Guidance

Technical note of the headline trade impacts of the upgraded UK-Republic of Korea Free Trade Agreement

Published 18 December 2025

1. Introduction

The United Kingdom and the Republic of Korea (RoK) have concluded negotiations on an upgraded Free Trade Agreement (FTA). This builds upon the existing Trade Continuity Agreement (TCA) carried over from the European Union in 2021.

This technical note sets out the Department for Business and Trade’s (DBT) headline results of the economic impact of the upgraded UK-RoK FTA. It presents modelled estimates of the change in services trade flows between the UK and the RoK as a result of the FTA.

The results are not a full and holistic assessment of the impacts of the FTA. They are a preliminary assessment to provide an initial understanding of the general magnitude and direction of the impacts on services trade.

The department will publish an assessment of the impacts of the upgraded UK-RoK FTA at signature. This will provide more detailed sectoral narrative of the headline modelling results.

2. Preliminary modelling results

These preliminary results are not forecasts. They represent the marginal economic impacts of the agreement compared with a counterfactual of the existing TCA with the RoK, while maintaining all other factors affecting the UK-RoK economic relationship constant. A comparative static model is used which means that a comparison can be made of the economy before and after the introduction of the agreement, focusing on the long-term impact. The results therefore represent the change in the long-run level of trade flows, each year, relative to a baseline of the existing TCA.

To estimate these figures, the analysis uses a sectoral simulation gravity model known as the New Quantitative Trade Model (NQTM). More details are published in the accompanying Modelling paper. This builds on DBT’s existing Services Gravity Modelling as set out in a 2021 Services Trade Modelling working paper. It is based on a framework developed by Caliendo and Parro^{[footnote 1]}, using International Trade and Production Database for Simulation (ITPDS) trade data and Centre for Prospective Studies and International Information (CEPII) tariff data aggregated from the Harmonised System 6 (HS6) level. A working paper setting out the model in full will be published in due course.

The model does not have an explicit time dimension. Nor does it provide results in pound sterling (£) values. Instead, the model presents results as a percentage change in trade, which are then applied to 2024 services trade data published by the Office for National Statistics (ONS) to obtain £ values in 2024 prices.

Results should be interpreted as broad orders of magnitude rather than precise estimates.

2.1 Modelled estimates of the impact on services trade

The preliminary estimates for bilateral services trade are modelled increases compared with their current level under the existing TCA expressed in 2024 prices. This provides an indication of the overall picture of services trade with the RoK after the FTA.

The tables below show modelled estimates of the change in trade flows between the UK and the RoK as a result of the upgraded FTA.

Modelling estimates that bilateral services trade with Korea could increase by £669 million (13%) per year in the long run as a result of the FTA.

Table 1: Bilateral services trade results

	£ million estimates (in 2024 prices)	Percentage (%) change
Change in UK services exports to the RoK	£410 million	11% increase
Change in UK services imports from the RoK	£259 million	18% increase
Change in total services trade between the UK and the RoK	£669 million	13% increase

Source: DBT modelling

UK services exports to Korea could increase by £410 million (11%) per year in the long run as a result of the FTA.

UK services imports from Korea could increase by £259 million (18%) per year in the long run as a result of the FTA.

3. Model description

3.1 New Quantitative Trade Model (NQTM)

The impact on bilateral trade from the upgraded UK-RoK FTA is modelled using an approach developed by Caliendo and Parro^{[footnote 2]}. This is a type of NQTM, which extends DBT’s existing Services Gravity Modelling as set out in a 2021 Services Trade Modelling working paper.

More details are published in the accompanying Modelling paper.

The interpretation of the results

The NQTM modelling is a representation of the world built on past data that may not represent what happens in the future, particularly at a time of trade policy uncertainty. The estimated preliminary results are not forecasts, they represent the marginal economic impacts of the agreement compared with a counterfactual of the TCA, maintaining all other factors affecting the UK-RoK economic relationship constant. Therefore, while this modelling provides insights on the expected orders of magnitude of the economic impacts, it does not capture all possible factors affecting the future trading relationship between the UK and the RoK, such as the impact of recent tariff announcements by the United States of America (USA) on both countries, for example.

No economic model is able to fully capture the complexity of the real-world and country-specific behaviours. Therefore, the model used, like all economic models, is based on several assumptions and stylised simplifications which must be considered when interpreting the figures. In particular, capital and investment are not part of the modelling structure, and labour cannot reallocate across countries.

The analysis employs a comparative static model, comparing the economy’s state before and after the agreement. These impacts are therefore assumed to be realised in the long run.

Database

All data is set to the baseline year 2019 due to data availability and to avoid bias caused by disruption in trade from the coronavirus (COVID-19) pandemic. This means the baseline does not include international policy changes that have taken place since then.

No adjustment is made for changes in trade policy that are not already incorporated into the baseline, such as recent announcements on tariffs by the USA and other countries, or future growth trends.

4. Modelling inputs

The existing agreement bilaterally removed 98% of the RoK’s tariff lines on goods trade. Therefore, this upgraded agreement provides greater services liberalisation of trade with the RoK, with limited additional market access for goods. Technical Barriers to Trade (TBT) negotiations removed ambiguity in the Pharmaceutical Products and Medical Devices Annex text as a preventative measure. Consequently, Non-Tariff Measure (NTM) impacts are limited and have not been modelled. As a result, an evaluation of the reduction in restrictions affecting services trade is important for evaluating the agreement.

One function of services agreements is to ‘liberalise’ trade by reducing or removing barriers, such as regulations and restrictions. A second is to reduce the ability of a country to make restrictions in the future (known as ‘water’), which is the extent to which countries have the policy space under their General Agreement on Trade in Services (GATS) World Trade Organization (WTO) commitments to become more restrictive.

The changes in the restrictions under the existing agreement affecting services trade have been modelled using the Organisation for Economic Co-operation and Development’s (OECD) Service Trade Restrictiveness Index (STRI)^{[footnote 3]}. This allows for qualitative information on measures affecting services trade from the agreement to be translated into a quantitative measure.

4.1 Summary of inputs

For this analysis, an aggregated 16% reduction in both the UK and the RoKs ‘water‘ was assumed across all modelled services sectors. This is based on the average percentage reduction in ‘water’^{[footnote 4]} across services sectors in the existing TCA and a further assumption that the UK will also make additional commitments to liberalise its applied regime by an average reduction of 5% as calculated using the OECD’s STRI.

The inputs for the reductions in the ‘water’ are scaled according to Ciuriak and others^{[footnote 5]}, finding that actual liberalisations generate responses 2.4 times greater than reductions in ‘water’. Therefore, the NQTM approach models the effect of both the liberalisations and reductions in the ‘water’ as a result of the agreement.

5. Uncertainty

5.1 Sensitivity analysis

The range of impacts are calculated using the estimated standard error from the regression and are made to reflect the 95% confidence interval for the parameter β, which represents the elasticity of trade with respect to the STRI in the model. In this way the reported range concerns the inherent empirical uncertainty about how trade flows will react to the negotiated fall in trade costs.

More detailed information can be found published in DBT’s 2021 Services Trade Modelling working paper and the NQTM Modelling paper published alongside this technical note.

Table 2: Point estimates and sensitivity analysis, modelled UK services exports/imports to/from the RoK

	Lower bound	Point estimate	Upper bound
Services exports	5% (£211 million)	11% (£410 million)	16% (£626 million)
Services imports	10% (£142 million)	18% (£259 million)	27% (£387 million)

Source: DBT modelling

1. Caliendo L and Parro F. ‘Estimates of the Trade and Welfare Effects of NAFTA’ Review of Economic Studies: 2015, volume 82, issue 1, page 144 ↩

2. Caliendo L and Parro F. ‘Estimates of the Trade and Welfare Effects of NAFTA’ Review of Economic Studies: 2015, volume 82, issue 1, page 144 ↩

3. Geloso Grosso M and others. Services Trade Restrictiveness Index (STRI): Scoring and Weighting Methodology (PDF 4.5MB) OECD Trade Policy Papers: 23 January 2023, No. 177 ↩

4. OECD, Water in the GATS, 2015 ↩

5. Ciuriak, Dadkhah and Lysenko, ‘The Effect of Binding Commitments on Services Trade’ World Trade Review: 2019, volume 19, issue 3, pages 365 to 378 ↩