Simplification Of The Harmonized Tariff Schedule Of The .

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Simplification of the HarmonizedTariff Schedule of the United StatesInvestigation No. 332-388Publication 3318June 2000

U.S. International Trade CommissionCOMMISSIONERSStephen Koplan, ChairmanDeanna Tanner Okun, Vice ChairmanLynn M. BraggMarcia E. MillerJennifer A. HillmanThelma J. AskeyRobert A. RogowskyDirector of OperationsEugene A. RosengardenDirector of Office of Tariff Affairs & Trade AgreementsThis report was prepared principally by:David B. BeckLawrence A. DiRiccoRonald H. HellerCraig M. HouserFrederick SchottmanJanis L. SummersOffice of Tariff Affairs & Trade AgreementsAddress all communications toSecretary to the CommissionUnited States International Trade CommissionWashington, DC 20436

U.S. International Trade CommissionWashington, DC 20436Simplification of the HarmonizedTariff Schedule of the United StatesPublication 3318June 2000

CONTENTSExecutive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iiChapter One: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1The Harmonized Tariff Schedule of the United States (HTS) . . . . . . . . . . . . . . 2The Growth of the Tariff Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3The Need for Simplification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Chapter Two: Preparation of the Simplified Tariff Schedule . . . . . . . . . . . . . . . . . . . . 8Guidelines for simplification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Methodology and procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Programs not reflected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Chapter Three: The Simplified Tariff Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Consolidation of tariff classes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14The conversion of specific and compound rates of duty . . . . . . . . . . . . . . . . . 14Reorganization of the General Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Elimination of the Chemical Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Restatement of Column 2 rates of duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Clarification of article descriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Limitations on simplification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Statistical issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Chapter Four: Possibilities for Further Simplification . . . . . . . . . . . . . . . . . . . . . . . . 20The international Harmonized System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Harmonize rates to provide opportunity to consolidate provisions . . . . . . . . . 20Harmonize preferential origin regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Reduction of statistical requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Appendix A. Letters of Request from House Ways and Means Committee andSenate Finance CommitteeAppendix B. Notice of InvestigationAppendix C. Draft Simplified Harmonized Tariff Schedule of the United States (2004)

-ii-EXECUTIVE SUMMARYOn July 14, 1997, the Committee on Ways and Means of the House ofRepresentatives requested the U.S. International Trade Commission (the Commission) toinstitute an investigation under section 332(g) of the Tariff Act of 1930, to proposemodifications to the Harmonized Tariff Schedule of the United States to make it simpler,more transparent and easier to use. By letter, dated March 30, 2000, the Committee onFinance of the Senate joined in the request.The initial request letter directed the Commission to seek to alleviate complianceand administrative burdens; to suggest simplification of the nomenclature structure withoutproposing duty-rate changes significant for trade or industry; to suggest appropriate waysto reflect column 2 (statutory) rates of duty; to propose the conversion of specific,compound and complex rates of duty to their ad valorem equivalents when suchconversions would not have significant effects on trade or industry; and to proposeappropriate means for simplifying statistical reporting categories.On November 5, 1997, the Commission instituted its investigation (No. 332-388),notice of which was published in the Federal Register on November 13, 1997 (62 F.R.60919). On March 25, 1999, the Commission released a proposed schedule for publiccomment which was made available on the Commission’s web site, a notice of which waspublished in the Federal Register on March 31, 1999 (64 F.R. 153376) .The growth in the size of the tariff schedule from 6,421 tariff rate lines in 1963 to10,175 tariff rate lines in 2000 has been accompanied by a corresponding decrease in thetrade weighted average duty rate. On dutiable imports for 1963, the trade weightedaverage rate was 11.9 percent ad valorem and the rate for total import trade (dutiable andfree) was 5.1 percent. For 1999, the weighted average rate for dutiable imports was 7.4percent and the rate for total import trade was 1.8 percent ad valorem.Largely as a result of the rate harmonization efforts achieved during the UruguayRound and the entry into effect of the final stages of the North American Free TradeAgreement, the draft tariff schedule proposed by this report, based on the schedule ofconcessions for 2004, contains 8,073 tariff classes, approximately a 20 percent reductionfrom the 10,176 classes in the 1999 version. However, when the approximately 5,000inviolable product classes of the Harmonized System are taken into account, the draftactually represents a 40 percent reduction in the number of categories that were eligiblefor elimination.The report makes additional recommendations to simplify the tariff schedule, including:- A reorganization of the General Notes to the Harmonized Tariff Schedule toimprove their arrangement and understanding;- The elimination of the Chemical Appendix; and

-iii- The clarification of article descriptions.Virtually all of the comments received from the public and government agenciesfavored the idea of simplifying the tariff schedule. However, comments on the statisticalsystem tended to be mixed. Many believed the proposals to eliminate categories did notgo nearly far enough to effect a substantial simplification, others wanted to maintain thecurrent statistical detail for the goods of interest to them. In view of the interagencyresponsibility for the foreign trade statistical program, the Commission has referred thematter of simplification to the so-called 484(f) Committee with specific recommendationsfor its consideration regarding the sun-setting of classes and the winnowing out of obsoleteprovisions.Finally, while the proposed draft cites the possibility for the elimination ofapproximately 2,100 provisions, a new round of multilateral trade negotiations could leadto even greater rate harmonization and simplification. There are at present about 3,000rate lines with normal trade relations (NTR) or column 1-general duty rates of “free.”Moreover, there about 5,000 rate lines with NTR rates below 3 percent ad valorem, andabout 6,600 with rates below 5 percent ad valorem. Thus, the future potential foradditional simplification is apparent.

CHAPTER ONEIntroductionFollowing receipt of a letter of request from the Committee on Ways and Means of theUnited States House of Representatives,1 the U.S. International Trade Commission (theCommission) instituted this investigation, Simplification of the Harmonized Tariff Schedule ofthe United States, on November 5, 1997, under section 332(g) of the Tariff Act of 1930. Theletter of request directed the Commission to issue its final report on the investigation by July13, 2000. The Commission’s notice of the institution of the investigation is reproduced inappendix A. Subsequent to the initial letter of request, the Commission received a letter fromthe Committee on Finance of the United States Senate2 joining in the request for preparationof a draft simplified tariff schedule. A preliminary draft of the simplified schedule previously wasmade available for public comment, by means of copies placed on the Commission’s WorldWide Web site3 and in the Office of the Secretary and through the dissemination by othermeans of portions of the text upon request; in addition, the views of interested governmentagencies were sought. All submissions and views were taken into account in the preparation ofthe final report.As a result of its investigation, pursuant to the terms of the letter of request and thecomments received, the Commission has prepared a final draft of the Harmonized TariffSchedule of the United States (HTS) containing the legal provisions of the tariff schedule. Thissimplified text comprises the general and additional U.S. rules of interpretation, the generallegal notes, the chapter legal notes and additional U.S. notes, and the 4-, 6-, and 8-digit tariffrate lines. For reasons elaborated on in the report, the 10-digit statistical reporting numbers1Letter of July 14, 1997, is reproduced in appendix A.Letter of March 30, 2000, is reproduced in appendix A.3See http://www.usitc.gov.2

-2and accompanying notes and units of quantity have not been incorporated in this report.Issues concerning the elimination or simplification of statistical classes have been referred tothe inter-agency committee authorized under section 484(f) of the Tariff Act of 1930responsible for creating and maintaining the statistical enumeration.The Harmonized Tariff Schedule of the United States (HTS)The HTS sets forth the nomenclature structure, rates of duty, and statistical reportingrequirements applicable to imports into the United States. The schedule, except for thestatistical requirements, was enacted in the Omnibus Trade and Competitiveness Act of 19884and entered into effect on January 1, 1989, with the repeal of the former Tariff Schedules ofthe United States (TSUS). Under that Act, the Commission maintains and publishes theannotated HTS and its printed supplements, and has undertaken the electronic disseminationvia its World Wide Web site (http://www.usitc.gov) of the schedule and revisions thereto asthey become effective.5The nomenclature structure of the HTS is based upon an international system formallycalled the Harmonized Commodity Description and Coding System (“the Harmonized System”or “HS”), maintained by the World Customs Organization (WCO)6 in Brussels and implementedby means of a multilateral convention. The HS comprises product descriptions enumerated as4-digit headings and 6-digit subheadings and includes legal rules and notes. The HS wasestablished to facilitate trade by means of a standardized tariff nomenclature for thedescription, classification and coding of goods, comprising a system that would also serve asthe basis for the collection, comparison, and analysis of comparable international trade4Subtitle B of title I of Public Law 100-418, 102 Stat. 1107, of Aug. 23, 1988 (19 U.S.C. 3001 etseq.).5The printed version will continue to be supplemented once or more during each year, as needed,but the time and cost of issuing printed updates prohibits more frequent hard copy supplements.6Formally known as the Customs Cooperation Council pursuant to convention.

-3statistics. Under the terms of Article 3 of the HS convention, contracting parties are required toinclude without change all of the 4- and 6-digit categories of the HS, as numbered, and thelegal notes thereto. The United States acceded to the Convention as of January 1, 1989. TheHTS comprises a hierarchical system of product descriptions based upon the HS 6-digitnomenclature, which have been further subdivided and coded at 8 digits to create neededlegal tariff categories and at 10 digits to reflect statistical classes. The U.S. obligations underthe HS Convention preclude changes to the approximately 5,000 product classes of the HS.This report is directed at the simplification of the 8-digit U.S. tariff rate lines, the generallegal notes, and additional U.S. legal notes in the chapters. The statistical reportingrequirements and matters relating thereto will be separately treated by the so-called “484(f)Committee,” formed to implement Section 484(f) of the Tariff Act of 1930, as amended. Furtherdiscussion appears later in this report in the section entitled “Statistical Issues.”The growth of the tariff scheduleThe table on the next page shows the historical growth of the tariff schedule, in termsof rate lines, statistical categories, total trade, the trade-weighted average rate of duty ondutiable goods, and the overall trade-weighted average duty rate (in percent ad valorem terms)on duty-free and dutiable trade.7In the first edition of the former TSUS in 1963, there were just over 6,400 tariff ratelines, 1,900 of which had statistical subdivisions; there were approximately 31,000 statisticalcategories (many of which were largely theoretical and related to cotton fabrics). In 1964, thefirst full year of the TSUS, import trade was over 18 billion, and, the average rate of duty was7The source of all cited data is a file entitled “Value of U.S. Imports for Consumption, DutiesCollected, and Ratio of Duties to Values: 1891–1999" compiled by the Commission’s Statistical andEditorial Services Division, Office of Information Services, March 2000; the compilation was based uponofficial statistics reported by the Department of Commerce.

-411.9 percent ad valorem on dutiable imports and 7.4 percent on total imports. In 1988, the lastedition of the TSUS, there were 7,450 tariff rate lines, about 2,400 of which had statisticalprovisions, and the total number of statistical categories exceeded 47,000. Total import tradein 1988 exceeded 437 billion, and the average duty rates had declined to 5.3 percent advalorem on dutiable imports and 3.4 percent ad valorem on total imports.YearTariff ratelines,chs. 1-97Statisticalcategories,chs. 17,4355.1%1.8%20006Total importsforconsumption( 1,000,000)Averageduty rateon dutiableimportsAverageduty rateon totalimports1Subdivisions of tariff rate lines for statistical reporting purposes.Sum of number of statistical categories plus the number of tariff rate lines that were not subdivided forstatistical purposes.3The former TSUS became effective Aug. 31, 1963; it replaced the former paragraph system fordescribing and classifying goods in trade that had appeared in prior tariff laws. The figures for rate lines andstatistical categories were compiled on that date. However, the remaining data on trade and average duty rates arefor 1964, the first full year during which the TSUS was in force.4It is estimated that more than three-fourths of the total number of statistical categories shown for 1963and 1988 comprised annotations covering cotton fabric. Many of these had negligible or no trade. It was estimatedby the Bureau of Census that approximately 4,800 statistical categories had trade in any year. However, the exactnumber of 7-digit TSUSA provisions is not known.5The TSUS was repealed at the close of Dec. 31, 1988, and the HTS entered into effect on Jan. 1, 1989.6The number of rate lines and statistical categories is as of Jan. 1, 2000; trade and rate data are for 1999.2The first edition of the HTS in 1989 added about 1,300 rate lines for a total of 8,753,and–even without most of the earlier provisions for cotton fabrics–had 14,224 total reportinglines (with 7,744 actual 10-digit provisions under 2,273 of those rate lines). Total import traderose to over 468 billion, while the average duty rates amounted to 5.2 percent ad valorem ondutiable imports and 3.4 percent on total imports. That year also marked the implementation of

-5the U.S.-Canada Free-Trade Agreement, with fairly extensive additions to both the tariffchapters and the general notes.Subsequently, and particularly with the implementation of the NAFTA and theconcessions resulting from the Uruguay Round of multilateral trade negotiations, the level ofcomplexity and number of provisions in the HTS has risen even as rates of duty have declined.By 2000, the HTS had 10,175 rate lines, 2,730 of which had statistical reporting provisions,and 17,032 reporting lines. During 1999, the last full year for which data are available, totalimport trade had risen to over 1 trillion, and the average duty rate was 5.1 percent ad valoremon dutiable imports and 1.8 percent for total imports. Similarly, the length of the general legalnotes to the HTS–which contain the rules for classification and special tariff treatmentprograms, among other matters–increased from 28 pages in 1989 to 169 pages in 1999.Clearly, the amount of product detail and program rules in the tariff schedule has risendramatically. Given huge increases in the volume of imports, the added complexity of the tariffschedule is compounded for the trading community and government agencies alike.The need for simplificationThe reduction in tariff levels and their consequential loss of significance as a tradebarrier has tended to focus increased attention on the costs to the public and government ofcomplying with and maintaining complex trade regulation measures. The Commissionunderstands that some industry representatives have suggested in other fora that theadministrative costs of complying with import regulations can be significantly greater than thecosts of tariffs.In addition, the burden of trade compliance is not limited to the United States. Foreigngovernments also maintain complex legal and regulatory regimes affecting exports to those

-6countries. Despite efforts to harmonize government reporting requirements, the accelerated8growth in the number of companies engaged in or seeking to enter international commerce,enhanced by the global reach of the Internet, has magnified the compliance problems.Simplification of the tariff system thus represents a significant step in the direction of tradefacilitation. In addition, achieving the widespread availability of each country’s currentrequirements (particularly by means of electronic or magnetic media), increasing theopportunity for firms to submit information electronically to governments, and the simplifyingand standardizing of regulations and procedures would serve to alleviate some of the existingadministrative and compliance difficulties.Two programs that are currently in progress may show some promising effects. Theseprograms involve the rewriting of the so-called Kyoto Convention, an initiative of the WorldCustoms Organization on harmonizing customs procedures and rules, and the development inthe United States of the International Trade Database System (ITDS), an initiative suggestedby the National Performance Review.The revised Kyoto Convention (formally known as The International Convention on theSimplification and Harmonization of Customs Procedures (Revised)), was adopted by theWorld Customs Organization in June 1999. The goal of the Convention is to provide aframework of harmonized customs procedures and practices throughout the world that aresimple, effective, predictable and transparent. The Convention reflects the general recognitionthat efficient and effective customs procedures can facilitate the flow of international trade andthat a non-transparent customs system can operate as a non-tariff trade barrier. Some of thekey elements of the revised Kyoto Convention include: (1) standardized and simplified8The Commission notes that the C

called the Harmonized Commodity Description and Coding System (“the Harmonized System” or “HS”), maintained by the World Customs Organization (WCO) 6 in Brussels and implemented by means of a multilateral convention. The HS comprises product descriptions enumerated as 4-digit headings

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