Here is a case study of De Minimis method.

Company A manufactures baby carriages (HS8715.00) in Japan and plans to
export them to Chile under Agreement between Japan and Chile.

The product specific rules for baby carriage (HS8715.00) under the Agreement are:

A change to heading 87.05 through 87.16 from any other heading; or
No required change in tariff classification to heading 87.05. through 87.16,
provided there is a qualifying value content of not less than 45 percent when the
Build-down method is used, or of not less than 30 percent when the Build-up
method is used.

To prove that the baby carriage qualifies as an originating good of Japan,
Company A decided to choose the CTC rule in this case.

Baby carriage is made from Indian aluminum bar (HS7604.10) and
Chinese handle grip (HS8715.00).

Since handle grip does not undergo “change in tariff classification from
any other heading”, baby carriage does not meet the CTC rule.
But if the value of handle grip (HS8715.00) is equivalent to 10% of transaction
value of baby carriage or less, Company A is allowed to disregard the portion of
handle grip for the purposes of the CTC rule pursuant to De Minimis provision
of Article 32.

Specific percentages referred to in Article 32(De Minimis)is here.

 

Here is a case study of Accumulation method.

Company A manufactures color TVs (HS8528.12) in Japan and plans to export
them to Chile under the Agreement between Japan and Chile.
Tuners (HS8529.90) which are used in the manufacturing process of the color
TV are imported from Chile.

The product specific rules for colour TV (HS8528.12) under the Agreement are:
A change to heading 85.25 through 85.28 from any other heading; or
No required change in tariff classification to heading 85.25 through 85.28,
provided there is a qualifying value content of not less than 45 percent
when the Build-down method is used, or of not less than 30 percent
when the Build-up method is used.

To prove that the color TV qualifies as an originating good of Japan, Company A
has to prove that the color TV satisfies either the CTC rule or qualifying value
content of not less than 45 percent when the Build-down method is used, or of not
less than 30 percent when the Build-up method is used.

Company A decided to choose the method based on the value of originating
materials (Build-up method) in this case.

Company A’s manufacturing costs of color TV

If Parts c (tuner) is an originating good of Chile, the color TV will qualify as an
originating good of Japan by considering Parts c as an originating material of
Japan in accordance with of Article 33.

The calculation of QVC of the color TV is:

This calculation shows that the TV qualifies as an originating good of Japan.

Here is a case study of Build-down and Build-up method

Company Y manufactures washing machines in Japan and plans to
export them to Chile under the Agreement.

The product specific rule for washing machine (HS8450.11) under the Agreement is:

A change to subheading 8450.11 through 8450.20 from any other heading; or
No required change in tariff classification to subheading 8450.11 through
8450.20, provided that there is a qualifying value content of
not less than 45 percent when the Build-down method is used,
or of not less than 30 percent when the Build-up method is used.

To prove that the washing machine qualifies as an originating good of Japan,
Company Y has to prove that the washing machine satisfies either the CTC rule,
or the 45% value-added rule (Build-down method) or the 30% value-added rule
(Build-up method).

(a)Build-down method

When Company Y uses the method based on the value of non-originating materials
(Build-down method)

The formula for calculating the qualifying value content (Build-down method) is:

QVC is the qualifying value content of the good, expressed as a percentage;

TV  is the transaction value of the good adjusted to F.O.B. basis; and
VNM is the value of non-originating materials used in the production of the good.
Since the origin of Parts D and E are not determined, in applying the formula,
value of those Parts should be considered as part of the value of non-originating
materials(VNM).

Thus, the calculation of the QVC of the washing machine is:

This calculation shows that the washing machine qualifies as an
originating good of Japan.

 

(b)Build-up method

(b) When Company Y uses the method based on the value of originating materials
(Build-up method)

The formula for calculating the qualifying value content (Build-up method) is:

QVC is the qualifying value content of the good, expressed as a percentage;
TV  is the transaction value of the good adjusted to F.O.B. basis; and
VOM is the value of originating materials used in the production of the good.

Since it is known that Parts A is originating good of Japan, Company Y found that it
would be easier to use the Build-up method because it is clear that QVC of the
washing machine will be more than 30%, taking into account the value of Parts A
only. In this case, Company Y does not need to check the originating status of other
parts and other costs.

Thus, the calculation of the QVC of the washing machine is:

This calculation shows that the washing machine qualifies as an
originating good of Japan.

Regardless of changes in its tariff classification, a product is considered as
originating when the value of the product is increased up to a specified level
expressed by an ad valorem percentage.

The rules based on a value-added/ad-valorem criterion may be described
primarily in two distinct ways:

a maximum allowance for non-originating materials

maximum third country content allowance, meaning that a final product can be
considered as an originating product provided that the foreign inputs do not
exceed a certain threshold;

Example 1
A drilling machine of heading 84.59 is manufactured from the following materials:

Parts & Costs	Origin	Value
case with origin from a free trade partner country	Originating	100
electronic control panel, from country outside the free trade area	Non-Originating	250
electric motor, from country outside the free trade area	Non-Originating	100
other parts of undetermined origin	Non-Originating	50
labour costs and manufacturer’s profit margin		500
Selling price of the final drilling machine(Ex-works)		1000

 

Product-specific rule (European model) for headings 84.56 to 84.66 is
Manufacture in which the value of all the non-originating materials used does
not exceed 40 % of the ex-works price of the product.

Thus, the value of the non-originating materials incorporated in the drill
(electronic control panels, motor and other parts = value 400)
(N.B. input with undetermined origin counts as non-originating input) does not
exceed 40 % of its ex-works price,
i.e., the percentage required for substantial transformation;

the drill therefore qualifies as the originating product.

 

a minimum requirement of domestic content

a minimum requirement of domestic content,  meaning that a final product can be
considered as an originating product provided that the domestic inputs exceed a
certain threshold;

Example 2
An electric hair curling iron (subheading 8516.32)

Parts & Costs	Cost	Origin	Value
Non-originating materials(8516.90)	Net-cost	Non-Originating	1.2
Cost of production	Net-cost		2.45
Profit	Cost		0.5
Transport	Cost		0.25
FOB Price			4.4

 

An electric hair curling iron (subheading 8516.32) is made in Mexico from
Japanese hair curler parts (8516.90). Selling price value 4.40; the value of
the non-originating hair curler parts is 1.20.

 

Product-specific rule (European model) for headings 8516.32 is

A change to subheading 8516.32 from subheading 8516.80 or any other
heading; or
A change to subheading 8516.32 from subheading 8516.90,
whether or not there is also a change from subheading 8516.80 or
any other heading,
provided there is a regional value content of not less than:
a. 60 percent where the transaction value method is used, or
b. 50 percent where the net cost method is used.

The first tariff shift rule requirement(a) is not met, meaning that the second rule(b)
combines a tariff shift rule with a regional value content requirement.
In our example, both the transaction value method and the net cost method are fulfilled:

Note1: In this situation “Net cost” is the total sum of a “Non-originating materials” and
“Cost of production”

Note2:Net cost represents all of the costs incurred by the producer minus expenses for
sales promotion (including marketing and after-sales service), royalties, shipping
and packing costs and non-allowable interest costs.