A harmonized tariff code is part of the Harmonized Commodity Description and Coding System that was created by the World Customs Organization (WCO). The system was introduced in 1988 and is also called the "Harmonized System." The system uses a logical nomenclature method to categorize goods into approximately 5,000 commodity groups. More than 200 countries use the system to classify goods with a harmonized tariff code. As of August 2010, the Harmonized System was used in more than 98 percent of international trade.
The Harmonized System is arranged into numerical chapters that identify the type of commodity. As of August 2010, there were 99 chapters. A harmonized tariff code contains at least six digits. Many countries add up to four additional digits to identify a particular commodity in more specific detail. This helps nations gather trade statistics, monitor controlled goods and develop trade policies.
An example of how the system works would be an exporter who needs to determine the correct harmonized tariff code to place on documents for a shipment of rear-view mirrors. The first two digits of a code indicate the chapter where the commodity is classified. In this example, the exporter would start in chapter 70, glass and glassware, in which all codes start with “70.” The next two digits relate to a product grouping in the chapter. If a code begins with "7009," it refers to glass mirrors. The final two digits provide even more definition. A code of "700910" is for rear-view mirrors used in vehicles.
One of the main purposes of using a harmonized tariff code is to ensure consistency in international trade. The WCO promotes uniform interpretation of the Harmonized System. To assist importers and exporters in determining the correct tariff code, the WCO publishes a reference called the Explanatory Notes, an exhaustive set of guidelines and explanations. The committee also resolves interpretative disagreements and questions, and it prepares periodic amendments to the Harmonized System and Explanatory Notes.
Countries assign customs duties based on the harmonized tariff code of the product. Import tariffs and export tariffs generate revenue for nations. Countries also use customs tariffs to affect the flow of international goods. Tariffs might be lowered or removed to encourage trade with particular nations or certain commodities. Nations raise tariffs to discourage trade with particular countries as a punitive measure or to protect domestic production of a commodity.