[비즈한국] In the tariff war ignited by U.S. President Donald Trump, 'item classification' is emerging as another major battlefield. This is because tariff rates vary depending on which category an imported or exported product falls under. Countries around the world are engaged in fierce battles over the item classification codes of goods.
Tariff rates and country of origin are directly linked to costs
Recently, the Korea Customs Service website has been filled with correlation tables for item codes regarding tariffs imposed by the United States. The 'Korea-U.S. Item Code Correlation Table' summarizes how products subject to U.S. tariffs correspond to Korea's own item classification system, serving as a response to U.S. tariff policies. This is a support measure provided by the Korea Customs Service to help Korean import/export companies respond quickly to changes in U.S. policy.
The item numbers used in this classification are 'HS Codes'. The HS Code (Harmonized System code) is an international standard product classification code established by the World Customs Organization (WCO). The first 6 digits are based on international common units. These 6 digits are assigned based on major categories, types, uses, and functions. Subsequent digits are subdivided by individual countries using different classification systems to arrive at the final HS code. Korea uses the 'HSK Code', an item classification number that extends up to 10 digits.
For example, for roasted coffee beans, the first 2 digits are classified under Chapter 09 (Coffee, tea, maté, and spices), and the next 2 digits are added based on the specific item—in this case, 01 for coffee—resulting in the first four digits, 0901. Following that, coffee that is not roasted is classified with a 1, while roasted coffee is classified with a 2.
HS codes are critical because they determine the tariff rate, country of origin determination, and eligibility for Free Trade Agreement (FTA) preferences. Depending on which code a country assigns to the same product, a company's competitiveness and the costs it must bear change. For instance, if a smartwatch is classified in Korea under HS code 8517 for communication devices, it is duty-free; however, if it is classified under HS code 9102 for wristwatches, a basic tariff of 8% applies. In fact, when Samsung Electronics005930's 'Galaxy Gear' smartwatch was classified as a wristwatch by countries like India, Turkey, and Thailand—leading to 4-10% tariffs—it avoided those tariffs after the WCO classified the Galaxy Gear as a communication device in 2015.
Trade disputes even arise over which code to apply
Trade disputes also erupt over HS codes. If a specific country attempts to apply a code with a higher tariff rate to secure tax revenue, the exporting country argues for the assignment of a code with a lower rate. Since the authority to assign HS codes lies with each nation's customs authorities, disputes can arise if the importing and exporting countries view the HS code of a specific product differently.
An official from the Revenue Examination Division of the Korea Customs Service said, "Usually, HS code-related disputes are resolved through bilateral diplomacy, but they are sometimes brought before the WCO."
If an agreement on an HS code cannot be reached through negotiations, the matter may be referred to the WCO Harmonized System Committee (HS Committee) for a decision. While WCO decisions do not have legally binding force, they hold significant weight as they represent an international consensus on item classification.
A recent case involved a conflict between Korea and India over Radio Units (RU) for base stations exported to India. India viewed them as 'communication equipment' subject to a 20% tariff (HS code 8517.62), while the Korean government and Samsung Electronics argued they should be seen as 'parts' with no tariff.
Ultimately, the Korean government took the case to the WCO. On September 18 (Korean time), the HS Committee ruled in favor of Korea. As a result, the government and Samsung Electronics expect to save approximately 800 billion won in tariffs and penalties.
In 2023, there was a dispute regarding outdoor LED display modules. Countries including the U.S., EU, and Switzerland argued that LED display modules for outdoor advertising exported from Korea should be classified as 'other monitors.' Prior to that, outdoor LED display modules were treated as intermediate components and mostly exempt from tariffs, but the U.S. and EU sought to secure tax revenue and protect their domestic manufacturing industries by classifying them as 'other monitors' subject to tariffs.
In response, the Korean government argued that outdoor LED display modules are intermediate goods without video signal conversion capabilities. Eventually, the HS Committee decided to classify them as 'flat panel display modules.' Consequently, Korean companies were able to avoid tens of billions of won in tariff burdens.
Will the U.S. accept industry efforts to find 'loopholes' in reclassification?
Following the signing of the Korea-U.S. joint factsheet on tariff negotiations on the 14th, the industry is showing moves to minimize tariff burdens through item reclassification. The non-ferrous metal industry, which faces high tariffs of 50%, is also looking for tariff loopholes through item classification.
Lee Seung-hoon, Head of Planning at the Korea Non-Ferrous Metals Association, said, "We are considering reclassifying aluminum foil as 'parts for automobiles,' which would be subject to a 15% tariff, based on the fact that it is used in secondary batteries for electric vehicles."
However, it is uncertain whether such reclassification will be accepted by the U.S. There is a high possibility that the U.S. will view this as reclassification for the purpose of tax evasion and refuse to change the HS code. With the signing of the factsheet, the assignment of HS codes is expected to become a new battlefield in the tariff war.