The Economic Similarity, Regional Economic Agreement and Bilateral Trade Flows

Traditional literature takes gravity variables, regional economic agreement formation, and economy similarity as exogenous variables when discussing the determinants of the bilateral trade flows. This research uses the bilateral trade information from 1986 to 2008 and the common types of trade gravity models, such as the traditional cross-sectional model, three-way fixed effects model, and bilateral fixed effects model, to re-examine bilateral trade flow determinants. This article assumes that the trading economies’ similarity and the bilateral trade volumes’ similarity in percentage over foreign trade with each other, contribute to the parties’ willingness to be involved in the same regional trade group. The same are regarded as endogenous variables, which will be used to explore the gravity variables and the effect of the endogenous regional economic agreement on bilateral trade flow.