To be more specific, the shirt is categorized into the 6th heading, meaning it is a woman's or girl's blouse
- Then, it is further categorized by what it is made of, which is the 30th subheading, or cotton
- Therefore, the HS Code reads 6206.30.0000
HS Code Challenges for Companies
Though the HS code provides a universal economic language for goods and international trade, using the correct HS code can be tricky, as an interpretation of the code may vary between countries and customs authorities. The improper use of HS codes could result in the wrong tariff being applied and an increase in import costs to the customer.
Further misusing the HS code could have negative repercussions for a business that imports. If a business was to apply the wrong code, Customs could consider it as non-compliance, misleading, or misdeclaration. All of these considerations come with penalties that can make importing and exporting for a business difficult.
These instances can be seen when sending multiple items as a set. According to the U.S. Department of Commerce’s International Trade Administration, the heading that provides the most specific description is preferred. However, if the package consists of different materials, they must be classified separately. For instance, a candle and a hat cannot be classified together.
Textiles in a set also have their own rules. If the clothing is made out of different materials, each code must show that. While these special circumstances can be tricky, however, there are numerous resources to find the codes, such as:
- The Census Bureau Search Tool
- A consultant at the U.S. Census Bureau Foreign Trade Division
- Local offices of the U.S. Commercial Service International Trade Specialist
- And the Customs Rulings Online Search System database
HS Code and Managing Inventory
Since HS codes must be included on all shipping documents and invoices, it’s important to keep inventory organized to save time and money in the long run. For instance, if a business has a diverse product range, it can be time-consuming to look up every HS code as the products are ready to ship. By utilizing an inventory method that incorporates the HS code, business owners can streamline their shipping process.
One method is to use the supplier’s codes to double-check work. If products were purchased wholesale, suppliers may have classified them already. However, it is important to note that if the product is modified, then it will most likely have a different HS code.
Another method is to incorporate the HS code as an inventory group. HS codes are divided into many categories. If a business organized their inventory by the HS categories, it could make classifying the products much easier.
Business owners can also assign HS codes to items that will be exported. By tracking their assets and understanding which are shipped internationally, owners can increase their inventory efficiency by only assigning HS codes to the products being exported. An easy way to keep track of these assets is by utilizing a digital inventory management solution, which automatically updates and help keep products in an order.
While HS codes seem overwhelming, there are many resources to help business owners choose the correct classifications. There are many benefits to HS codes, though business owners should look at them as a requirement to ship internationally if they wish to expand their business.