The World Customs Organization will be rolling out changes and updates to the Harmonized System and that could mean barely a blip on your radar or big changes to how your goods are classified. Listen in as Stephanie Holloway, Regional Customs Manager for The Americas, gives an overview of the Harmonized System, why reviews of the system are conducted, and what to expect when changes hit in 2022.

Chris Parker: Hello everyone. And welcome to The Expeditors Podcast where you can hear about front-of-mind topics in the logistics and freight forwarding industry through the lens of a global logistics provider. I'm your host, Chris Parker. And today's topic, the upcoming changes to the Harmonized System in 2022. Next year, changes to the Harmonized System are going into effect, and that could mean a big impact to how goods are classified globally within the customs process. If you're not up to speed on these developments, 2022 would be the worst time to have your shipments delayed as global shipping continues to catch up with demand, recovering changes to the Harmonized System, what it is, and what you should know to keep things moving smoothly, all things considered. And with me today is the regional customs' manager for the Americas, Stephanie Holloway. Stephanie, welcome to the podcast.

Stephanie Holloway: Thank you so much, Chris.

Chris Parker: Yeah, absolutely. Before we get started talking about today, I want to get to know you a little bit more. Could you walk me through kind of your background and your career?

Stephanie Holloway: Yes. I would say that I was born and raised at Expeditors in the customs' product. So I started off in operations right out of college. Then I had the opportunity to move into an account management role, then actually got to see the perspective from an importer. I worked onsite at one of our customers supporting them both in brokerage and transportation. And then actually at that point, I was in Minneapolis. I moved back to Seattle to work here at our corporate location, supporting systems. And just recently I moved into more of a business development role. So I've had a lot of opportunity to talk about this with customers at the end of the year.

Chris Parker: There's a saying I've heard of, "Careers, aren't ladders, they're jungle gyms." And it really sounds like you've taken full advantage of that.

Stephanie Holloway: I've been all over. Yes. I guess just between Seattle and Minneapolis, but that's quite a jungle in itself.

Chris Parker: Yeah, absolutely. And so how many years does that cover?

Stephanie Holloway: I think sixteen, but don't do the math. I don't know. I remember when I first started and people would say, "Oh, I've worked here 20 years." And I was like, "Whoa, now I'm that person".

Chris Parker: Yeah.

Stephanie Holloway: Almost.

Chris Parker: Yeah. I just hit 10. I'm like, "Oh man."

Stephanie Holloway: Don't think about it. Just keep going.

Chris Parker: Just keep going. Just keep going. And so you said you're born and raised in customs. What about customs? Why do you nerd out over customs? What about it is fascinating to you?

Stephanie Holloway: Boy, that is a loaded question. Probably topics like this, actually that get you all excited and talking a little too loud, that's totally me, but I think it's because it's not dull at all especially in the last couple years. The Trump administration brought so many changes so rapidly to the customs process. Before that, when I actually took over the systems' role, customs was making a big transition from their old customs software that was called ACS to their new platform that was called ACE. And we had tons of work to do on that. There were a lot of great things that they did that we got to support and give to our operations teams. So it's not dull, there's always stuff going on. And this is a great example of just another thing to roll with. So here we are.

Chris Parker: Well, let's go ahead and jump right into it then. So I mentioned at the top, we're talking about the Harmonized System. Could you explain what it is? Kind of who runs it and what role does it play in trade?

Stephanie Holloway: Yeah. So I'm not going to do this justice, but I will speak to it as clearly as I can. So back in the early 1970s, a group of people at the World Customs Organization or the WCO, I don't know if it was called the WCO at that time, but a group of folks got together and they really had a vision to create a system, or they like to call the nomenclature to help show trade patterns globally. And what they did was created a system that's numeric in nature. It breaks out into chapters and headings and subheadings. But what it does is allow us to classify anything really that you can imagine into some type of codified system or codified number that then can be used by countries. So the WCO sets what we call the first six digits of that system.

Chris Parker: And how many digits are a total in this number?

Stephanie Holloway: Oh, well that's the fun part, Chris. So the WCO sets the first six and then countries get to do whatever they want after that. So countries sometimes just add on another two. So maybe there's just eight digits for that country and other countries add on another two, four, six. I mean, I don't know if there's eight out there, but they really get to do what they need to do to get to that level of precision in that they find valuable. And then at the same time, that's also where duty rates are being set so that countries can collect the proper amount of taxes, for lack of a better word, for duties as freight is coming into their countries. So it's giving them the level of visibility to what's moving in and out. Because these systems are also used for exports, not just imports and they can personalize them as much as they want.

Chris Parker: Yeah. Okay. So I looked into this a little bit and it sounds like the changes to the Harmonized System do happen, but not very often, how often do changes come and how have they been historically handled? Because you've got these six numbers, you said the first six numbers that are kind of globally recognized, and then everyone's got their own story after that. How do those updates happen? What's the review process like?

Stephanie Holloway: I don't actually know the specific review process that the WCO does.

Chris Parker: Sure.

Stephanie Holloway: But they're only putting out changes about every five years is what we've seen in the last kind of iterations that they've put out. I think they take feedback from organizations globally in terms of what needs to be changed. They also look at what isn't being used to see if there's opportunities to delete things or not use them.

Chris Parker: Oh, okay. Kind of streamline it, simplify it.

Stephanie Holloway: Streamline it. Yep. And so those come out about every five years and I think they actually put out... Like the ones that are coming out in 2020, they made these recommendations years ago almost because it takes so long for countries to adopt it into their, I guess, classification systems, right? So as the WCO makes exchanges at the six-digit level, it has to trickle down and over 200 countries use what the WCO recommends. As far as countries making individual adoptions or changes, some countries like the U.S. they're making changes twice a year. And then this is just a bigger change that they're adopting, right? Other countries just make changes once a year. And some countries really just make changes when the WCO makes changes. So everyone kind of has their own cadence and their own schedule of what they do.

Chris Parker: Yeah. But just as long as the numbers match up when shipments are being processed.

Stephanie Holloway: Yes, exactly. Yep. So everybody needs to use the right classification at the right time.

Chris Parker: Sure. Yeah, absolutely. All right. And with this being the seventh review, it sounded like, what's so big about this one? What changes are coming?

Stephanie Holloway: Yeah. So I wouldn't say that this one's necessarily bigger than any others that they've put out, but in the WCOs' literature, which if you really want to go brokerage customs nerd, read that for fun. But they kind of presented five categories that I thought were really good breakdowns. So the first one being new product streams and some of this stuff doesn't necessarily feel new, but it's new when you think about it from a bureaucratic getting all of the classification headers broken down globally. So a couple things in there are smartphones, 3D printers, tobacco products, like e-cigarettes, electronic waste, drones, things like that. Then they had a category called technological advances. And this was really in terms of how things are manufactured, not necessarily that their new products, and that they specifically referenced glass fibers, metal forming machinery, health, and safety. So this is always on our minds. Right?

Chris Parker: Absolutely.

Stephanie Holloway: We immediately think COVID, but in this case, it's not necessarily, COVID, it's more rapid diagnostic kits for things like malaria, Zika, stuff like that.

Chris Parker: Absolutely.

Stephanie Holloway: But also cell culture, cell therapy products, things that five years ago, weren't as norm as what they are now, this is coming from a completely non-medical source, by the way, maybe those have been the norm. I'm just not in the know. But then the last two categories that they break out are human security and protection of society. And really that's the WCO saying, "Hey, customs organizations, we see that you guys are being tasked with anti-terrorism efforts." And so really trying to break down into a more, I wouldn't say granular way, but help them get insights into potential dual-use items, but then also parts for improvised explosive devices, radioactive materials, things like that.

Chris Parker: Dual-use, what do you mean by that?

Stephanie Holloway: Dual-use, a good example, would be like fertilizer, right? Fertilizer, completely normal thing to import until you're importing it in gigantic quantities.

Chris Parker: Oh sure.

Stephanie Holloway: For the purposes of evil.

Chris Parker: Yeah. So if the WCO is making these decisions or is making these changes through these reviews, what are they looking at in order to inform these decisions? Do you know?

Stephanie Holloway: I think they're getting feedback honestly, from countries in terms of what they need to help facilitate trade both in and out and get the visibility that they need. But I mean, they're probably just observing trade patterns as a whole, which is what makes this whole system so wild.

Chris Parker: Yeah. Yeah.

Stephanie Holloway: Like the fact that we can see trade patterns globally, and talk about apples literally to apples going in and out of countries is pretty incredible to think about.

Chris Parker: Yeah. All right. Well, this is clearly been a very popular topic with our customers because you've been presenting on a lot of webinars. I've been hearing, we know what's to come clearly, but what's the impact to importers.

Stephanie Holloway: Yeah. So it's both importers and exporters.

Chris Parker: Yeah, sure.

Stephanie Holloway: Because you're declaring to governments, right? Both directions they want to know what's being sold and they also want to know what's being imported. But I would say the impact is going to vary greatly. Right? There's some people who are listening that will not even notice. It will be a blip on their radar or maybe one small product line that will be impacted. Other customers are going to have huge impacts. Personally in the data that I've looked at, automotive companies are going to be pretty heavily impacted, but it really just depends on your product mix that's being imported or exported. Hey, I had to catch myself. In the U.S., specifically from Expeditors data, when we look at what is the impact to our customer base going to be? We're seeing about 10% of the lines that are being imported into the U.S. that are going to be impacted, which is on par with other WCO changes. So nothing too crazy, but for some customers, very crazy. Other customers, you do you. Yeah, you're fine. Just keep going.

Chris Parker: So what does an exporter or importer need to do to prepare for these new tariff numbers let's call them?

Stephanie Holloway: Yeah, that's a good question. So first of all, different countries, importers, and exporters have different levels of responsibility, right? So in the U.S. and Canada and the EU, they're really responsible oftentimes for providing that classification to their customs broker as part of their declaration to the government. So in those cases, they should really start digging in now, especially since we're in December-

Chris Parker: We've got a few weeks left.

Stephanie Holloway: Exactly. And I think we all look at this, and we're like, "Everyone's on vacation." Start digging into those HS numbers that they know are going to be impacted, mapping them to their new kind of counterparts. Sometimes it's a one-to-one. Sometimes it takes more research to understand which new classification needs to be used. Then most importantly, hopefully updating our parts database that's something that at Expediters we're super passionate about or finding other ways to communicate with their customs broker, whoever's doing their declarations to make sure they have the information they need at that end of the year period, to be successful. For other countries like Mexico, where the customs broker is actually the responsible party to do the classification work on that one importers and exporters aren't completely off the hook because we're going to need documents, showing the correct classification, things like that. So really just partnering with your broker to make sure that they have what they need is going to be the most important part and lots of communication is going to be needed.

Chris Parker: So start making phone calls.

Stephanie Holloway: Yes. Faxes, phone calls.

Chris Parker: Everything, send everything.

Stephanie Holloway: Yeah.

Chris Parker: And I guess, what would the impact be to someone, to either importers, exporters, or brokers, should an out-of-date kind of HS numbers be used? What happens when an old number is used?

Stephanie Holloway: Yeah. So generally speaking, most customs authorities have modern systems where they're just not going to accept. So it's not like we can say, "Hey, here's the old number. We'll get you the new one later, please process my declaration." It's just not going to get accepted into the system which means you can't submit the entry or the declaration, therefore you can't get your release. Therefore, you can't move your freight through the country or to where it needs to go.

Chris Parker: You can't even get it out.

Stephanie Holloway: You can't usually even get out of the port or wherever it needs to get out of. So most of the time that's what's going to happen is you can't get it moved.

Chris Parker: And in a time where capacity is ultra-tight and schedules are delayed.

Stephanie Holloway: Yeah.

Chris Parker: This is-

Stephanie Holloway: Who needs this? Yeah, exactly. So most of the time in this current environment, from a customs' perspective, our main challenge has been filing the declaration at the right time into the right port. Right? Because if a ship skips a port or something happens there or they discharge freight that we're not expecting that's what we're usually dealing with. Now, this is a whole new layer of challenge in terms of, "Do I have the right classification I need to make entry?".

Chris Parker: Yeah. How would today's shipping crisis affect or be affected by these new changes?

Stephanie Holloway: Just make more chaos, which is exactly what we don't need. Right?

Chris Parker: Sure, sure.

Stephanie Holloway: So it's just going to be harder to get your freight cleared, which hasn't necessarily been the challenge. I can't say that for certainty because for some folks it may have been, but that hasn't been part of the equation and now that will be part of the equation.

Chris Parker: Yeah. But this is the seventh review. I mean it's happened seven times previous or sorry, six times previous, how has it been handled in the past? Has there been a noticeable change in-

Stephanie Holloway: Oh, that's a good question.

Chris Parker: Shipments being delayed and then stuff not being able to leave the country.

Stephanie Holloway: Yeah. I don't think it's as noticeable because we weren't dealing with-

Chris Parker: A pandemic.

Stephanie Holloway: A pandemic, crisis, shipping, everything we're in. But we have lived through this before and folks that are listening, if you've been in the industry for a while, this isn't shocking. Even in the US, we handle these types of changes on a more minor level twice a year. So is it widespread panic? No. But given the current environment and I think this is why so many people are paying attention. They just can't handle one more thing.

Chris Parker: Yeah.

Stephanie Holloway: Right?

Chris Parker: Yeah.

Stephanie Holloway: They've got to keep their freight moving.

Chris Parker: Absolutely. All right. Final question. And I want to kind of do a fun one here. Wackiest HS number you've ever seen.

Stephanie Holloway: Oh, Chris, this is a loaded question for a customs broker.

Chris Parker: I'm sure you've seen plenty.

Stephanie Holloway: You're asking a complete customs' nerd, a question that's really nerdy, but I had many favorites before the WCO changes and as I've been analyzing these and looking at them, the WCO for some reason, and I would love to get the background story. I don't know if long-time listeners, first-time callers can call into this show and give me any info or scoop they have on this. But they went next level on amusement park rides on this round. So they used to just get classified, it was just, I don't know, something super casual, not that exciting. Just amusement park rides, essentially traveling circuses. And they broke out amusement park rides and then went next level and broke out seven distinct subheadings. So we got roller coasters, water rides, bumper cars, carousels. So anybody who's importing or exporting amusement park rides has their work cut out for them. And so I think the bumper dodgem, that's legit in the classification system now, dodgem cars is my new favorite classification.

Chris Parker: I did not know that bumper cars were all also called dodgems.

Stephanie Holloway: I didn't either. dodgem.

Chris Parker: My global perspective is just expanding now.

Stephanie Holloway: Yeah. And you can only imagine that. Now you can get the dodgem in and out of every country's data.

Chris Parker: Yeah.

Stephanie Holloway: It's going to be rich.

Chris Parker: Yeah. Just got to pay those duties.

Stephanie Holloway: Where are they coming from? I don't know. Where are they going to? We will now know.

Chris Parker: Well, thank you so much for your time today Stephanie, if people want to get into contact with you with any questions or maybe even inform you on the deep history of amusement park rides in just numbers-

Stephanie Holloway: Which I'm hoping for, my fingers are currently crossed.

Chris Parker: How can people get into contact with you?

Stephanie Holloway: Yes. Reaching out to me via LinkedIn is great. So, Stephanie Holloway, you can find me with Expeditors or just using our expeditors.com page and it will get directed to me. There's a contact section and I would love to hear from people.

Chris Parker: Cool. Excellent. Well thank you again for your time and I hope you take care.

Stephanie Holloway: Thank you, Chris. Happy to be here.

Chris Parker: Thanks for listening to today's episode. If you've got any questions or want to learn more about today's topic, check out the show notes for more information. And before you go, make sure you're subscribed on whatever podcast app you're using so you won't miss the next episode. To learn more about Expeditors, you can find us on LinkedIn, Facebook, Instagram, and Twitter, or simply visit us at expeditors.com. Take care, and I'll see you next time.