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The Role of the Harmonized System in USMCA
On: March 25, 2016 | By: Sue Senger | 7 min. read
The United States-Mexico-Canada Agreement (USMCA) provides preferential tariff treatment on goods originating in and traded among the three North American countries. The process for determining whether or not goods "originate" and therefore are eligible for duty-free entry depends on the Harmonized System (HS) number.
With USMCA, or any free trade agreement, using an incorrect classification number creates a domino effect.
If an incorrect classification number is assigned to the product and incorrect rule of origin be applied:
- The product will be qualified incorrectly.
- The exporter’s certificate of origin will be prepared incorrectly.
- The goods are entered into another country under an incorrect classification number.
- Border customs may dispute the number.
- Import clearance delays may occur.
- The buyer may incur additional costs.
- The importing country may begin an investigation.
- Goods may be denied preferential duty treatment.
- Penalty action may be taken.
A study of the Harmonized System is required to properly classify the products exported, the materials or ingredients used in production and to apply the correct USMCA rule of origin.
The Harmonized Commodity Description and Coding System is a multipurpose internationally recognized numerical coding system intended to describe and classify goods in international trade.
The Harmonized System consists of:
- General Rules of Interpretation (GRI’s)
- Section and Chapter Notes
- Heading and subheading Descriptions
Six general interpretive rules (GRI’s) govern classification in the Harmonized System. These rules provide a methodical approach to classifying goods and ensuring that products are assigned a single classification number.
The HS classification number consists of 10 digits. The first six digits are called the international level. These numbers are the same for those countries that agree to the Harmonized System. The next four digits are country specific. NAFTA rules of origin for certain products are more detailed and may require eight digits or the national level. Most products are classified to the sixth digit.
For example, let’s look at classification number 7210.70.6030. Each level is identified as:
72 | Chapter Level (Classify to 2 digits) |
7210 | Heading level (Classify to 4 digits) |
7210.70 | Subheading level (Classify to 6 digits) [ International Level ] |
7210.70.60 | Tariff item level (Classify to 8 digits) |
7210.70.6030 | Complete Classification number Use 10 digits when importing into the United States |
The HS number is sub-divided at various levels to provide greater detail and definition of a product than the previous level.
General Rules of Interpretation
The General Rules of Interpretation (GRI’s) set forth the principles of classification of goods in the Harmonized System. At the international level, the system consists of six rules. There is one additional U.S. rule.
GRI 1 through 4 must be applied in order. GRI 5 and 6 apply as necessary. U.S. rules apply as necessary.
The General Rules of Interpretation are found in their entirety on the U.S. International Trade Commission website, and are also found in the beginning of the Harmonized Tariff Schedule of the United States.
Let’s take a brief look at the GRI’s and their meaning.
GRI 1
The titles of sections and chapters are provided for ease of reference only; classifications shall be determined according to the terms of the headings and relative section or chapter notes....
Approximately 75% of all goods are classified under GRI 1. The goods are classified by their name. Make sure you read the sections and chapters notes before you decide on the classification number.
GRI 2a
Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article....
Three types of articles fall into this category:
- Unassembled/disassembled = complete
- Incomplete/unfinished with essential character = complete
- Both 1 and 2 with essential character = complete
GRI 2b
Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances....
This rule relates to mixtures and combinations of materials of substance: composite goods—more than one material.
GRI 3a
The heading which provides the most specific description shall be preferred to headings providing a more general description....
This rule refers to relative specificity. An example would be hazelnut coffee. The specific description would be coffee.
GRI 3b
Mixtures, composite goods consisting of different materials or made up of different components, and goods set up for retail sale, which cannot be classified by reference to 3(a) shall be classified as if they consisted of the material or component which gives them their essential character....
When selling products in sets you must determine what the essential character is of the set. An example would be a box dinner of spaghetti. Included in the box is cheese, spaghetti and tomato sauce. The correct classification number would be the spaghetti as that is the essential character.
GRI 3c
When goods cannot be classified by reference to 3(a) or 3(b), they shall be classified under the heading that occurs last in numerical order among those which equally merit consideration....
An example would be if you were selling a writing instrument that functions as a pen at one end and a pencil at the other. Would you classify this product as a pen or a pencil? Applying this rule, you would classify this writing instrument as the classification number that occurs last in the harmonized schedule. A pencil is classified under 9608.40. A pen is classified under 9608.50. The proper classification would be 9608.50.
GRI 4
Goods, which cannot be classified in accordance with the above rules, shall be classified under the heading appropriate to the goods to which they are most akin.
This rule is infrequently used. It provides an option for a new product that comes on the market that has not been given a harmonized number.
GRI 5a
Camera cases, musical instrument cases, gun cases, drawing instrument cases, necklace cases and similar containers, specially shaped or fitted to contain a specific article or set of article....
When selling a case that is specially made for a product, the correct classification would be with such articles of a kind normally sold therewith.
GRI 5b
Subject to the provisions of rule 5(a) above, packing materials and packing containers exported with the goods therein shall be classified with the goods if they are of a kind normally used for packing such goods.
This rule refers to packing containers that are clearly suitable for repetitive use as with metal drums or containers of iron or steel.
GRI 6
The classification of goods in the subheadings of a heading shall be determined according to the terms of those subheadings and any related subheading notes....
This rule is to expand the general rules of interpretation to apply to the subheading level. When you are classifying goods in a subheading, you are to be guided by the terms of those subheadings and any related subheading notes.
Additional U.S. Rule of Interpretation
U.S. 1a
A classification controlled by use is to be determined in accordance with the use in the United States....
This provision is controlled by “use” determined by the use in the United States.
U.S. 1b
A provision for parts of an article covers products solely or principally used, as a part of such articles but a provision for parts or parts and accessories shall not prevail over a specific provision for such part or accessory.
This rule is often overlooked. When classifying a part, you should classify it by name. Some parts that are goods themselves and classified in their own respective headings are, for examples, pumps, resistors, capacitors, compressors, and transistors.
U.S. 1c
Provisions covering goods of named textile materials cover goods which are of textile materials and which would be regarded as consisting wholly of that named textile material....
This rule is a special textile provision, which predominates by weight.
Apply these rules to your products and you will use the correct classification number. Remember, this is a very important step in qualifying your product for USMCA.
This post was originally published in September 2002 and has been updated to include current information, links and formatting.
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About the Author: Sue Senger
Sue Senger is retired after a long career as an international trade consultant and faculty member at St. Paul College in St. Paul, Minnesota. She taught classes in Business Management, Supply Chain Logistics, Entrepreneurship/Marketing and Global Trade.