Rules of origin are used to determine the country of origin of a product

for purposes of international trade. There are two common types of rules
of origin depending upon application, the preferential and non-
preferential rules of origin (19 CFR 102). The exact rules vary from
country to country, from agreement to agreement.

Non-preferential rules of origin are used to determine the country of

origin for certain purposes. These purposes may be for quotas, anti-
dumping, anti-circumvention, statistics or origin labelling.

The basis for the non-preferential rules originates from the Kyoto
convention[1] which states that if a product is wholly obtained or
produced completely within one country the product shall be deemed
having origin in that country.

For a product which has been produced in more than one country the
product shall be determined to have origin in the country where the last
substantial transformation took place.
To determine exactly what was the last substantial transformation, three
general rules are applied:
 1 Change of tariff classification (on any level, though 4-digit level is
the most common)
2 Value added-rule (ad valorem)
3 Special processing rule, the minimum transformation is described.
For instance, in the EU non-preferential rules of origin for T-shirts
(HS6109), the origin is supposed to be in the country where the
complete making-up was done.[2]

According to the non-preferential rules a product always has exactly one

country of origin. However, the non-preferential rules may differ from
country to country; the same product may have different origins
depending on which country's scheme is applied. Usually it is the rules
of the country into which a product is being imported that apply.

Preferential RoO are part of a free trade area or preferential trade

arrangement which includes tariff concessions. These trade
arrangements might be unilateral, bilateral or regional (also sometimes
called multilateral) trade arrangements. The rules of origin determine
what products can benefit from the tariff concession or preference, in
order to avoid transshipment.
Where are rules of origin used? 
Rules of origin are used:

— to implement measures and instruments of commercial policy

such as anti-dumping duties and safeguard measures;

— to determine whether imported products shall receive most-

favoured-nation (MFN) treatment or preferential treatment;

— for the purpose of trade statistics;

— for the application of labelling and marking requirements; and

— for government procurement.

Not much more work was done on rules of origin until well into the
Uruguay Round negotiations. In the late 1980s developments in
three important areas served to focus more attention on the
problems posed by rules of origin:
  

Increased number of preferential trading arrangements

First, an increased use of preferential trading arrangements,
including regional arrangements, with their various rules of origin;
  
Increase in the number of origin disputes
Second, an increased number of origin disputes growing out of
quota arrangements such as the Multifibre Arrangement and the
“voluntary” steel export restraints; and
  
Increased use of anti-dumping laws
Lastly, an increased use of anti-dumping laws, and subsequent
claims of circumvention of anti-dumping duties through the use of
third country facilities.