HS2022: Capitalizing on Expanded Use of Dual-Use Codes for Strategic Trade Analysis

1. Introduction

The World Customs Organization (WCO) has developed and maintained the Harmonized Commodity Description and Coding System, or Harmonized System (HS), since it came into effect 1988. Employed by 211 economies, the HS is a uniform taxonomy used for Customs tariffs and international trade statistics. Every five years, the WCO issues a new edition of the HS which features updates and modifications to the coding system to reflect emerging technologies, clarifications, and other approved changes. In January 2020, the contracting parties to the HS Convention approved the seventh edition of the HS, which included 351 sets of amendments. It will come into effect on January 1, 2022 (1).

The HS is at once the key enabler and challenge of strategic trade analysis. State authorities need to utilize the HS code declaration on customs documents to not only track tariffs, but to assist in determining whether a shipment may contain strategic goods and is subject to export control license requirements (2). The HS system, however, was not designed to identify strategic goods and does not correlate well with Export Control Classification Numbers (ECCNs) that correspond to national and multilateral export control regimes. Many HS codes may apply to a specific strategic good covered by an ECCN and vice versa. This lack of clear correlation makes it difficult to track strategic trade flows and harder for Customs authorities to use the HS to try an uncover shipments that should be licensed but are not.

While the HS and strategic trade controls (STCs) are fundamentally different systems, one proposed solution has been to try and bring the HS codes more in line with the commodity classifications contained in ECCNs. A better correlation between the two would make statistical tracking and customs compliance checks easier for strategic goods. Among the 351 amendments to the 2022 edition of the HS are 16 that apply to dual-use, strategic goods covering materials, manufacturing and testing equipment, and key end-use products. According to the WCO, these are amendments to the HS to “facilitate the monitoring and control of transfers of certain products considered by the WCO enforcement experts as strategic dual use goods that could be diverted for unauthorized uses” (3). These amendments add to or change existing HS codes in a way that separates out strategic goods and generally make the correlation between ECCNs and the HS code much clearer.

The inclusion of these amendments in HS2022 presents a unique opportunity for States to monitor and test the relative importance of close correlation between the HS and ECCNs with regard to strategic trade control enforcement and outreach efforts. In advance of the new HS codes coming into effect in January 2022, States should seek to understand how exporters currently classify these strategic goods and plan for how they can effectively utilize these changes to promote more effective STCs. Licensing authorities should begin to take proactive steps in notifying companies to the upcoming changes. Using historical transaction and licensing data, State authorities can identify relevant entities and provide information to ensure accurate HS identification under the new codes. It is in the interest of State authorities to make these efforts because the more accurate HS identification is, the easier it will be to identify export control violations and illicit trade. Monitoring and measuring the impact of these amendments will also help ensure their efficacy and success. That success would help States make an increasingly persuasive case for further amendments related to strategic goods in future editions of the HS, creating the potential for increasing correlation between the HS and ECCNs.

2. The HS, STC Lists, and Correlations Between Nomenclatures

The HS and STC lists are systems that were designed with very different purposes in relation to international trade. The HS provides a method of classifying goods uniformly across state borders based primarily upon the goods’ physical traits. This uniformity allows for customs authorities to quickly identify goods as they cross borders, assess the appropriate tariffs, and maintain statistics on trade flows. The Harmonized System Convention is used by more than 200 countries, territories, and customs/economic unions, representing more than 98 percent of global trade.

The HS categorizes goods into their codes based upon the physical composition of the product, its immediate function, and/or in the case of a mixture or composite product, its “essential character.” The key feature of the HS system is the ability to systematically move from chapter to heading to sub-heading in finding the appropriate code without requiring knowledge of the product’s ultimate end-use or in many cases, delineation of technical parameters of the product.

STC lists are developed “based on the associated proliferation risks, potential economic impacts, and practicality of control...[and] does not consider import duties, anti-dumping rights, or sanitary regulations” (4). These are nomenclatures that prioritize controls rather than classification. Strategic goods on these lists have distinctive characteristics due to their advanced capabilities, technical thresholds, and/or distinctive usages that could support WMD or weapons development. For this reason, STC lists make delineations on what is and is not controlled based on detailed lists of technical parameters which are usually not present in HS codes. The applicability of STCs also involves an assessment of the commodity’s end-use and ultimate destination where the HS is based only on identification of a products physical characteristics.

Reconciling the two systems is a difficult task. There are correlation tables, studies, and data-driven methods to do so, but this is beyond the scope of this article. No matter what the approach, the connection between the two systems is interpretive, ambiguous, and often based on many-to-many relationships. The HS2022 amendments offer formalized, structural changes that eliminate much of the ambiguity, albeit for a small number of strategic goods.

3. HS2022 Amendments Related to Strategic Trade Goods

In January 2020, the WCO announced that the seventh edition of the HS nomenclature, which includes 351 sets of amendments, had been accepted and would enter force on January 1, 2022 (5). The amendments comprise a wide range of additions and changes throughout the HS, including major new provisions for dual-use strategic goods. Under the new nomenclature, the headings and sub-headings for these commodities will be more explicitly aligned with multilateral STCs, making it easier to identify relevant transactions and track trade flows. The relevant amendments concern goods that have potential, if diverted, to contribute to unauthorized chemical, biological, nuclear, and military end-uses. The general areas covered are: (6)

• Radioactive materials

• Toxins

• Aramids

• Crucibles of tantalum

• Bismuth of high purity

• Zirconium

• Hafnium and rhenium

• Biological and safety cabinets

• Freezer dryers and spray dryers

• Industrial robots

• Additive manufacturing equipment or 3D printers

• Isostatic presses

• Furnaces

• Radiation-hardened cameras and high-speed cameras

• Unmanned aircraft

• Mass spectrometers

The table below provides the details of the amendments. It also shows the language in the existing HS, if applicable, and the relevant ECCN that applies to the new or expanded HS codes under the amendments.

Generally, the amendments related to dual-use strategic goods fall into one of the following categories:

• Heading and/or sub-heading that is new in essential character;

• Addition of sub-heading(s) for a commodity in an existing chapter or heading;

• Addition of technical parameter distinction or structure; or

• Extraction of a specific commodity that was previously covered by “Other.”

Not all transactions under these new or modified HS codes are guaranteed to contain strategic goods, but there will be a much higher correlation between the HS and the ECCN. It increases confidence for Customs officials that transactions involving the HS code will involve strategic goods.

4. Benefits of HS2022 amendments for strategic trade analysis

The core benefit of the HS 2022 dual-use amendments is that it will bring the HS closer in line to STC nomenclatures. It will allow exporters to better identify their commodities within the HS, particularly for commodities where no explicit code currently exists, such as hafnium, rhenium, and additive manufacturing equipment. They will also provide clearer indicators for state authorities to identify transactions that are likely to contain strategic goods. The following section discusses some of the benefits the HS2022 amendments will have from the perspective of strategic trade analysis.

Clearer identification of strategic goods

Customs authorities have a broad mandate that extends well beyond strategic trade controls. As mentioned previously, there is broad inconsistency in the correlation between the HS and ECCNs. The low percentage of strategically controlled trade in relation to transactions not involving strategic goods makes detection of illicit trade extremely difficult. The HS codes included in these amendments provide greater alignment with the language in ECCNs, creating the ability to better target searches on the relevant commodities than under the current system. Rather than being subsumed within extremely broad HS codes that contain many irrelevant commodities, the addition of new or modified codes that specifically relate to strategic goods removes a great deal of ambiguity in classification and detection. Diversion detection will always require detailed checks and subject matter knowledge of export licenses, technical parameters, and commodity profiles, but these amendments assist authorities in better targeting their initial inquiries.

Better statistical trade matching

Trade flow matching or mirror statistics is one method to detect potential illicit activity, tariff avoidance, and/or general trade trends. This practice involves a) comparing trade statistics between two reporting countries or b) using the reported trade statistics from one country to fill the gaps in lack of reporting from a trading partner. Grigoriou et al make the case that mirror statistics can be a useful method to detect customs issues such as “under/overvaluation, misclassification, smuggling or fraud at origin” at the State and global level (7). If a country’s reported exports of a commodity match the quantities, weights, and values of their trading partner’s reported imports, this corroborates the transactions. If there is not a match, then there may be grounds for a more detailed investigation to determine if there was diversion. Both scenarios have value when analyzing strategic trade.

The increased clarity in the HS codes for these strategic goods allow for more robust trade flow matching analysis for these commodities. The more specific HS codes are in general, the more detailed information can be gleaned in examining trade flows at the HS-6 level across States. Specific to the dual-use amendments, since the HS codes better match the ECCNs, analysts will have greater confidence that their trade matching contains the commodities of concern.

More accurate strategic good profiles

Another technique for strategic trade analysis involves creating commodity profiles for strategic goods. Using transaction data, analysts can construct models that identify typical quantities, weights, values, and unit values for strategic goods. These profiles can then be used to identify where unlicensed transactions match the characteristics of strategic goods and should be pulled aside for further scrutiny. This approach can be used in risk assessment and is also the basic premise behind using machine learning methods for detecting illicit strategic trade transactions as developed by the Strategic Trade Control Research Group. The HS2022 amendments better isolate certain dual-use strategic goods, which will make their profiles more robust. The more we can remove extraneous, non-strategic goods from HS codes, the better profiles we can make.

After creating strategic good profiles using these amended HS codes, analysts can apply them to the previous HS headings and sub-headings in order to a) identify transactions where exporters have not made the transition to the new codes yet and b) find unlicensed transactions that fit these more targeted strategic good profiles for potential enforcement action. Applying these profiles to historic transaction records also allows analysts to identify the parties involved in potentially unlicensed transfers of strategic goods, which can be fed into future risk assessments and export license evaluations.

Better understanding of the global market

We can gain an understanding of the global market for strategic goods using aggregate trade statistics reported to UN Comtrade at the HS-6 level. Export statistics allow us to determine the major producers of strategic goods, while import statistics identify the primary markets for their sale. One of the major caveats to this approach is the lack of correlation between the HS and STC nomenclatures. In many cases, we can only be marginally confident in our market share analysis for strategic trade because we do not have one-to-one linkages to HS codes. The HS2022 amendments “solve” this problem, at least for this small selection of dual-use commodities. In the future, analysts will have a much better understanding of the global markets for these commodities. This knowledge can help guide STC risk assessment, resource allocation, and assistance programs.

6. HS2022 – Making it Count

The HS 2022 dual-use amendments provide a many opportunities not only for more efficient strategic trade analysis and enforcement, but outreach. Using historical trade data, state authorities can proactively provide information on the changes to domestic exporters. This can be achieved through information posts government information and licensing websites or more direct approaches. Using historical export licensing and/or transaction data, states can distribute information on HS2022 to parties that have used the relevant HS codes in the recent past. These efforts can be used to reinforce export control license requirements for these strategic goods. Outreach promotes compliance as the HS codes change over, but also increase data quality. The more efficiently that exporters transition to the amended HS codes, the quicker we can gain the benefits from a STC enforcement perspective.

Finally, the HS2022 amendments can be seen as a test for future efforts to further align the HS and STC nomenclatures. The HS and STCs serve different purposes in international trade and will never perfectly match. As seen through these amendments, however, there are opportunities to better isolate and explicitly identify strategic goods within the HS. With planning, strategic trade analysts can use data to evaluate the impact of these amendments over the next few years. Chronicling how exporters react and adjust to the changes along with the impact on strategic trade control enforcement efforts can provide justification for consideration of future amendments.

7. Conclusion

The HS2022 amendments bring the HS closer to the language, distinctive properties, and technical parameters contained in STC lists. These amendments show that the system can be modified, albeit slowly and piecemeal, to improve the alignment between HS and STC lists. Clearer identification of HS codes for strategic goods can improve the accuracy of classification by trading parties, more effective analysis of strategic goods transactions and trade flows, and better targeting of shipments for scrutiny or inspection. As these amendments come in force, it behooves state authorities to prepare for the opportunities presented by more accurate identification of strategic goods within the HS – this includes formulating domestic outreach plans and brainstorming ways to apply more robust data for future strategic trade control enforcement efforts.