Regulatory Risks and Strategic Response Directions for South Korea's Defense and Space Industries in Light of Enhanced Dual-Use Technology Export Controls

Executive Summary

Executive Summary

The strengthening of dual-use technology export controls is not merely a change in the regulatory environment, but a paradigm shift brought about by the structural collapse of the boundary between civilian and military technologies, coupled with rapid technological advancements in AI, drones, and space. South Korean defense and space companies are facing a situation where it is difficult to effectively respond to this challenge with an approach centered solely on compliance with existing regulations. As the scope of the United States' ITAR/EAR continues to expand to encompass advanced AI chips, autonomous systems, and overall space technology, the consensus on international norms is being delayed due to the strategic competition between the U.S. and China, leading to a prolonged period of regulatory uncertainty characterized by a 'selective tightening' scenario, which is projected to be the most realistic outcome (with an occurrence probability of approximately 55%). In this environment, the key response direction that South Korean companies should take is to establish a 'regulatory proactive technology architecture' that internalizes the possibility of compliance with export controls as a design element from the technology development stage, and to secure a 'strategic insider' position within the U.S. and European defense ecosystems, leveraging existing defense cooperation achievements with Poland, Australia, and the UAE. An active strategy is required that transforms the perception of regulatory tightening from a threat into an opportunity for securing competitive advantage, and for this, it is essential to enhance compliance capabilities at the corporate level alongside the expansion of diplomatic relations and agreements with allied countries at the government level.

I. Issue Situation Analysis

Enhanced Dual-Use Technology Export Controls and Regulatory Risks in the Defense and Space Sectors

Issue Situation Analysis

1. Background and Evolution of the Issue

Dual-use technology refers to technologies that can be utilized for both civilian and military purposes, and has been a core subject of international export control regimes since the Cold War. However, this issue has recently entered a qualitatively new phase. Whereas in the past, technologies were typically developed for civilian purposes and then repurposed for military use, there is now a surge in research focused on 'dual-use by design,' where technologies are conceptualized from the outset with both civilian and military applications in mind, particularly in Europe. SIPRI warns that this trend is fundamentally undermining the premises of existing export control systems, indicating that maintaining multilateral export control cooperation is becoming increasingly difficult.

The background to these changes lies in the large-scale rearmament movement in Europe, triggered by Russia's full-scale invasion of Ukraine. Defense spending in Europe and Canada increased by $90 billion year-on-year [17], with governments rapidly integrating advanced technologies such as drones, AI, and autonomous systems into their defense sectors [5]. The problem is that the boundary between civilian and military technologies is rapidly dissolving in this process. With instances emerging where semiconductor chips from the automotive industry or pipes for shale gas extraction are repurposed for missile propellant production [1], the proliferation of dual-use technologies is accelerating across the entire supply chain.

The rapid advancement of AI technology further complicates this issue. An independent international scientific panel under the UN has warned that the pace of AI technology development is outstripping both scientific understanding and governments' policy response capabilities [3][10], implying that the formation of export control norms for AI-based weapon systems is lagging behind technological progress. Amidst intensifying military AI competition between the United States and China [8], existing multilateral export control frameworks, such as the Wassenaar Arrangement, are revealing structural limitations in effectively controlling these emerging technologies.

2. Current Situation (Latest Trends)

The current international export control environment exhibits a complex landscape with multiple trends unfolding simultaneously. First, the United States is continuously expanding the scope of its ITAR (International Traffic in Arms Regulations) and EAR (Export Administration Regulations), particularly strengthening export controls on advanced AI chips and servers. In this regard, attempts at smuggling are being detected throughout the AI server supply chain, leading companies like NVIDIA to enhance their own verification procedures [13]. This indicates a sharp rise in regulatory risk in areas where semiconductor and defense/space technologies intersect.

Second, while new international norm discussions on AI weapon systems are gaining momentum, substantive agreements have not yet been reached. As 'machine warfare' becomes increasingly visible [8], the formation of global rules is being delayed due to the strategic competition between the United States and China. A UN panel has explicitly warned that AI capabilities are outpacing scientific understanding and governmental adaptive capacities [3], suggesting that regulatory gaps will persist for a considerable period.

Third, the complexity of supply chain management is increasing as the military application of civilian technologies accelerates in the defense sector. There is a growing trend of defense startups repurposing automotive chips and industrial components for weapons production [1], and a blurring of lines in technology transfer and joint development, as seen with Ukraine's Brave1 platform expanding cooperation with Western defense firms like Airbus [14]. In South Korea's case, plans to enhance unmanned combat capabilities in response to North Korea's drone threats have been announced [2], which simultaneously boosts the domestic drone industry and heightens the export control risks associated with related technologies.

3. Key Actors and Their Positions/Interests

United StatesAs the primary architect and enforcer of dual-use technology export controls, the U.S. controls global technology transfer, including to its allies, through ITAR/EAR. The U.S. prioritizes maintaining technological superiority and preventing technology leakage to China and Russia, demanding that allies increase defense spending (to 3.5% of GDP) and adhere to strict technology controls [16]. While parts of the U.S. AI industry advocate for deregulation under the guise of competition with China [11], security authorities are moving towards strengthening controls, creating internal tensions.

EU and NATOare seeking a balance between the need for rearmament and the pursuit of technological sovereignty. NATO is facing difficulties in substantially increasing actual weapons production capacity while fulfilling its defense spending commitments [17], and the surge in dual-use technology research by European defense firms increases the potential for conflict with export control norms. The EU is urging for strengthened security cooperation with South Korea [7], while simultaneously expressing concern about proliferation risks stemming from deepening military cooperation between North Korea and Russia.

South Koreafaces conflicting pressures from expanding defense exports and complying with export control regulations. South Korea is actively expanding defense exports to countries like Poland, Australia, and the UAE, and is accelerating the development of its domestic drone industry and unmanned combat capabilities [2]. However, warnings from the OECD about the vulnerability of its export-dependent semiconductor industry to external shocks [4] and the logistical risks in the Strait of Hormuz [6] directly impact the supply chain stability in the defense and space sectors. Korean defense and space companies are bound by ITAR's re-export control provisions when exporting products incorporating U.S. components and technologies to third countries, which acts as a structural constraint in export contract negotiations.

Defense Startups and Civilian Technology Companiesare growing rapidly by replacing the slow production speeds of traditional large defense companies [1], but they are relatively vulnerable in terms of export control compliance burdens due to their use of dual-use technologies. The case of Turkey's Aselsan collaborating with a civilian telecommunications company to jointly develop smartphones [9] exemplifies the global trend of defense companies integrating civilian technologies, which in turn increases scrutiny from regulatory authorities.

4. Summary of Key Issues

The first key issue is the ambiguity in technology definition and regulatory gaps. The surge in dual-use by design technologies makes it difficult to clearly define which technologies are subject to export controls. In emerging technology fields such as AI, drones, and autonomous systems, internationally agreed-upon control standards have not yet been established [3][8], creating legal uncertainty for companies and security risks for governments.

The second issue is the weakening of multilateral export control cooperation. The intensification of U.S.-China strategic competition is diminishing the effectiveness of existing multilateral regimes like the Wassenaar Arrangement, and countries are moving towards strengthening their own independent export control standards. This increases the burden of 'regulatory layering' for South Korean defense and space companies, requiring them to comply with multiple, diverging regulatory frameworks simultaneously.

The third issue concerns supply chain transparency and re-export control risks. Within complex supply chains where civilian components are integrated into defense products, which are then exported to third countries, the risk of violating ITAR's re-export control provisions is rapidly increasing [1][13]. When Korean companies export satellites, launch vehicles, drones, etc., that contain U.S.-origin technology to the Middle East or Southeast Asia, the obligation to obtain prior approval (license) from the U.S. government is emerging as a key obstacle.

The fourth issue is the dilemma between technological sovereignty and alliance dependency. Middle powers, including South Korea, find cooperation with the U.S. and NATO allies indispensable for developing advanced defense and space technologies, yet this very cooperation is constrained by export control regulations, creating a paradoxical situation. Without enhancing technological self-reliance, the risk of export controls cannot be escaped, and conversely, the process of cooperation for technological self-reliance is itself subject to export control regulations. This structural dilemma poses a fundamental challenge to the mid- to long-term growth strategy of South Korea's defense and space industries [4][16].

II. In-depth Issue Analysis

Enhanced Dual-Use Technology Export Controls and Regulatory Risks in the Defense and Space Sectors

In-depth Issue Analysis

1. Analysis of Fundamental Causes of the Issue

The fundamental cause of the issue of strengthening dual-use technology export controls lies not merely in an intention to enhance regulations, but in a structural paradigm shift in technological development. Traditional export control systems were designed based on the logic of the Cold War era, when the distinction between civilian and military uses of technology was relatively clear. However, in areas such as AI, drones, advanced semiconductors, and space technology today, the very boundary between civilian and military technologies is dissolving. The reality of semiconductor chips from the automotive industry being repurposed for missile propellants and pipes for shale gas extraction being used in weapons production [1] demonstrates that the collapse of this boundary has already materialized across the entire supply chain.

A more fundamental problem is the proliferation of 'dual-use by design,' as pointed out by SIPRI. Whereas in the past, the issue was the post-hoc repurposing of civilian technology for military purposes, now, a method of designing technology with both civilian and military uses from the outset is being institutionalized, particularly in Europe. This can lead to a fundamental operational failure of the export control system, which operates by identifying and listing controlled technologies in advance. If the boundaries of controlled technologies are intentionally made ambiguous from the design stage, it becomes impossible to determine which technologies are subject to control.

The pace of AI technology development acts as a catalyst that further exacerbates this issue. The UN's independent international scientific panel has explicitly warned that the advancement of AI technology is outpacing both scientific understanding and governments' policy response capabilities [3][10], implying a paradoxical situation where regulatory authorities must design regulations without fully grasping the risks of the controlled technologies. In particular, since AI-based autonomous weapon systems rely on software and algorithms as core technological elements, effective control is structurally impossible with existing export control systems designed around the transfer of physical hardware.

The intensification of geopolitical competition also acts as a key fundamental cause. As the strategic competition between the United States and China shifts towards a technological hegemony contest, countries have begun to use export controls simultaneously as a security tool and an economic weapon. When the U.S. strengthened export controls on advanced AI chips, attempts by Chinese companies to circumvent these by smuggling were detected throughout the supply chain [13], raising questions about the effectiveness of export controls themselves and triggering a vicious cycle of reinforced controls. Ultimately, the strengthening of export controls forms a dual dynamic where it acts as a means to prevent technology proliferation while simultaneously intensifying geopolitical competition.

2. Structural Context

Political Structure

The current trend of strengthening export controls is not the product of a single political will but a result of overlapping political pressures. The most critical structural pressure arises from the U.S.-led realignment of alliances. The U.S. is applying dual pressure on Asian allies, demanding increased defense spending (to around 3.5% of GDP) [16] while simultaneously maintaining strict controls on advanced technology transfers. This reflects a strategic intent to manage allies' defense build-ups such that they do not develop in ways that threaten U.S. technological superiority.

The political context in Europe is more complex. The pressure for rearmament triggered by Russia's invasion of Ukraine, combined with threats of U.S. troop reductions in Europe [5], is accelerating the development of dual-use technologies by various European countries to secure defense autonomy. Airbus's cooperation agreement with Brave1, Ukraine's defense technology ecosystem, for joint military technology research and testing [14] exemplifies how these political pressures are translating into concrete industrial collaborations. However, this process creates a political dilemma where it becomes unclear which category of the resulting technologies falls under existing export control regimes.

Economic Structure

From an economic structure perspective, the most noteworthy point is the shift in the primary actors driving defense technology development from traditional large defense contractors to startups and civilian technology companies. Silicon Valley-style startups are entering the defense market by leveraging production speed, mass production, and cost reduction to compete with traditional defense firms [1]. Unlike established defense companies, these startups often have less developed export control compliance systems. This means that export control risks, which were once concentrated among major defense contractors, are now dispersing across the entire supply chain.

The structural vulnerability of the semiconductor sector is also deeply intertwined with export control risks in the defense and space sectors. The OECD has warned that South Korea's export dependency on semiconductors increases its vulnerability to external shocks [4], posing a dual risk for Korean companies that rely on advanced semiconductors as key components in defense and space applications. While the strengthening of export controls may impede the procurement of essential components, the semiconductor technology produced by South Korea itself could become subject to export controls.

Security Structure

The core of the security structure lies in the transformation of the modern battlefield, where technological superiority directly translates into security superiority. As drones, AI, and autonomous systems fundamentally alter the nature of warfare [5], nations strive to maintain strategic advantage by controlling the proliferation of these technologies. North Korea's continuous development of drone capabilities with Russian support [2] demonstrates that this technological proliferation is already occurring among adversarial forces, paradoxically strengthening the rationale for enhanced export controls while simultaneously raising questions about their effectiveness. With the delay in establishing global rules for military AI [8] and the looming advent of 'machine warfare,' the security dilemma further exacerbates the uncertainty within export control regimes.

3. Comparison of Historical Precedents and Similar Cases

The history of dual-use technology export controls dates back to the establishment of COCOM (Coordinating Committee for Multilateral Export Controls) during the Cold War. Founded in 1949, COCOM was a multilateral cooperation framework created by the Western bloc to control the export of strategic materials and technologies to the Soviet Union and Eastern Bloc countries, serving as a direct predecessor to the current Wassenaar Arrangement. The primary challenge faced by the COCOM regime was the increasingly blurred line between civilian and military applications of technology, a situation structurally similar to the present. The notorious 'Toshiba incident' in the 1980s, where the Japanese company Toshiba exported precision milling machines to the Soviet Union, contributing to advancements in Soviet submarine noise reduction technology, remains a historical case illustrating how failures in dual-use technology control can lead to direct security consequences. This incident established a precedent for the United States to impose strong sanctions even on companies from allied nations, which has direct relevance to the regulatory environment currently faced by South Korean defense and aerospace companies.

Following the end of the Cold War, the Wassenaar Arrangement, launched in 1996 to replace COCOM, aimed for more comprehensive dual-use technology controls. However, its structure, requiring consensus among participating states, inherently limited its ability to respond swiftly to emerging technologies. This limitation became evident with the proliferation of cyber surveillance technologies in the 2010s. When cyber surveillance software developed by European companies was used by authoritarian regimes to suppress dissidents, loopholes in dual-use technology controls became an international controversy, prompting the addition of cyber surveillance technologies to the Wassenaar Arrangement. Nevertheless, consensus on this issue was delayed for several years due to Russian opposition, repeating a structurally identical pattern to the current delays in forming international norms for AI weapon systems.

The most direct analogous case is the strengthening of satellite technology export controls from the late 1990s to the early 2000s. In 1998, the U.S. Congress legislated the transfer of satellite technology from the Commerce Department's Export Administration Regulations (EAR) to the State Department's International Traffic in Arms Regulations (ITAR). This action stemmed from suspicions that China had acquired ballistic missile technology while utilizing U.S. companies' satellite launch services. This measure significantly impaired the competitiveness of the U.S. satellite industry, resulting in a windfall for European launch vehicle companies. This historical precedent demonstrates that strengthening export controls can lead to unintended negative consequences for industrial competitiveness, contrary to the regulators' intentions, and provides a crucial reference point for understanding the current situation faced by South Korean space and defense companies.

In the semiconductor sector, the U.S. export controls on advanced semiconductors to China serve as the most direct ongoing precedent. The advanced AI chip export controls progressively tightened by the U.S. since 2022 have triggered attempts at smuggling by Chinese firms [13], prompting the U.S. to respond by further expanding the scope of controls. In this context, the OECD's warning [4] that South Korea's export dependency on semiconductors increases its vulnerability to external shocks carries direct implications for South Korean companies that use advanced semiconductors as key components in the defense and space sectors.

4. Key Variables in Issue Development

The key variables that will determine the future development of this issue can be identified across four main dimensions.

First, the speed and direction of the expansion of U.S. ITAR/EAR regulatory scope.The pace and direction in which the U.S. expands the scope of export controls on AI-based weapon systems and space technologies will be the most direct determinant of the business environment for South Korean defense and aerospace companies. In particular, if regulations are strengthened to explicitly include AI technologies in software and algorithmic forms as controlled items under ITAR/EAR, a fundamental re-evaluation of joint development and technology transfer methods will become unavoidable. The trend of NVIDIA strengthening its self-verification procedures following the detection of smuggling attempts in the AI server supply chain [13] suggests that this regulatory tightening is also extending to self-regulation by private companies.

Second, the possibility of maintaining multilateral export control cooperation frameworks.The key variable is whether existing multilateral export control regimes, including the Wassenaar Arrangement, can be reformed to effectively encompass emerging technologies such as AI, drones, and space technologies. Amidst intensifying U.S.-China strategic competition, the delay in global rule-making [8] increases the likelihood that nations will move towards strengthening their own independent export control systems. The weakening of multilateral cooperation and the strengthening of individual national regulations will increasingly subject South Korean defense and aerospace companies to the complex burden of complying with multiple regulatory regimes simultaneously.

Third, the balance between South Korea's defense export expansion strategy and its compliance capabilities with export control regulations.South Korea is actively expanding its defense exports to countries like Poland, Australia, and the UAE, with the issue of transferring weapon systems containing U.S.-origin components and technologies to third countries emerging as a key point of contention. The speed at which South Korean defense and aerospace companies can build compliance capabilities to maintain export competitiveness while adhering to U.S. ITAR/EAR regulations will be a critical factor in the success of their export expansion strategies. In this regard, the EU Ambassador's call for strengthening security and economic cooperation between South Korea and the EU [7] suggests that diplomatic space exists for South Korea to pursue diversification beyond a U.S.-centric defense cooperation structure.

Fourth, the deepening military cooperation between North Korea and Russia and the associated technology proliferation risks.North Korea is continuously developing its drone capabilities with Russian support [2], and the increase in North Korea's illicit coal exports, reflecting weakened sanctions monitoring [15], fundamentally questions the effectiveness of export control regimes. The EU Ambassador's warning that deepening military cooperation between North Korea and Russia heightens non-proliferation risks on the Korean Peninsula [7] indicates that this issue extends beyond mere regulatory compliance to encompass South Korea's overall security environment. As North Korea's drone and missile technologies advance at an accelerated pace, the South Korean government will face a dilemma: increasing pressure to enhance technological security for domestic defense and aerospace companies while simultaneously rushing to develop technologies to bolster response capabilities.