WCO Considering Changes to Global Tariff Classification Scheme

An interim report on the potential changes to the Harmonized System, released by the WCO on Jan. 18, includes details on the “state of consideration” of those changes “to date,” the WCO said in a news release issued that day. It “also recognises that there are areas where improvements to the HS could be made to improve usability or extend its capabilities.”

There “is a question as to whether the HS is sufficient for future needs,” the report said. For example, the “strengthening policy agenda in relation to trade and environmental issues, including those related to the circular economy, biodiversity, plastic pollution, and climate change, has led to an increasing demand to monitor and measure specific products.”

Another problematic area -- highlighted during the COVID-19 pandemic -- is identifying “critical goods” such as pharmaceuticals, which can require identifying specific end-uses or value chains and can be “very problematic in establishing criteria for identification at the border.”

Going forward, the HS may need a greater capacity to identify goods more specifically, and the ability to “identify goods using a broader range of non-physical criteria,” the report said. But that’s complicated because the HS is already “troubled by a high frequency of ‘borderline entities,’” or goods that “can be correctly classified in two or more otherwise exclusive classes” or “may fall into different classifications based on different criteria.”

One possibility the WCO is considering is a greater level of granularity though the use of more digits beyond the six-digit level of the current HS.

“For many HS areas, the use of the extra digits would not be needed and would simply add ‘00’ at the seventh and eighth digits,” the report said. However, for areas already under capacity strain or where a high level of demand for divisions is emerging, it would allow the insertion of new subdivisions without major work in restructuring chapters, headings or existing subheadings.

Another is linking the HS with product identification systems like the GS1 Global Product Classification System. Those product-specific systems could then be used by customs agencies in “risk management, strategic trade control and end-use monitoring.”

However, there is currently “no single product identification system that covers all tradable commodities.” And a recent review on the subject found that adding HS codes to GS1 product codes to link the classifications “was not feasible as it was not possible to establish a 1:1 linkage between the GPC and HS,” the report said.

The report also discusses an optional annex to the HS that could be used by countries “to make new national provisions that have wording, and, where possible in their existing structures, numbering, that is consistent” among the countries using the annex. That would also be easier to implement than some other options, the WCO said: “As a non-binding tool, it would not impact on the HS Convention.”

“If used at the end of existing national subdivisions, there would not be consistent numbering and, depending on those existing national subdivisions, the scope may alter even if the wording is kept the same, as the scope of the subheadings above may be different. So, such a tool would be best used directly after the six-digit HS provisions as the 7th and 8th digits to provide for direct comparisons between” WCO members using the annex, the report said. “It could also extend to 9, 12, or even more digits, depending on the level of specificity required.”

The annex “could be particularly useful for environmental, health, safety, or security purposes, where precise classification and regulation of goods are crucial,” the report said.

The WCO also is considering changes to the HS that would make tariff schedules worldwide easier to use.

For example, a survey conducted as part of the review found that about a quarter of respondents rarely used the general rules of interpretation during their classification of goods, while another quarter used them less than half of the time. “More than half of the total respondents expressed challenges in comprehending the application” of the rules.

According to the interim report, the WCO is considering how the general rules of interpretation can be made more visible in terms of physical placement in the HS, as well as “potential means to improve the understanding” of the general rules of interpretation through education and “awareness raising.”

The report also says there is the potential for reviewing the general rules of interpretation themselves “with a view to improving clarity,” though it noted there are “potential risks,” such as that of “new, unforeseen outcomes as courts establish a new body of judicial precedent.”

The interim report also identified problems with the notes to the HS, as many users are “either unaware of the existence of potentially relevant Notes or do not consider them when classifying.”

It said there are 21 notes to the HS that define words and terms that apply to the entirety of the classification scheme, “and these are scattered across various Sections and Chapters.” References alerting the user to the notes are uncommon, the report said.

“There are generally few references to Notes in the terms of headings or subheadings, especially where outside of the Section or Chapter where the Note is located,” the WCO said. “When the definition is outside of the Chapter of the classification a user is dealing with and there is no reference to that Note, this further increases the risk that they will not know that a relevant word or term is legally defined.”

The interim report suggests that “different methods” could be “used to indicate within provisions that a word or phrase is legally defined,” such as through italics, underlining, asterisks or footnotes. It also says references to relevant notes could be inserted in the provisions themselves. And it also says the WCO will consider the “possibilities, advantages and disadvantages” of “grouping either all nomenclature-wide Notes, or all definitional Notes together for easier consultation,” such as at the beginning of the HS nomenclature.

The next stage in the WCO’s review is an assessment of the proposals “to identify feasible strategic proposals,” according to a slide deck the WCO linked in its news release. An initial report will then be presented to the WCO’s Finance Committee before a report is submitted to the full Harmonized System Convention “for consideration and comment,” after which a final report will be presented to the WCO Policy Commission, the WCO Said.