Customs challenges

Product classification: the customs code conundrum?

How important is it to assign the correct customs code to your products? What does classification involve and how does it impact your business from procurement to fulfilment?

Declaring a product to customs under a certain commodity code and getting an error message back, asking for more information. Has this happened to you? Is it just customs authorities being difficult?

Well, I guess if the world was a different place – if we all got along and were able to do business with everyone, if we were all equal and no-one lived in poverty or in the midst of war in various regions across the globe – then, yes, life for companies trading globally would be so much easier, and our global flow of goods could stream unhindered and unbureaucratically.

But, unfortunately, this is not the world we live in and we all need to adhere to complex regulatory requirements in order to trade and move goods safely around the globe. It’s about global security and about smooth and timely global distribution in a compliant manner. That’s good. But, is there more to it?

What about saving money?

The commodity code lies at the heart of global trade. It defines and classifies the goods you intend to ship and forms a key element of customs declarations. Based on this code goods are declared to customs and approved by the authorities for transport. And this code also determines the customs duties to be paid, which directly affects businesses’ purchasing behavior. Or at least it should, as there is much saving potential to be realized.

Customs duties and taxes are key factors to be considered when deciding from which countries to procure materials and products. If a particular product is sourced from China, for example, and you would need to pay 6% import duty and 25% anti-dumping duty, it seems like a relatively simple choice to rather procure from e.g. Bangladesh where the same product could be subject to preferential duty rates and minimal, or even zero, anti-dumping duties.

Not quite as simple as it seems

Of course, for customs authorities to grant such preferential duty rates, you need to prove that these goods indeed originate in Bangladesh and provide the relevant declarations and codes. It sounds simple and straightforward in our example, however, in the larger scheme of global trade, it becomes a more impenetrable thicket of tariffs and codes, and ever-changing preferential origin regulations.

Customs codes are numerical and consist of several digits, which are far from easy to identify, and there always seem to be several options. If we then take into consideration additional factors in conjunction with the customs code classification such as the ECCN (Export Control Classification Number), for example, the picture becomes even more complicated. Have a look at my colleague Mark’s post on US export controls and why they matter, to understand how this topic plays in here.

Unfortunately, one time will not do

Many companies involved in global trade assume that it is sufficient to assign all products and materials to applicable customs codes one initial time. Unfortunately, this is not the case. Commodity codes, preferential agreements, and also export control legislation change all the time. All the time. So it’s crucial, to regularly check your material master data to ensure classification of items is in line with latest regulatory updates and requirements. It’s a very complex and challenging task, and much depends on getting it right – for both compliance but also procurement and fulfilment efficiency.

This is very much in a nutshell, of course, and there is much more to understand on the topic. Take a look at the case study below from Erema and find out more about automating of product classification with AEB. Please let me know if you have any questions – I am happy to discuss this further on LinkedIn.

Automated Product Classification with AEB

Erema Case Study: Efficiency for Classification and Export Controls