We develop a model of international tariff negotiations to study the design of the institutional rules of the GATT/WTO. A key principle of the GATT/WTO is its most‐favored‐nation (MFN) requirement of nondiscrimination, a principle that has long been criticized for inviting free‐riding behavior. We embed a multisector model of international trade into a model of interconnected bilateral negotiations over tariffs and assess the value of the MFN principle. Using 1990 trade flows and tariff outcomes from the Uruguay Round of GATT/WTO negotiations, we estimate the model and use it to simulate what would happen if the MFN requirement were abandoned and countries negotiated over discriminatory tariffs. We find that if tariff bargaining in the Uruguay Round had proceeded without the MFN requirement, it would have wiped out the world real income gains that MFN tariff bargaining in the Uruguay Round produced and would have instead led to a small reduction in world real income relative to the 1990 status quo.

What incentives do governments have to negotiate trade agreements that constrain their domestic regulatory policies? We study a model in which firms design products to appeal to local consumer tastes, but their fixed costs increase with the difference between versions of their product destined for different markets. In this setting, firms' profit‐maximizing choices of product attributes are globally optimal in the absence of consumption externalities, but national governments have unilateral incentives to invoke regulatory protectionism to induce firm delocation. An efficient trade agreement requires commitments not to engage in such opportunistic behavior. A rule requiring mutual recognition of standards can be used to achieve efficiency, but one that requires only national treatment falls short. When product attributes confer local consumption externalities, an efficient trade agreement must coordinate the fine details of countries' regulatory policies.