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.

In cases where a product-specific rule(PSR) provides a choice of rules based
on a value added criterion(VA), change in tariff classification criterion(CTC),
specific manufacturing or processing operation criterion, or a combination of
any of these, the exporter can decide which rule to use.

Where product-specific rules require a change in tariff classification criterion or
specific manufacturing or processing operation criterion, it is required that each
of the non-originating materials used in the production fulfills the applicable rules
set out in Annex 3.

If a value-added criterion(VA) is applied, the regional value content (RVC) of
a good is calculated using the formula set out in Article 29.

Example: Hair curling iron of subheading 8516.32
An electric hair curling iron (subheading 8516.32) is made in Malaysia
from Mexican parts (8516.90).
FOB price US$ 4.40; the value of the non-originating parts is US$ 1.20.
The breakdown of the value of the good is shown in the table below:

Retrieved from:WCO ORIGIN COMPENDIUM

Here is a product-specific rules for “Hair curling iron”(HS8516.32)

Retrieved from:Comparative Study on Preferential Rules of Origin

 

In subheading 8516.32, there are three alternative rules and the producer can choose
a rule. The first rule requires a RVC of not less than 40 percent. This rule is fulfilled
since the RVC is 76 %. For the calculation of the RVC (Regional Value Content),
see Article 29 or Regional Value Content / Value Added Rules.

Therefore, the good at issue is considered originating under the ATIGA.