Some Code by Any Other Name: Harmonized Tariff System Revisions and How It May Affect Your Export Business

By Scott Goddin & Nicholas Strychacz, Portland US Export Assistance Center

If you are an exporter of software and related high-tech products, you should be aware of recent changes made by the World Customs Organization (WCO) to the Harmonized Tariff System (HTS). Due to advances in technology and global trading patterns, the revisions are to be the most sweeping since the HTS was created, and are scheduled to come into effect on January 1, 2007 (customs authorities will likely require compliance within the first quarter of 2007). For students of this obscure discipline, many of the tech categories will finally be brought into the twenty-first century.

The Harmonized System (also known in the US as Schedule B numbers) are important for a number of reasons: the number is needed for calculating tariff rates, completing the Shipper’s Export Declaration (SED) and other shipping documents, and determining whether a product qualifies for a preferential tariff under a Free Trade Agreement. Companies that fail to take the revisions into account will lead to incorrect classifications that could result in miscalculated tariffs, shipments rejected at customs, and even heavy fines or seizure of shipments – which will cause a deviation from your export strategy, or potentially disrupt your global supply chain. Oregon firms are encouraged to review the revised HTS to assure conformity of their product to the new categories.

The current HTS draft can be found on the US International Trade Commission website (www.usitc.gov). The final version of the revised HTS will be posted on the website at the beginning of February and will also be published in hard copy by the Government Printing Office at that time. The current revised HTS numbers for software and related products can be found in the table below.

Given the complexity and the short timeframe involved, you should plan on devoting significant effort into bringing your export strategy in line with the new regulations. As opposed to previous HTS revisions, which allowed for “one-to-one mapping” (changing entire classification categories instead of individual component categories), the new revisions do not always allow one-to-one mapping. In fact, several digits in many HTS numbers are changed, making the old system nearly obsolete. Exporters whose products require many inputs, then, are extremely disadvantaged. While software developers may not require hundreds of inputs, as do some manufacturers, some time and effort will be required to bring your product into compliance. This process will involve checking your goods and their inputs against the revised classification databases and soliciting new origin certifications.

A recent JPMorgan Chase white paper[1] identified several tips regarding the HTS revision for exporters.

1. Identify the products potentially affected by the changes.
2. Monitor US government updates as they become available.
3. Monitor export market’s government publications for timing and details of changes.
4. Begin reclassification to the extent possible. This will be at least to the 6-digit level, or to the 8-digit level when possible (as in the United States). The US has not yet released the HTS through the 10-digit level.
5. Prepare for the solicitation of certificates of origin for preferential trade agreements under the new numbers.
6. Plan contingencies for the potential late publication of HTS and certificate of origin material.
7. Ensure that adequate staff is available for the additional workload.
8. Develop plans with brokers and freight forwarders in order to handle problems, avoid border delays and prepare for contingencies.

Larger integrated delivery companies such as Federal Express and United Parcel Service have in-house capabilities to assist firms in this evaluation of classifications, but company staff should work closely with these firms since, ultimately, your company is responsible for accurately classifying your products – especially if penalties are to be assessed. Smaller specialized forwarders can also support the classification review and offer ongoing support and assistance with customs authorities.

Beyond this, there are several resources available for exporters needing information on how to avoid the pitfalls that the HTS revision presents. International Business Training (www.i-b-t.net) provides useful advice on the changes. Also, the International Trade Commission has published a document on its website that details the changes. This report includes the list of eight-digit classifications, which should be carefully looked over. The report can be accessed at www.usitc.gov/tata/hts/other/rel_doc/fr/index.htm.

We encourage you to make the most of these resources – as well as the expertise that your firm possesses – as soon as possible. The faster exporters address the potential problems brought about by the HTS revision, the easier and less painful the changes will be.

About the author
This article was co-written by Nicholas Strychacz, a student intern at the Portland US Export Assistance Center (USEAC) and recent graduate of Lewis and Clark College, where he majored in International Affairs. Nick is planning to attend graduate school next year toward a degree in International Economic Policy.

Scott Goddin is director of the Portland US Export Assistance Center (www.buyusa.gov/oregon) and has been working in international trade with the US Department of Commerce for more than 20 years. He works with Oregon and Southwest Washington high-technology companies to develop international markets, specifically helping them to design market-entry strategies; find and evaluate distributors, VARs or agents; evaluate product or service delivery methods; and “internationalize” their companies.

Goddin has served as a US trade negotiator working on Asian market access and standards issues for US high-tech and communications companies and intellectual property rights issues in Korea, Taiwan and China. Goddin also has served in temporary assignments as a commercial attaché at American Embassies in Seoul, Taipei and Nairobi and has managed the office in Portland supporting local Oregon firms since 1997. You can learn more about export assistance at www.export.gov or contact Goddin directly at scott.goddin@mail.doc.gov.