Origin Puzzle on Assembled Machinery
A manufacturer in a partner country assembles industrial pumps from components sourced from three countries. The finished pump is classified under a heading that requires, for preferential origin under a free trade agreement, either a change in tariff classification (CTC) or a regional value content (RVC) of at least 45% under the build-down method. The pump sells for $2,000 ex-works. Non-originating materials cost $1,150. Originating materials cost $300. The assembly labor and overhead in the partner country total $400. One non-originating component, a motor valued at $500, is classified in the same heading as the finished pump, so it fails the CTC test for that component. The importer wants to claim preferential treatment and asks whether the RVC route saves the claim.
1. Apply the build-down RVC calculation and determine whether the pump qualifies.
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Build-down RVC = (Ex-works price - value of non-originating materials) / Ex-works price x 100.
Ex-works price = $2,000. Non-originating materials = $1,150. RVC = ($2,000 - $1,150) / $2,000 x 100 = $850 / $2,000 x 100 = 42.5%.
That is below the 45% threshold, so the RVC route fails. The CTC route also fails because the $500 motor is classified in the same heading as the finished pump and therefore does not undergo the required change.
Because the rule is expressed as 'either CTC or RVC,' the pump fails both branches and does not qualify for preferential origin on these facts. The $300 of originating materials and $400 of labor and overhead are already embedded in the ex-works price; they do not reduce the non-originating value. The correct conclusion is no preference, and the importer should pay the MFN rate unless the production or sourcing is restructured.
2. What changes could the manufacturer make to qualify, and what documentation must support a claim?
Read the worked answer
To reach 45%, the manufacturer needs non-originating materials no higher than 55% of $2,000, i.e., $1,100. Current non-originating value is $1,150, so it must reduce that figure by at least $50. Options include sourcing the motor or another component from an originating supplier, negotiating a lower price, or shifting enough value into originating content. Alternatively, if the motor could be sourced so that it undergoes the required tariff change (for example, from a different heading), the CTC branch could be satisfied without meeting the RVC threshold.
The manufacturer should also verify whether the agreement permits accumulation or a de minimis allowance for the motor; if a de minimis rule applies, a small value tolerance might rescue the CTC test, but the file must confirm the specific rule and its value limit.
Documentation must include a valid origin certification or declaration, supplier declarations supporting originating status of materials, cost records substantiating the RVC calculation, and a bill of materials tying each component to its tariff classification and value. The importer should retain these records for the period required by the agreement and be ready to demonstrate the calculation on request.