2. Changing and adding codes to the International trade classification: Combined nomenclature

The findings presented in this section are based on desk research and interviews with CN-code experts working at organisations such as Statistics Netherlands, Eurostat, DG TAXUD and the Dutch customs.

2.1 What are CN codes and who governs them?

The Combined Nomenclature (CN) is used to classify goods. This classification of goods is used to set Common Customs Tariffs and for the EU's external trade statistics. The CN is also used in intra-EU trade statistics. It is based on the World Customs Organization's Harmonized System nomenclature with additional EU-specific subdivisions. The Harmonized System is a list of commodities applied by most trading nations.

More specifically, the first 6 digits of the CN-codes correspond to the Harmonized System nomenclature that is governed by the World Customs Organization (WCO). The 7th and 8th digits of the CN-codes are governed by Eurostat and the EU Directorate General for Taxation and Customs Union (DG TAXUD). Statistics Netherlands (CBS) does not play an active role in this. However, users of these codes, including national statistics institutes (NSIs), can submit suggestions for changes to Eurostat or DG TAXUD.

2.2 Introducing new CN codes: timing and responsibilities

2.2.1 Timing and initiation of CN code alteration

According to the European Commission’s website, the CN codes are revised and updated annually. “Every year, Annex I to the basic CN Regulation (Council Regulation (EEC) No 2658/87 on the tariff and statistical nomenclature and on the Common Customs Tariff) is updated and published as a stand-alone Regulation in the EU's Official Journal. Such updates take into account any changes that have been agreed at international level, either at the World Customs Organization (WCO) with regard to the Harmonized System (HS) nomenclature or within the framework of the World Trade Organization (WTO) with regard to conventional duty rates. Other changes may be required to reflect the evolution of, for example, commercial policy, technological or statistical requirements.” (European Commission, 2021a)

The CN is accompanied by a code of conduct to prevent unwarranted expansion of the nomenclature and to outline how new codes can be proposed and introduced. The annual updating process is intended to result in modernisation of the CN, taking into consideration technological or commercial developments (European Commission, 2000). Generally speaking, CN proposals suggest the splitting of existing codes.

2.2.2 Classifying and defining goods for the CN

When proposing new CN codes, a clear definition of what exactly this new category would comprise is crucial. These definitions will also be used by customs in the future to check and test that traded goods are classified correctly. According to the European Business Statistics Manual published by Eurostat (2021a, p. 91), the basic criterion for the classifications of goods in the HS and the CN are the ‘physical properties and intrinsic nature’ of the goods concerned, based on inherent criteria such as:

• the raw materials they are made of;
• the stage of production they have reached;
• how they are produced;
• the purpose or user category for which they are intended;
• whether they can be stored.

A goods classification is thus determined primarily by its inherent features. These features can also be used to define goods for which a new CN code is proposed. The important thing is that there is a way to check or test whether products have been correctly classified.

2.2.3 Official guidelines for CN-codes and their alteration

This section presents and summarises excerpts from the CN Code of conduct (European Commission, 2000). These excerpts have been taken from the Customs Code Committee, Tariff and Statistical Nomenclature Section.

The CN subheadings in the HS nomenclature should reflect:

• the EC’s international commitments (for example WTO tariff concessions and WCO recommendations),
• various EC policy requirements expressed by the competent Commission departments (where the needs are not met elsewhere),
• legitimate needs of a Community nature for specific sectors expressed by Member States and by European Federations.

Modernisation

• The modernisation of the CN will involve creation or deletion of CN subheadings, changes to the CN subheading structure or modifications of descriptions, in particular in accordance with Article 9(1) of Regulation (EEC) No 2658/87.
• 3.2.2. In modernising the CN, due account shall be taken of nomenclatures related to the CN (e.g. PRODCOM).

The nomenclature

• When amending the nomenclature structure of the CN, the code number allocated to a CN subheading should be maintained, where the coverage of the CN subheading remains the same or the change in coverage is a minor one.
• A CN subheading cannot be deleted unless it has been in force for at least two calendar years. C 150/6 Official Journal of the European Communities 30.5.2000 EN
• Descriptions in the CN should be clear, precise and concise, and if necessary accompanied by legal notes.
• The products to be covered by a CN subheading should be clearly identifiable or recognisable on the basis of objective and measurable criteria.
• The descriptions in the CN should observe the parallelism between the different Community language versions of the CN and coherence in the terminology used.
• The tariff annexes to the CN should normally be used only for products which are the subject of specific WTO tariff measures and for which the creation of CN subheadings is not deemed necessary.
• ‘TARIC subheadings for statistical purposes’ shall reflect the needs of the Community. Such subheadings shall enter into force on the first day of a month, apply on a monthly basis for at least one year and be subject to the normal review cycle for CN codes.

2.3 Steps for proposing and introducing new CN codes

1. Initiation of revision and suggestions for changes (annual revision)
   a. Sometimes (new) products are placed in different categories by different countries. As the EU is a customs union, this should not happen. Therefore discovering such discrepancies can trigger the development of new regulations, explanatory notes and codes.
   b. New CN codes can also be suggested by trade unions.
   c. New CN codes can be proposed by federal statistics and customs bureaus.
2. Submission of proposed changes
   a. First submit a proposal at EU level. For a proposal to have a chance to come into force on 01/01/2023 it should be submitted by the end of 2021.
   b. Proposals need to be submitted before April to be able to be considered for implementation the following year. Usually, the proposals are uploaded into an IT system of the EU in April.
3. Evaluation of proposals and decision
   a. Evaluation steps:
   i. First, the proposals that TAXUD and Eurostat receive are allocated and shared with relevant EC departments and classification experts, statisticians, topic experts. At this stage the proposals are internally evaluated to determine their relevance, importance and feasibility. There can be several iterations with the proponent to clarify or refine unclear aspects. This might lead to approval, new insights, additions, changes, removal of parts, or rejection of the proposal.
   ii. Subsequently, the remaining proposals are attached to a working document by TAXUD and sent to the EU Member States for their information.
   iii. The proposals are then sent to the Customs Code Committee, Tariff and Statistical Nomenclature Section for evaluation. This committee meets three to four times a year and receives the working document, the proposals and the agenda 15 days prior to the meeting. Committee members are delegated by the Member States and generally work at the national customs office, ministry of finance or NSI. At the committee meetings the proposers present their proposals. (If the proposal is to be presented by someone who is affiliated with neither the NSI nor the customs office this needs to be approved in advance by the Member States.) The Customs Code Committee can accept, reject or request further information on proposals during the meeting. Straightforward proposals (e.g. a single, simple product to be added) are sometimes accepted very quickly. However, for more complex proposals there might be several iterations at this stage. The committee might ask the proponent for clarifications or changes 
   iv. Proposals that have been accepted by the Customs Code Committee, are subsequently subject to internal EU ratification procedures. Several EU organisations need to agree to the proposed changes. The accepted proposals are then sent back to the committee along with translations in the all EU languages 
   v. The Customs Code Committee votes on the remaining proposals in July. Each member state has one vote it can use in favour or against a proposal. A proposal is accepted if a qualified majority of votes is in favour of the proposal 
   vi. Adjustments to the nomenclature need to be approved by the parliaments of the EU Member States 
   b. Evaluation criteria:
   i. Importance of the proposed codes. E.g. societal relevance or importance in regard to new policies or technological trends.
   ii. Clarity of the definitions of the proposed codes. Can they be applied and checked by customs officers in all EU Member States?
   iii. Trade volume estimate of the good and/ or share of the good of the current code. There are approximate financial trade volume thresholds to introduce new codes on different levels:
   1. 25 million euros for a new subheading at EU level (digits 7 and 8)
   2. There are some exceptions, for example if the proposed codes are of very high importance or if they would cover a substantial but below-threshold trade volume but are growing very fast.
4. Publication and implementation
   a. In October, a book is published comprising all the changes to the CN codes. This way Member States and companies have sufficient time to implement the new codes before they come into force.
   b. The accepted changes come into force on 1 January of each calendar year.

2.4 Interrelation with other classifications

Harmonized System nomenclature: The Harmonized System was introduced in 1988 and has been adopted by most countries worldwide. It has undergone several changes in the classification of products. These changes are called ‘revisions’ and entered into force in 1996, 2002, 2007, 2012 and 2017 (UN Stats, 2021).

The CN codes are generally taken as a reference for the PRODCOM codes. PRODCOM codes are usually not more detailed than CN codes. It would certainly be interesting to determine the largest bio-based product categories (definitely fewer than 10) and to propose that the corresponding CN codes be split. This alone could provide more rigorous insights into the development of the bio-based economy. In the future, when volumes of other bio-based products are larger, new CN codes can be proposed for these as well.

2.5 Recommendations for proposing new CN codes

• The Code of conduct is very useful to inform the drafting of a proposal for new CN codes (see References section for the link).
• Proposals need to a) state a reason for the proposed change, b) clearly define the goods for which new codes are suggested and c) not contradict other EU legislation.
• The most important evaluation criteria for CN proposals are a) the estimated volume of the good and b) the clarity of the definition for customs to check goods’ classifications.
• The length of this process is strongly influenced by the complexity and clarity of the proposal (and goods definition) and the number of new codes proposed.
• Ideally, only a few codes for the most important bio-based goods should be proposed. This is a cross-cutting topic (like introducing new codes for gen-manipulated produce or second-hand goods) that could lead to a large number of new codes which is undesirable. What are the largest, most important categories of bio-based products?
• Clearly define the proposed categories and think of how customs officers can check the correct classification of these goods.
• Get input on the proposal from DG GROW, European trade associations and national customs services.