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10 Steps to Help You Adjust to the January 1, 2007, Harmonized Tariff Schedule (HTS) Updates

Every five years, the World Customs Organization updates the Harmonized Tariff Schedule (HTS) nomenclature at the international (six-digit subheading) level. The HTS updates, effective January 1, 2007, are massive. The changes will likely revise your import cost structure and will require significant administrative effort to implement.

If that effort is not timely, it will result in cash flow difficulties and has the potential for increased import cost as well as disruptions in your supply chain.

Accurate HTS code assignment is critical because it determines how a product is taxed when shipped across borders. Manufacturers must be prepared to deal with these changes because key processes such as product classifications, special trade program qualifications, and certificate of origin solicitations will be affected.

Many importers and exporters manufacture products that are comprised of thousands of parts. Will you be able to handle the significant administrative burden required to reclassify products, update your global classification database, and cope with all of the resulting changes to the various preferential trade programs in which you participate? Don’t put it off any longer - the time to do it is now.

The Risks of Waiting

• Large administrative effort: The HTS changes could render your entire database of product classifications obsolete. Many of the individual product classifications will change, and all will need to be reviewed.
• Potential for supply chain interruptions: If product classifications are not reviewed prior to import, the analysis will have to be done at time of shipment. The volume of transactions and the need for research on some items will result in shipment delays and thus can impact your supply chain.
• Revision to import cost structure: HTS classification is the basis for duty rates. The overall change is meant to be rate neutral, but there will be changes to duty rates for individual items, with a resulting potential impact on the overall duty liability for an individual company. Analysis of the HTS changes and the potential for impact will at least allow time for budgeting, and more importantly, the time for any appropriate revisions to the sourcing strategy. In addition, more than 350 preferential trade programs rely on classification for eligibility determination, and in many cases, require supplier certification. Waiting until the new classification structure is in place to qualify products for preferential treatment will result in deferred duty (cash) benefit and may result in loss of that duty benefit.

The Scope of Changes

• Virtually all sections of the HTS (encompassing 83 of the 97 chapters and 240 headings) have changes.
• Many of the changes are intended to eliminate confusing language and have resulted in new subheadings.
• Other subheadings have become more inclusive, thereby removing many product classifications from “basket” provisions.
• Additions, changes, and deletions have also been made to section and chapter notes, resulting in even further product classification changes.
• The national changes involve either reduction or expansion of statistical breakouts.
• Most preferential trade programs’ rules of origin are based on HTS classifications; as such, it is expected that significant changes to these unilateral, bilateral, and multilateral agreements will be necessary.

Impact on Trade

• Industrial and high-technology products (falling in chapters 84, 85, 87, and 90) are heavily impacted.
• While the intent is to make changes “substantially rate neutral,” it is very that duty rates have changed as products are reclassified under the new numbers.
• There is a significant administrative burden to re-research previously classified products to update classification databases applicable to each country and to cope with all of the changes to the various preferential trade programs.
• Depending on when the new data is officially available from each country’s customs administration, changes may have already become effective, leaving little or no time to properly implement them.

10 Next Steps for Importers/Exporters

1. Identify your universe of products potentially affected by the changes.
2. Collect national updates as they become available.
3. Monitor all countries’ government publications for timing and details of changes.
4. Begin reclassification to the extent possible; this is at least to the six-digit level or greater for countries that have already published additional digits (such as the U.S., which has published to the eight-digit level, but not yet to the ten-digit level).
5. Prepare for the solicitation of origin certificates for the various preferential trade programs under the new numbers (taking into account that rules of origin may not be available until after the normal solicitation time next year).
6. Plan contingencies for potential late publication of national HTS and preferential trade program rules of origin (past the January 1, 2007, effective date).
7. Ensure that adequate staff is available to deal with the workload. Consider engaging global trade experts with the systems and knowledge in place to assist with the effort.
8. Communicate with the supply base to make it aware of the issue and request its cooperation in the smooth handling of these adjustments.
9. Coordinate strategy with database administrators to react to possible late changes to ensure timely systems updates.
10. Develop plans with brokers and forwarders to handle problems and avoid border delays.

This article was written by Bernie Hart and was obtained from the May 2006 issue of Managing Imports and Exports.