Logistics Rewired: 2022 Harmonized Schedule Update

Tom Gould: Hello everyone and welcome to our webinar today.

Your questions are only going to be visible to you and to the Flexport team. So feel free to ask whatever you like.

And if you want to know how you can prepare for the Harmonized System 2022 Update, click the link in the chat and that will allow you to download the concordance table, and that's the US concordance table for how to see how your classification codes may have changed. And it will also allow you to get directly in touch with us.

When we're done with the webinar, there will be an on demand version that'll be available after the webinar. So if you missed something, we were recording this and you should be able to see, view that at your leisure anytime after the presentation today.

Now on the legal slide, I'm not going to dig into all the details, but remember that all the information is provided based on the situation, your situation at the time or our situation at the time and it's not customized to your specific presentation. And with that, I guess, I should introduce myself. My name is Tom Gould and I'm the Vice President of Customs and Trade here at Flexport. And Marcus, Adam, you want to introduce yourselves?

Adam Dambrov: Thanks Tom.

Marcus Eeman: Thanks Tom.

Marcus Eeman: Thanks Tom. We're going left to right, right?

Tom Gould: Marcus, you're next.

Marcus Eeman: Yeah. So hi, everyone, my name is Marcus. I'm the Global Customers Manager here in Chicago, in the central region and I've been working quite in depth on this HTS 2022 project to help Flexport get ready for it.

Adam Dambrov: Thank you Marcus. My name is Adam Dambrov, I'm Director of Trade Advisory and our team is helping people get ready for the HS 2022 revisions as well as providing general classification services to our customers and future customers.

Tom Gould: Wonderful. Thank you. And let's see, we're going to cover several things today. We're going to start out by talking a little bit about the World Customs Organization, the Harmonized System. I know that many of you participated in our first webinars. So some of this may be a little bit of review, but we are going to have some additional information for you as well.

And then we're going to talk a bit about what's changing sometime in 2022 and then we'll go over a bunch of examples. Now the examples if you attended our first webinar, we've dug through the data in the changes, and we've come up with different examples to go over with you to really show you more in depth what the changes mean to many products that you may be importing in the near future.

Then we're going to talk to you about how to prepare, how best to prepare for the upcoming change. And finally, at the end, we'll go through questions and answers. And as I said, we have planned, we have set aside questions,and feel free to put your questions in the Q & A, excuse me the Q & A on the right hand side of the screen.

What is the WCO?

Shall we move, there we go. So let's start out by talking a little bit about the World Customs Organization. The World Customs Organization is an independent body. It's not a government agency, but it's an inter-governmental agency with 183 countries around the world that represent somewhere in the neighborhood of 98% of global trade. Their mission is to enhance the effectiveness and the efficiency of customs administrations. And one of the main things that the World Customs Organization does, is they're the ones that publish the tariff schedule. What they publish is the first six digits of the HS schedule, along with the chapter and section notes and the explanatory notes, and really their idea is they want to have a single system that countries around the world can use to exchange data with their customs agencies. So that's a little bit about the World Customs Organization. Let's move on to the next slide.

What is the Harmonized System?

And the Harmonized System as I just mentioned, the first six digits of the harmonized code are harmonized globally. That means that if you're importing a product in one country or exporting a product out of one country and importing it into another country, the idea is that you should be able to use basically the same first six digits, or the same six digit code to identify your product.

So now, if you take a look here, this 6206 10 I think that's a shirt classification for women's blouses. And then if you'll notice, the number is actually a full 10 digit number. Now, the World Customs Organization publishes the first six digits, and it allows each of the individual countries to add on as many digits as they like to make the code specific to their country. So the first six digits keeps the numbers consistent from country to country, and the last few digits allow each country to add specifics to their particular system.

In the US, we use 10 digit, a 10 digit number and many countries around the world use 10 digit numbers, but some will use eight, some will use 12, some will only use the six digit WCO numbers. It's really up to each individual country to make those determinations. And the classifications, as many of you know, determine things like duty rates, they determine how you qualify for many free trade agreements out around the world. They help you to identify other issues with importing things like different government agency requirements, different types of duty rates, like anti dumping or countervailing duties and so forth. Let's move on to the next slide.

Let's talk a little bit about what happens. Oh, I'm sorry, we're gonna do a quick poll first. Can we move on to the next slide with a poll question? So the poll question that we're going to be asking is, because we'd like to just get a little bit of an idea about your process. So the question that we're asking is, who actually handles your product classifications at your company? And we'll share the results with you in a moment.

Are you determining your classifications in-house? Do you have some type of external trade counsel, a customs, a consultant, an attorney or someone like that, that handles your classifications for you? Is it your customs broker that handles it for you? Or are you not sure? And what we'd like you to do is pick whichever one handles the most or the primary, the bulk of your classifications.

So go ahead and select those. And I'm remembering that I have to select it as well, so that I can see. And what I'm seeing so far right now, the poll shows that about 63% of companies handle their classifications internally. That's a good thing, that's a great thing. Something around 25% have their customs broker determine their classifications. Only 9% have an external outside trade council, and 5% are not sure. And I guess that's a good thing that the number is fairly low. Wonderful, why don't we move on. So let's talk a little bit about what is happening in 2022.

What is Happening in 2022?

So the World Customs Organization, every five to six years, they go through a process where they review products that have been imported and exported from countries all around the world. And they look around at what other issues are being used by customs agencies around the world to impact how they do business. In other words, what types of issues are there that companies are using in their import and exports? And what type of information are countries looking for with their imports and exports?

So one of the things that happens is, you'll see that sometimes classification numbers are retired. For example, in the last round, the classification for typewriters was retired. Because there really is no longer any meaningful trade in typewriters. So there's a few classifications that were retired in ‘20, will be retired in 2022. And there will be a bunch of new classifications for new products that will be coming online and we'll be talking about those in just a moment.

And then I think what I'm going to do is, I'll turn things over to Marcus, who's going to talk a little bit about what countries have published their tariffs and some of the examples we'll be going through, Marcus.

Which Countries Have Published Their 2022 HTS?

Marcus Eeman: Yeah. Thanks Tom. So, when we did this last time, two months ago, the only two that were yes, were the United States and Canada. Since that time, we can see some updates have come through, we have the European Union, we have Australia, we have China. They have started to provide their information and you can click on the links if you need to see those tariff schedules.

So, as Tom pointed out every country gets ownership of their own tariff schedule, and they all get to make the determination about how, when, where and in what way do these changes go into place here. Great Britain, we think is still kind of finding their footing after Brexit. And we, you know, we expect them to kind of get their act together before the end of the year, but looks like most of the country is in a good spot for this.

And toward the end of the presentation, Adam actually have a couple of points about what this looks like in the United States, about what that timeline is and who has to approve it, and so forth. But we can go to the next slide and talk about, okay, well, what are some of these changes that we're seeing here.

What Product Groups Are Most Affected?

And so we're seeing most of the changes concentrated in 85. And if you were at the one, two months ago, you might remember this chart still hasn't changed. I think this just is a nice visual representation to see that. Really, we're seeing changes to Chapter 85, we're seeing changes to almost every heading under Chapter 44. Mostly to identify different kinds of wood commodity and wood species being imported and moved around the world, as well as 84 and some changes to the textile provisions as well. We can go to the next slide, please.

Stats: What is The Impact?

So the total impact is we're seeing 351 global updates made at the six digit level, that include 70 new headings and subheadings added. And what that means in the United States is 1500 10 digit HTS codes are being updated in some way. Some of them are purely cosmetic, we're just changing the last few digits. But the meaning of the tariff, the meaning of a classification hasn't actually changed. But many of these changes are more substantive, and that's kind of what we wanted to talk about, with some of the examples that were that we're starting with here.

So on the next slide will tell you about the two main ones that are getting taken out of the tariffs this year. Tom mentioned typewriters were taken out a few years ago.

Examples of Deleted Codes

But coming in 2022, your classification for globes, is being retired, had a good long life, it served the trade community well, but the trading globes is not quite what it used to be anymore. Likewise, telephone answering machines. I still remember when it was a big deal that we got one at our house, we didn't have to just dash to the telephone anymore. And unfortunately, times are changing and no longer have our telephone answering machines necessary. In trade, there's just not quite enough volume to justify specific six digit provisions for a telephone answering machine. Now let's go to the other ones.

Examples of New Codes

Let's talk about some of the additions to the tariff. So I'm talking about pomace oil, which as we all know, this sounds a little bit odd. What is pomace oil? Well, we probably don't know that. But you probably do know olive oil. And so very briefly, if you've ever wondered how olive oil was made, there was a great five minutes of how it was made, a version on Youtube, you can look at it.

The first pressing of olives results in extra virgin olive oil, and this is like the premier oil, it tastes the best, it has the most olive characters, the most unique, and it's also the most expensive. And then the second pressing gives you regular virgin olive oil, which has some olive flavor. The third pressing has very little flavor, but still a nice high heat oil.

Pomace oil is the fourth treatment, I wouldn't even say it's a pressing, you take the dried out flesh and the seeds and the pit within the olive and you can dissolve some of those things with chemicals and then you distill it a second time and you can get something called pomace oil, which sometimes just gets sold as regular vegetable oil.

So why am I bringing it up now? Currently, pomace oil can get lumped into the six digit provision for olive oil. And so olive oil producers in Spain, in Greece, in Italy, in the United States, pushed very hard to have a new provision for pomace oil created. And so 1509 is where olive oil was going to live, you know both now and going forward. But 1510 is going to be the new home of pomace oil. So there's very kind of low grade, very cheap, not very high quality.

Now across the entire WCO, we see how you know pomace oil is going to be differentiated from olive oil and there won't be any kind of commingling allowed especially because olive oil was now going to be defined according to UN standards and there's a certain amount of expressed acidity in the chemistry to be qualified as an extra virgin olive oil. So olive oil industries will probably be very happy by this new series of updates. Go to the next slide here.

Examples of New Codes

Last time I talked about changes to Chapter 29 which is, for those who don't know the main chemical provision. 29 had some of the changes, but we saw another one in 39 for a similar reason. So 3911.20 is for a metal phosphate with a polymer contained within it, which may not sound a whole lot. But if you may know, chapter 39, that's where articles of plastic go. So any random pieces of plastic or equipment or small parts, you might have some familiarity with chapter 39.

This methyl phosphate with polymer, this is also called phosphonic acid sometimes. But this is often used as a curing agent for a resin epoxy. So you mix it, the two parts together, and you may have done this before for home repair, and you then create like a hardened plastic to make a sealant or to hold something together.

Unfortunately, this can also be used to create chemical weapons, you take this phosphonic acid, and you can manipulate it, you can produce some pretty nasty poisonous gases. And so this was a chemical of interest for the Chemical Weapons Convention and the people overseeing that program.

So being able to identify this precursor chemical and being able to follow its movements around the globe make it easier to track. Okay, who's getting some of these precursor chemicals, and what might they be doing with it, so it's a little bit easier to kind of track these potentially dangerous chemicals down. So this was a little bit dark. But we can go to the next slide, and we'll end up a little bit lighter.

Examples of Updated Notes

So here, we're going to talk about lamps and luminaires. Lamps, as we may know it, we might think of a table lamp right, you sit on the table, you plug it in, there's a little pull chain that we call a lamp. A luminaire may not be a familiar word to us, but it is a very familiar word for the National Electric Council. It is for the American International Society of industrial Engineers. A lot of these things, a lot of these main industry groups would call something that sits on your table that you plug in and pull the chain, they'd call that a luminaire. But if you've ever had to classify a light bulb or a lamp like that, or lighting fixture that you mount into a wall or ceiling, you may have just searched the word lamp in the tariff and you may have gotten confused because you'd see two headings you'd see 85 39, and you see heading 9405 lamp was used in both places. And it's a little bit you can see how it could be frustrating for an entire system based on the meaning of words, to use two words in the same word in two totally different ways.

So this is meant to kind of clear that up a little bit. And so lamps that we might call light bulbs with pictured there are going to stay in 8539, where they have been isolated sources of light with a base, usually surrounded by glass envelopes. That's what we have pictured there. But luminaires, lighting fixtures, lighting fittings, those have always been in 94 05, but by using the word luminaire instead of lamps, it's making it a lot clearer and a lot easier for for importers to understand or for brokers to explain to their importers of these products.

If you go to the next one as well, we're starting to get a little bit in the weeds here. So I'm hoping we have some brokers on the call that like to get their hands dirty when it comes to the classifying.

Updates to Section XII (Plastics & Rubber) Notes

We're seeing an update here to the section note about printed articles, and if you've ever had a classification of an item or a sign, or something that kind of provides some sort of information in that way, and then you're visually or using words, you may have come across heading 4911, which is for other articles of the printing industry, things that have been printed upon.

And there's a slight change in the language here that might make it a little bit harder to get into 4911. 4911 is a nice attractive heading towards duty free, it's on the list for a meeting only 7.5 percent if you're importing this from China. They're changing the phrase, not merely incidental to the use to not merely subsidiary. So what this means is that any printing on here that's not merely incidental, right, meaning that it's more than incidental to the use. That's how it had been before, but now it's saying that it's more than subsidiary to the use.

So before incidental can sometimes feel like accidental, maybe it was there on purpose. Maybe it was there kind of by accident, and there's this printing thing here which you may have to classify, which makes it a little bit more ambiguous. It's harder to tell. Okay, is this chapter 39? Is this chapter 40? Or is it a printing article? You know, from Chapter 49.

Incidental makes it a little bit more gray. But by using the word subsidiary, they establish a hierarchical idea, right? We're saying not only does it have to be incidental, it's saying its subsidiary which often is a subsidiary to, it has to identify something primary and to kind of give an example of what might be incidental printing or what might be subsidiary printing.

And the top example is a plastic sheet tablecloth and it's been printed with a nice colorful design that looks really good. And you might have some debate like well, that design is pretty nice, maybe that's the essential character, maybe that's really important to this thing. But maybe it's just incidental. But now by changing that to the word subsidiary. Now so just like well, okay, that you know that printing is nice, but it is subsidiary, it's subordinate to the actual role of the tablecloth, which is protecting the table below.

That kind of language makes it a little bit harder to sort of make that argument that it’s just incidental. You might have to say now, it's easier to say it's not. More than a subsidiary in order to be classified as your central character, and that's driving the classification discussion.

Another example of this here is, we have our no smoking sign. Here's a pretty clear cut example in both the previous and in the current version of the tariff language to show not merely incidental, right. This sign is telling us a message and the whole reason for this sign being the whole essential character, that sign is to tell us, there's no smoking allowed here. It's not just a sheet of plastic or a profile shape of plastic. This is conveying information. This is if printed, this is an article of the printing industry from chapter 4911. So I want to give one more example here on the next slide.

Examples of Updated Codes

And this started with a discussion about okay, what's the biggest single change that is happening in tariffs this year? And headlines say it's drones, it says smartphones right? We're seeing better camera provisions. And I talked about wood and various wood species last time. But if I had to pick a single change, that was maybe the most impactful, I'd probably go with the one at the very bottom of the list, flat panel displays.

A new heading is being created under 8524 and you may think, well okay, I don't really deal with electronics, I deal with industrial cutting machines, how does this affect me? How could I come into play here? Think for just a moment about all the places where we have flat panel displays.

Think about it in your own home, right. You have your smartphone, smartwatch, tablet, computer, but okay, what about some of the other things? What about your coffeemaker? What about your refrigerator right? What about your blender? What about a heart rate monitor or a medical device monitor that has some sort of flat panel display in it? What about something with a touchscreen, right? Think about a smartwatch, think about all these other things that happen to have these flat panel displays in it. Like your cutting machine, right?

You say, well I only import cutting machines. Well right, but how does the worker interact with that machine? How does it program it? How does it give it controls? Well, it has to use a flat panel display. And so, if you've ever had to bring in a part of a flat part of the machine and it's the flat panel component, you do it now. You are on quite the journey for classifying, you have to do a very detailed parts analysis.

You think about okay, additional rule 1B is this, is it provided for anywhere else? And, you know, GRI1 okay. And there's actually a provision, section 16 note two, and you have to look at it really in depth, and you have to do quite the analysis to determine, okay is this essential to the functioning of my product? Can it be used with anything else? Is it just displaying? Or is it also doing processing of the images as well?

There's a lot of questions that kind of come along with it. And to do it right is very painstaking, and if you've ever had the misfortune of classifying and looking at 90 1380 versus 8528 52. I'm sorry, but the good news is you don't have to do that starting on January 1.

All of those parts are actually probably not all, but almost all of those parts are now going to be living in 8524. Under a GRI1 rationale, because these are going to be specifically named and provided for 8524. And as we know when applying the GRIs, that will take precedence over any provision for a parts or part provision, so a part thereof. So unless there's something else about it, or as part of a sub assembly, flat panel displays will now be blissfully and mercifully classified under a single heading of 8524.

So, with that, those are some great examples here. I think we have another poll question. If we'd go on to that. We'll take a look here. So how prepared are you for HTS 2022? After I've just given my scare speech now, we'll have to see what the results would have been before and after. Have you mapped your changes already? Are you in the process of mapping now? Are you planning on starting soon? Are you leaning completely on the broker? Are you a little bit unsure on how you're going to handle it?

Tom Gould: Interesting some of the results that we're starting to see pretty early on, Marcus, I see 47% says, we'll start planning soon. I guess that's a good sign for us because we had the we're doing this webinar now. So hopefully, this will kick start you into planning your changes, we don't have that much time left to to get them done, but hopefully we'll be able to help out with that.

Marcus Eeman: So it looks like a clear majority there at 44% start planning soon got about just about 300 votes, and then also a fairly even distribution among the other four. Although the minority one i I'm noticing and saying that we're all set. We've mapped our changes. Oh, looks like I get a few phone calls in the coming weeks.

Things to Watch Out For

Adam Dambrov: Okay, so I'll take it from here, Marcus, thank you for that detailed in depth discussion. We want to shift a little bit away from the granularity of those examples and look deeply into the tariff, which I'm sure most of you will be doing over the next six weeks or so.

I wanted to talk about some of the other unknowns or more practical implications that could impact your import business as a result of the changes to the HTS. And first, we'll talk about the implementation date. The ITC, the International Trade Commission, which is responsible for managing the HTS and making revisions to the HTS in accordance with the WCO updates, has indicated that the revisions are to take force or to enter into force on January 1st 2022.

However, the ITC recommended changes do need to be approved by the President. And there have been some delays in the past. So these updates come every five years, and I think it was either five or 10 years ago, there was some delay in the implementation of the changes. But keep your eyes out for a presidential proclamation on or around December 1st. That is what happened five years ago. Right on December 1st, there was a presidential proclamation approving the HTS revisions and saying that the revisions were not contrary to US policy and are in line with the government's economic goals and objectives.

So keep an eye out for that. If you don't see that published, the first week of December, it may delay by a few days the implementation of the changes. So that's a possibility as well, but everybody is trying to get them enforced for January 1.

Another question that's kind of out there is, how will these changes impact section 301? As many of you know, the assessment of 301 duties on imported goods is based on a country of origin, China. And an individual HTS code that is flagged for the 301 tariffs. It's very possible that in January, some new codes may not be flagged for 301 tariffs, we really haven't gotten any guidance on this from the USTR or customs. So remains to be seen how these changes will impact the collection of 301 tariffs. There might even be a window where no 301 tariffs could be collected, but it remains to be seen.

The next thing we want to talk about is PGA OGA flags and anti dumping countervailing duties. With respect to PGA OGA, there may be a lag between January 1 and the time that the different agencies are able to talk with CBP to get flags on those particular HTS codes.

You may know that any OGA requirement for imported goods is sort of identified by a flag on that HTS code, which your broker sees when he goes to enter merchandise under that. So that could cause some issues with respect to OGA PGA enforcement.

With anti-dumping and countervailing duties, a similar instance could occur that is similar to the 301 tariffs where a collection of duties is based on flagging of the HTS code for AD CVD. And some HTS codes may not be flagged right away in January for AD CVD cases. That being said, it's very important to understand that when you're talking about anti-dumping and countervailing duties, the HTS classification of the individual item is not what determines whether an item is subject to AD or CVD. It is the narrative of the scope language for the individual AD or CVD order that controls and really determines whether an individual product is subject to AD or CBD.

So even though commerce may not have gotten around to instructing CBP on updated codes, your product is still likely covered by the narrative HTS sorry, narrative AD CVD order. So it's important to know that it's not going to change the applicability of an order to your products. Next slide please.

Things to Watch Out For

Additional ways that the HTS impacts imports free trade agreements. As some of you may know free trade agreements are agreed to at a very specific point in time by the parties to that agreement, and all of the HTS codes within that particular agreement remain in force until all of the countries to that particular agreement make those changes.

So that will create some issues as well, particularly if you're trying to confirm origin going forward or looking at the different rules of a free trade agreement, the old HTS codes will still control. So that will add some confusion to trying to validate or qualify a product for particular HTS code.

Another area where this might have an impact is duty drawback. As some of you know the tifty and drawback rules for substitution were enacted to help improve the commercial interchangeability of products and it's now based on the HTS codes. So if you're claiming substitution drawback and the HTS codes have changed, it might cause some issues with aligning those HTS codes with your export classifications, because they may not be aligned, and that'll make it more challenging for you to prepare substitution drawback claims.

Duty calculation dates, and this is one of the reasons we're urging everybody to look at this sooner rather than later. If there's going to be a change in the duty rate that applies to your product, it may impact the day on which you want to import those goods. If the rate is going to go down January, then you might want to wait. If the rate's going to go up, then you might want to expedite imports.

And another piece is customs rules. If you had a customs ruling that was issued to you, or you rely on a customs ruling issued to a third party, and that particular HTS code is no longer valid. Well, then that kind of eviscerates that ruling in many ways, and you may want to seek a new ruling or guidance on whether or not it's still control. Next slide please.