Summary of ITDU Conference and Workshop December 5-6, 2006 in Washington, DC
A summary of the new import 2007 HTSUS Annotated Code is available on the International Trade Commission’s web site at the ITC Site. The new export 2007 Schedule B Code is available from the Census Foreign Trade Division at Schedule B 2007. The HS changes are located at HS Code Changes.
The HS code comprises the first six digits of the commodity codes used by almost universally by countries. Countries add additional digits for their own duty application and statistical purposes. Two-hundred countries use the system. The U.S. adds the seventh and eight digits to determine classification and application of duties. The ninth and tenth digits are for statistical compilation purposes.
Dave Beck, Acting Director of Tariff Affairs and Trade Agreements at the International Trade Commission, had just returned from meetings in Brussels with the World Customs Organization before coming to address the ITDU. The ITC is an independent quasi-judicial Federal agency with broad investigative responsibilities on matters of trade. The agency investigates the effects of dumped and subsidized imports on domestic industries and conducts global safeguard investigations. The Commission also adjudicates cases involving alleged infringement by imports of intellectual property rights, is involved with hearing anti-dumping cases, and publishes and is responsible for maintaining the HTSUS import tariffs. It maintains a database of trade agreements and rules of origin for each, as negotiated by the U.S. Trade Representative’s office. His office is relatively small, with 14 people.
The Committee for Statistical Annotation meets twice a year and hears requests for additions or changes to the 10-digit HTSUS number used to compile trade statistics. Members are the ITC, Dept. of Commerce – Bureau of Census – FTD, and Customs & Border Protection (formerly part of the Treasury Dept.)
The Harmonized System is an outgrowth of the Customs Cooperation Council, The Brussels Tariff Nomenclature, and the Customs Cooperation Nomenclature (CCN). In the late 1960”s it was decided to develop a worldwide harmonized system for classifying goods. This took 18 years, with the HS code finally adopted in 1988. The U.S. implemented it in 1989. Since then, the HS Committee has met 38 times. The review subcommittee meets twice a year and proposes any code changes at the six or four-digit level. The HS Council meets once a year and approves recommendations from the review committee for implementation.
Act 1205 of U.S. Congress authorizes the ITC to take the recommendations from the WCO and translate the changes into 8-digit codes used for collection of duties. The changes are then sent to Congress for review and enactment. Both houses must be in session on the same day for at least six days for review before they can vote on the changes. The classifications then go into effect fifteen days after the President signs the legislation. This could take until the end of January. The electronic tariff will be available on the ITC’s web site January 1, but at that point, it will not be in effect. The numeric coding changes at the six and eight digit level are available in Appendix B of the ITC web site.
The changes are not insignificant. Many are done to simplify the codes by combining like products. Others recognize the need to split out certain classifications, especially in the high-tech electronic chapter 84. The HS code has 97 chapters (actually 96, with chapter 77 being empty). Only 17 chapters are not affected by changes, with most of the significant changes in chapters 84, 85, and 90. The ITC already has a draft available at the 10-digit level, but it is in the hands of the U.S. Traded Representative’s office to sign off on them before they can be shown on the web site.
Correlation tables are available at the six-digit level from the WCO web site and from the UN. However, because most changes are not simply one-to-one correspondence between old and new numbers, these correlation tables need additional work to convert actual trade data from HS2007 to HS2002 codes.
Bill Shayne summarized the structure of the HTSUS. The 97 chapters are further subdivided into headings and sub-headings. Duties are applied at the 8-digit level and are country specific. It is imperative that anyone wanting to understand the application of the commodity codes applies the “General Rules of Interpretation” both on an international and U.S. level and reads the section, chapter, and heading notes. A review of the proposed HS code and note changes primarily affect the following chapters: #85 Nuclear Reactors, Boilers, Machinery, etc., Parts (250 code changes, 18 note changes), #84 Electrical Machinery & Equipment, Sound Equipment, TV Equipment (120,50), #29 Organic Chemicals (93, 10), #28 Inorganic Chemicals (43,2), #46 Manufactures of Straw, Esparto, Basket ware, and Wickerware (50,1), #87 Vehicles & Parts (65, 0), #61 Apparel Articles and Accessories (45,0), #38 Miscellaneous Chemical Products (49,0),# 90 Optical, Photographic, Medical or Surgical Instruments (24,7) as well as other chapters (see Bill Shayne’s presentation). No simple correlation table will convert the old numbers to the new. Any correlation will provide an estimate at best. It cannot be overemphasized that one needs to read about any changes in the notes by chapter heading, and sub-heading.
Carol Aristone of the Census Bureau’s Foreign Trade Division discussed the implications of the HS code changes on export Schedule B numbers, for which the FTD is responsible. Of the approximately 9,000 export codes, 1,200 will become obsolete, 1,100 will be new, and 500 will be re-coded on a one-to-one correspondence basis. As in the past, Census will accept the 2006 codes during the month of January. January 2007 data incorporating the new codes will come out in March of 2007. The data will also become available in the updated Standard International Tariff Classification (SITC) Rev. 4. Correlation tables should become available by February. Census will not go back in history to modify codes.
Paul Bingham of Global Insight stated that GI combines the commodities into 77 commodity groups based on aggregations of the SITC coding system. They are also mapped to other industry classifications such as NAICS, STCC and SCTG for transportation analyses. The definitions were established with linkages to the HS6 codes. The 77 groups are linked to economic activity factors and are used for modeling and forecasting. The changes will be a challenge since they not only use value but freight volume or weight. Historical time series are critical and the discontinuity in coding presents a challenge.
Ron Jansen discussed the HS changes in 2007 from the UN’s perspective. Overall, the Harmonized System is the “language of international trade” which is maintained by the World Customs Organization. The HS was adopted in 1988 and with the changes in 2007 has now been updated four times. The Standard International Trade Classification nomenclature was established in 1951 and revised in 1960, 1976, 1988, and now Rev. 4 in 2007. In 1993 the HS classification was recommended by the UN Statistical Commission to be used worldwide for compilation and dissemination of merchandise trade statistics. The preamble to the HS Convention emphasizes the importance of ensuring that the Harmonized System is kept up-to-date in light of changes in technology or patterns of international trade activity.
The 2007 revision includes 354 sets of amendments: to recognize technological progress; changes in trade patterns; clarify texts to ensure uniform application; and better reflect trade practices. Some codes were deleted due to low value of world trade or were split into two or more new codes that were added to recognize new products or to identify products of special interest. Yet other codes remain, but may have changes or amendments to their content definitions. Of the 5,053 HS6 codes, 260 are new and 431 are being deleted. The SITC is questionable. Breaks will occur in time series for some HS6 codes due to deletion, merging, or re-defining of the codes. A special commodity group has been established by the OECD called the Information, Communication and Technology (ICT) category. Based on the HS6 codes, this category includes telecommunications, computer, and related equipment, electronic components, audio and video equipment, and other ICT goods. In 2004, China overtook the U.S. as the leading exporter of ICT goods to the world.
Another product classification, the Central Product Classification (CPC), combines goods and service categories for production and trade purposes. It provides more detail than the HS in areas such as printed matter, petroleum products, and computer related products. Future recommendations to the World Customs Organization are to align the HS with the CPC in areas of standard software and petroleum products. This is where CPC provides more detail. The future of trade statistics is to combine enterprise and trade statistics and their analysis into structural business statistics, an endeavor undertaken jointly by OECD, UN and Eurostat.
Prof. Simon Pak, Associate Professor of Finance at Pennsylvania State University, Great Valley School of Graduate Professional Studies, addressed the issue of over and undervaluation of U.S. imports and exports. Improper valuation may be due to a variety of reasons. Among them are capital flight, import duty fraud, income tax evasion/transfer pricing, money laundering, and product variation in a given HS10 commodity code, or simply clerical or recording errors. It is an overwhelming task to detect abnormal pricing in over 50 million transactions annually for U.S. imports and exports. Customs examines import documents using benchmark pricing guides, but this is still difficult with the volume of import entries. An alternative approach is to use statistical analyses of historical prices for each commodity and country, and to identify records with prices per unit outside a normal range. His studies used this statistical approach to calculate the average price per unit, standard deviation, and to identify records in the upper and lower quartile range that are suspect.
Prof. Pak and Dr. John Zdanowicz, both of Florida International University at the time, were expert witnesses in the IRS vs Chen/Sunrider case. Chen/Sunrider was accused of artificially inflating the import value of herbs from Taiwan and China between 1989 and 1991 to evade U.S. income taxes. In the example of mushrooms imports from Taiwan, the average import price per unit from Taiwan was $28.88, the median was $34.97, and the upper quartile was $35.96 (excluding the defendant’s records). Chen/Sunrider’s pricing was between $95 and $115. The defendants were convicted of IRS tax fraud and had to pay $48 mil. in taxes and penalties. They were also convicted of Customs documentation fraud, had to pay $4 million, and were sentenced to two-years in jail.
Some problems remain with this approach. There may be product diversity or heterogeneity even within an HSTSUS 10 digit commodity code. This is somewhat mitigated by focusing on records in the outlying upper and lower quartiles. However, the publicly available records are aggregated at the HS10 level by month, country, and customs district level, with no company identification. There is no differentiation of transactions between related and non-related parties. Prof. Pak provided an illustration for the HS10 commodity of scrap gold from Mexico in June of 2005 valued at $801.85 per oz. while at that time the value of pure gold was between $415 and $440 per oz. – an overvaluation of at least $371,840. Another example was gold doré (a bar of semi-purified gold) from Peru, valued at $55.54 per oz. in August of 2005 compared to the price of $440 for gold at that time – an undervaluation of $474 million for the amount exported.
Additional examples of over and undervaluation were given for digital cameras. The leading overvalued import commodities found were: postaglandins, leukotrenes from Hungary; blood fractions from Germany; aromatic or modified drugs from Ireland; unmounted chips, wafers for integrated circuits from Taiwan, human, animal blood from Spain. Undervalued imports were: Ferrovanadium from Czech Republic; Furnaces and ovens for diffusion from Japan; woven fabrics from Spain; alumina bricks from China, and boring and sinking machinery from Germany. Examples of over-priced exports were: blood fractions to Netherlands, pyridine compounds to Belgium, unmounted silicon chips and wafers to Taiwan, medicaments in measured doses to the Netherlands, and hormones, postglandines, etc. to Germany. The top underpriced exports were bulldozers to Canada, optical fibers to Hong Kong, instruments for chemical analysis to S. Korea, and optical fibers to Japan. Details are available in Prof. Simon Pak’s PowerPoint presentation on the ITDU website.
After adjusting both exports and imports for under or overpricing, the results shown in a graph for 2001 – 2005 were that the U.S. trade deficit should, surprisingly, be greater than reported. The price filter used to process and perform calculations on the millions of records can also be tailor-made for particular HS code and country combinations to identify abnormally high or low-priced commodities. This can be used for estimating the amount of over or under-pricing. This approach could be used for real-time cargo inspection.
In summary, one is not sure on how to best estimate the true value of U.S. exports and imports. It may require specialists to closely follow specific commodities. One can also use statistical methods by applying “filters” to look at data points outside a specified range of standard deviations. Naïve adjustments of prices per unit in the upper or lower quartile ranges lead to the preliminary conclusion that underreporting of value is greater for imports than exports, and thus would result in a higher trade deficit.
William G. Bostic, Jr., Chief, U.S. Census Bureau, Foreign Trade Division ( FTD) discussed changes in his division. Jerome Greenwell is now the newly established FTD Trade Ombudsman. Dale Kelly (formerly Dickerson) replaces him as head of Regulations, and Wendy Peebles heads the Automated Export System Branch after Gerry Horner left for the BIS. With regard to the status of making AES (electronic submission of SED information to Census) mandatory, the existing final rule, if not accepted as is, will have to be re-published in the Federal Register, with modifications, for public comment. The comments will have to be addressed. Then another proposed final rule will be issued for concurrence with the State Department and Department of Homeland Security. Once concurrence is been obtained from both departments, the final regulations can be published. Currently, less than 40,000 paper export declarations are submitted, but this still costs Census $1 million to maintain a system to manually process this data.
A new grouping of commodities called the Advanced Technological Products Group was created to provide trade figures on technological products. The new 4-digit port code data series by 6-digit HS code became available with historical data. The State of Origin data series is now available based on zip code. The ITA was provided a more detailed data set by zip code for their study and eventual posting on their web site. One should refer to the ITA for details on what will be available and when. The FTD issued a new Related Party Trade Report and has an updated Exporter Profile Study based on 2003-2004 data displaying exporter’s data by size and type of company. The FTD will be making direct calls on companies in the coming months who are experiencing and not correcting fatal errors in their export information submissions to AES. Companies will be allowed a time period to identify and correct problems. Non-compliance could lead to referrals to Customs and/or BIS for enforcement. The FTD continues to operate under tight budgetary constraint, which does not provide for many new initiatives.