The Harmonized System

Each and every customs-clearing agent as good as every one who deals with for matters connected to Customs is good presented with the Harmonized System. It is an intricate cataloging system, divided to parts, chapters, headings and sub-headings, enabling the allocation of a catalogue number for a given product. Alongside the detailed structure, the Harmonized System includes too a system of classification instructions. The Harmonized System was developed by the World Customs Organization (WCO) and was printed within the framework of a treaty set for that purpose in 1983 in Brussels. Its roots are quite previous and gain up to the nomenclature of Geneva of 1937.

It is a success story: as per the figures of the World Customs Organization, not less than 177 countries and economic regimes apply the Harmonized system within the framework of the Customs Tariffs and their foreign trade statistics, and 98% of the total international trade in goods make use of the classification codes of the Harmonized System. Thus, the Customs Tariff of the State of Israel as well as the European, the American and others, are built according to the Harmonized System and alongside each and every classification code (“Customs Item”), the customs rate applicative is said on goods classified in that classification item.

The Dispute between Brazil and Thailand opposite the European Community

In 2002 a trade dispute became apparent between Brazil and the European Community, to which Thailand joined in 2003, alongside Brazil. Thailand and Brazil are significant exporters of frozen boneless chicken cuts to the European Community. During the years 1996 – 2000 the chicken cuts were classified under Customs item 02.10.90.20 of the European Customs Tariff, and were charged with customs in the rate of 15.4% ad valorem. During 2002 the European Community amended its customs tariff rate, adding a provision to the effect that chicken cuts are to be classified under item 02.07.14.10 of its Customs Tariff. As a result of this change, the chicken cuts were charged with higher customs amounts, in the amount of about 1.00 Euro per KG. Brazil and Thailand disagreed the new classification (02.07) claiming the old classification (02.10) is the appropriate one. We do not intend to dwell here on all the subtleties of classification, but let us attempt to simplify the matter: the chicken cuts are salted and frozen cuts with salt contents of 1.2% to 3%. Customs Item 02.10 includes: “meat and edible remains of meat, salted, soaked in salt water, dried or smoked”. Customs Item 02.07 includes: “meat and edible remains, fresh, cold or frozen”. Brazil and Thailand argued that the chicken cuts would be classified under item 02.10 being salted. The European community claimed the salting with which the cuts undergo is not sufficient for the purpose of Item 02.10, as it enable to preserve the cuts for long-term preservation, which do not exist in respect to the cuts referred to. This was exactly the amendment executed by the Europeans in their Customs Tariff in 2002 – they added a provision, which inserted the condition of long-term preservation. Brazil, Thailand and the European Community maintained among them consultations for the purpose of solving the matter, and when the contacts failed, Brazil and Thailand decided to direct the conflict to the Dispute Settlement Body (DSB) – the legal instance of the World Trade Organization – The WTO. That occurred during the months of September – October of 2003.

The Jurisdiction of the WTO

The World Trade Organization, which was established in 1994, was placed up on the basis of old veteran GATT – General Agreement on Tariffs and trade from 1947. One of the principles of the GATT agreements and the World Trade Organization is the decrease of customs duties and binding thereof. The idea is that apiece and every state undertook to bind its customs (i.e. not to raise them) and to decrease them gradually. With the establishment of the World Trade Organization, the undertakings of the states were updated as for customs binding, and each and every saying submitted a detailed schedule of its customs binding. A country imposing customs duty over the ordering indicated in its schedule(save for exceptional cases – safety measures) violates its commitments and can be expected sanctions according to the agreement. The list of binding is made out – not surprising – as per the Harmonized System. Brazil and Thailand claimed that the timed of the European Community in respect to item 02.10 does not enable the EC to impose a 1.00 Euro per KG customs duty. The EC argued on the other side that the relevant binding schedule was not that of item 02.10 as the proper classification of the goods was 02.07. The problem brought before the WTO’s DSB was the adjusted interpretation of the binding schedule of the EC: doesitem 02.10 including chicken cuts with the EC finding itself in a state where it has violating its binding, or that item 02.10 of the timing excludes chicken cuts.

After some procedural steps, a panel (legal tribunal) was established in June 2004 for the purpose of examining the complaint of Brazil and Thailand. In the month of May 2005 the panel published its report. Appeals filed by both parties with the WTO’s Appellate Body were rejected in full, save for some minor points, in mid September 2005.

To anyone concerned in the bottom line we can stated that the Panel as well as the Appellate Body accepted the complaint of Brazil and Thailand and ruled that the classification of the goods was in item 02.10 of the schedule binding of the EC. Accordingly, the Appellate Body instructed the EC to bring its practice into conformity with its WTO undertakings.

We shall focus on several points which have vast importance over and above the circumstances of the case itself.

The World Customs Organization was Moved Aside.

Seemingly, this was a conflict between states concerning the proper classification of certain goods, and the suitable place to settle this kind of a conflict was the World Customs Organization. Section 10 of said Brussels Treaty (of the Harmonized System) states explicitly that every conflict between the states subscribing to the treaty in respect to applying and interpreting the treaty which cannot be solved between the states themselves, shall be assigned to a committee dealing with the Harmonized System which will submit its recommendations regarding the conflict. In order to cast out any doubt, Brazil and Thailand subscribed to this Treaty together with the European Community states. If so, what really happened here?

The “guilty” party in this matter were Brazil and Thailand for directing the conflict to the World trade organization for its ruling. Indeed, Both Brazil and Thailand did not ignore the above question and explain to the Panel why the had directed the matter to the World trade Organization rather than to the World Customs Organization. Brazil and Thailand emphasized that they did not bid the proper interpretation of segment 02.10 of the Harmonized System, a matter within the jurisdiction of the World Customs Organization, but a ruling as to the proper interpretation of the binding schedule of the European Community. This schedule, argued Brazil and Thailand, were a part of the World Trade Organization agreements hence, the WTO had jurisdiction o’er the case. Probably, and this is our presumption, Brazil and Thailand preferred the World Trade Organization as an interpreter, rather than the World Customs Organization as an interpreter. As we shall see later, this decision of Brazil and Thailand was correct indeed.

Surprising maybe, and maybe not, but the EC agreed that the World Trade Organization was authorized to deal with the matter. The EC preferred the World Trade Organization due to procedural reasons: in a hearing before the Panel of the World trade Organization, Brazil and Thailand were supposedly the claimants, where the European Community was the defendant. Such being the case, the onus of proof lays on the claimant- i.e. Brazil and Thailand – to prove that the chicken cuts are classified under item 02.10 of the binding schedule of the EC. If Brazil and Thailand had failed in raising the burden, or even in case of a doubt, the EC would have won the case. The EC tried to benefit from this procedural advantage. On the other hand, had this conflict been brought before the World Customs Organization, the organization would have been asked to provide a clear solution to the classification conflict, one way or the other, with the EC having no procedural advantage.

And what was the panel’s decision? The Panel ruled that it had jurisdiction over the case, as the matter was assigned to DSB by members of the WTO. It was the duty of the WTO to settle conflicts concerning proper interpretation of the WTO agreements, stated the Panel. The Panel also ruled that when a conflict was assigned to the WTO, it is not allowed to transfer the matter to another body.

A matter of interest, the Panel passed a series of specific questions concerning the rules of classification, including the classification of chicken cuts, to the World Customs Organization (two questionnaires with a total of 13 questions). Indeed, according to the dispute settlement regulations of the WTO, the Panel is authorized to send questionnaire not only to the direct parties but also to other parties and organizations. The Panel did not include in the questionnaires passed to the World Customs Organization the jurisdiction issue (Brazil, Thailand and the EC were asked about that). The World Customs Organization cooperated: it took the questionnaires seriously and provided specific answers, however at the end of the second questioner, the World Customs Organization expressed its position:

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