The Impact of Free Trade Agreements on Developing Countries:
Opportunities and Challenges
Zihan Wang
Shanghai Weiyu High School, Shanghai, China
Keywords: Free Trade Agreement (FTA), North American Free Trade Agreement (NAFTA), United States-Mexico-
Canada Agreement (USMCA), Developing Countries, Sustainable Development.
Abstract: Amid deepening globalization, Free Trade Agreements (FTAs) have evolved into rule-driven instruments
prioritizing intellectual property, environmental standards, and comprehensive governance, exemplified by
the USMCA. While FTAs offer developing nations market access and technological inflows, they pose
challenges, such as heightened competition threatening local industries, regulatory pressures from stringent
environmental clauses, and risks of eco-nomic dependency. This research found that developing countries
must strengthen domestic industrial competitiveness through innovation and skill development while
reinforcing social safety nets to mitigate inequality to navigate these trade-offs. Regional alliances and
specialized negotiation teams can enhance bargaining power against asymmetric terms. Simultaneously,
adaptive environmental policies and cross-border knowledge-sharing frameworks are critical to balancing
economic growth with ecological sustainability. By adopting proactive strategies, industrial upgrading,
institutional capacity-building, and multilateral cooperation-developing economies can transform FTA
challenges into catalysts for equitable, climate-resilient development.
1 INTRODUCTION
For developing countries, joining FTA is often
regarded as an effective way to promote intra-country
economic growth as this can facilitate technology
transfer within country and effectively attract Foreign
Direct Investment (FDI) (Al-Balushi &
Anderson,2024). However, the challenges brought by
FTA to developing countries could not be neglected.
For instance, after some developing countries cut
their tariffs under the framework of FTA, some
domestic traditional industries may decline due to the
higher intensity of market competition, which may
lead to a decrease in the autonomy of domestic
industries, thus further exacerbating social inequality
and economic imbalance (Autor et al.,2016). Apart
from the financial aspect stated above, the impacts
brought by FTA to developing countries in other
aspects are also controversial. For instance, compared
to developed countries, the bargaining power of
developing countries in FTA is relatively limited,
thus causing them to make unfavorable concessions
in areas such as intellectual property protection,
environmental standards and sustainability and
sacrifice their long-term benefits (Baker &
O’Malley,2020).
This article will take USMCA as an entry point
and analyze the specific impacts of the FTA on
developing countries from economy, society, and
environment through textual analysis, combined with
texts of the research on it. This agreement was an
edited version of the North American Free Trade
Agreement (NAFTA) which came into effect in 1992.
Statistics showed that NAFTA and USMCA brought
an increase in FDI and upgraded manufacturing
technology to Mexico, while at the same time,
bringing a series of negative impacts. For instance, a
shock to domestic traditional industries and an
increased reliance on external market
(Baldwin,2016). This article analyzes and
summarizes opportunities and challenges brought to
developing countries on the basis of the case
USMCA, discussing how to maximize the benefits
brought to developing countries by FTA and avoiding
the potential negative impacts and problems as well.
454
Wang, Z.
The impact of Free Trade Agreements on Developing Countries: Opportunities and Challenges.
DOI: 10.5220/0014384400004859
Paper published under CC license (CC BY-NC-ND 4.0)
In Proceedings of the 1st International Conference on Politics, Law, and Social Science (ICPLSS 2025), pages 454-459
ISBN: 978-989-758-785-6
Proceedings Copyright © 2026 by SCITEPRESS – Science and Technology Publications, Lda.

2 LITERATURE REVIEW
Arguments raised by existing studies on the question
of the impact of FTA on developing countries fall into
two main areas.
Some scholars believe that FTAs can bring great
economic opportunities to developing countries.
Developing countries can increase the effect of jobs
in the country by participating in FTAs, while
cooperation with other countries can not only help the
country attract foreign investment but also promote
the technological upgrading of domestic industries
and the diversification of industrial structure, thus
promoting economic growth to help the country to
enhance competitiveness in the global economic
market (Crossa, 2024). In the case of USMCA,
Mexico has deepened the integration of its
manufacturing industry chain with the United States
and Canada after the implementation of the
agreement, which has promoted the upgrading of
Mexico's domestic export structure and the
development of its high-value-added industries, thus
further illustrating the opportunities that FTA brings
to developing countries (Devdiscourse, 2022).
Other scholars emphasize the negative impacts of
FTA on developing countries, arguing that free trade
does not necessarily balance economic growth, social
justice, and environmental issues. Although FTA may
bring short-term financial benefits, in the long run,
over-reliance on external markets may inhibit
innovation in local industries, pose a great threat to
local small-scale enterprises, and exacerbate social
inequality (Gallagher & Carreón-Rodríguez, 2021).
At the same time, for developing countries, joining
the FTA may lead to over-dependence on developed
countries with which they cooperate, leading to the
weakening of their economic and legislative
independence, and may even further weaken their
voice on the world stage (Hufbauer & Schott, 2005).
In addition, the FTA may also lead to the over-
development of high-pollution industries in
developing countries and increase domestic
environmental pollution. After the USMCA came
into effect, the local enterprises in Mexico were
threatened by the competition in the US market,
which exacerbated the problem of regional poverty
(Jaumotte, 2004). At the same time, resources in some
parts of the country have been over-exploited, leading
to increased pollution problems (Jean & Bureau,
2016).
Based on these different perspectives, this article
argues that FTA brings both economic benefits and
certain social risks to developing countries as forms
of opportunities and challenges (Venkata ,2024).
Although FTA can promote technological progress, it
will also bring a series of serious problems if it lacks
effective national policy support. Therefore, when
signing FTA, developing countries should pay more
attention to the balance between economic growth,
social equity and sustainable development, while
avoiding the imbalance in economic structure and the
aggravation of social problems caused by blind
dependence on external markets.
3 IMPACTS BROUGHT TO
DEVELOPING COUNTRIES BY
SIGNING FTA
3.1 Overall Impacts Brought to
Developing Countries by Signing
FTA
Based on existing research, this article will explore
the role of FTA in promoting economic growth,
industrial upgrading and technology transfer in
developing countries, and at the same time analyze
the potential risks of increased market competition
and weakened industrial independence.
3.1.1 Opportunities Brought to Developing
Countries by FTAs
Under the framework of FTA, developing countries
can open up their markets. Meanwhile, FTA provides
developing countries with a platform to have access
to comparatively more advanced technologies. By
signing FTA with developed countries to establish
closer trade relations, local enterprises in developing
countries are more likely to introduce advanced
production technologies and management modes of
developed countries, thus promoting the
modernization of the industry and efficiency,
bringing about industrial upgrading. Furthermore,
FTA brings developing countries the opportunity to
receive foreign direct investment (FDI) from
developed countries, which generally focus on
advanced technology and efficient production
systems, thus further promoting the technological
upgrading of local enterprises to obtain the effect of
FDI (Kotschwar, 2017).
At the same time, the signing and establishment
of FTA significantly reduces the import and export
transaction costs, improving the convenience of local
firms entering other countries' markets. With the
expansion of the export market, the scale of
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production has expanded, the demand for labor has
significantly increased, and the number of jobs in the
country has also increased, especially in labor-
intensive industries such as manufacturing. Taking
the Comprehensive and Progressive Agreement for
Trans-Pacific Partnership (CPTPP) as an example,
which has contributed to the rapid expansion of
export-oriented manufacturing industries in member
countries such as Vietnam and Malaysia by
eliminating tariff barriers and promoting intra-
regional investment flows, thus driving a large
number of employment opportunities in industries
such as garments and electronics (Lin, 2012).
3.1.2 Challenges Brought to Developing
Countries by FTA
Developing countries may suffer from regional
development imbalances and weakened economic
independence. While FTA can facilitate the
integration of developing countries into international
trade markets, this economic impetus is often
spatially selective. Trade and investment may be
more concentrated in regions with good
transportation and infrastructure. At the same time,
for the sake of trade facilitation, investments targeting
export-oriented firms may be concentrated in coastal
areas, while in contrast, inland and rural areas are less
likely to enjoy the economic dividends brought by
FTAs, leading to imbalances in regional development
(Moerland, 2017).
At the same time, FTA may also bring weakened
economic independence to developing countries.
With the increase in FDI, developing countries may
gradually develop due to the economic ties of trading
partners. After signing FTA, developing countries'
economic policies may also be influenced by external
economies in order to cater to other economies. And
further dependence on trading partners may lead to
the possibility of more constraints on their economic
autonomy, further affecting their independence and
negotiating power in the international economy,
which in turn may lead to the weakening of
developing countries in the areas of industrial
protection, tariff policies, and even the loss of
autonomy (OECD, 2021).
In developing countries, FTA also tends to lead to
problems of social inequality due to the uneven
distribution of wealth and resources. With the
intensification of competition in the international
trade market, the more competitive and advantageous
industries and infrastructure, and the relatively
developed educational level of the region will receive
more investment and be further developed, while the
less competitive regions and industries will be
marginalized, resulting in the downsizing of
enterprises, thereby bringing about the problem of
unemployment. For example, rural areas and
traditional industries are often difficult to reap
dividends from FTA, which will lead to the further
widening of the gap between the rich and the poor
(Rao, 2024).
After signing the FTA, developing countries may
lower their environmental standards and allow highly
polluting industries to enter the country in order to
further attract FDI and expand exports, but this will
also lead to increased ecological degradation (Trejo-
Nieto, 2022). At the same time, developing countries
may face the risk of developed countries transferring
highly polluting and energy-intensive industries into
the country, such as petrochemicals, mining, and
steel, among others. Although it can bring short-lived
economic growth to developing countries, it tends to
increase support for export-oriented industries,
especially highly polluting industries that developed
countries do not want to over-exploit in their own
countries.
3.2 Impacts Brought to Mexico by
Signing USMCA
This chapter analyzes the economic, social, and
environmental impacts of the USMCA (formerly
NAFTA) on Mexico, comparing them to the impacts
of FTA on developing countries summarized in the
literature.
3.2.1 Industrial Upgrading and Economic
Restructuring
USMCA facilitated the liberalization of trade
between Mexico, the United States and Canada,
making it an important link in the North American
supply chain, meanwhile, having the effect of
significantly advancing Mexico's internal
manufacturing industry, with exports in the
automotive and electronics assembly sectors growing
by 12.7% and 9.4%, respectively, from 2020 to 2022.
Especially in the automotive industry, Mexico has
become one of the world's leading automotive
production bases. USMCA has also contributed to the
upgrading of Mexico's industrial structure by
requiring the use of more components from the U.S.
and Canada in the country's manufacturing sector
(Urata, 2022). In addition, the USMCA introduced
stricter Rules of Origin and labor standards, which
effectively prompted some multinational enterprises
to transfer low-end production to Mexico to meet the
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proportionate requirements of the regional value
chain, thereby promoting local employment and
technology transfer (Villarreal & Fergusson, 2022).
Furthermore, Mexican manufacturing FDI
inflows reached $31.8 billion in 2021, an increase of
more than 15% from 2019, demonstrating the
potential of the USMCA to attract long-term capital.
However, while the USMCA has brought
technological upgrading in the manufacturing sector
to Mexico, some of the country's traditional sectors
have not been able to enjoy the dividends it has
brought. The development of foreign trade has led to
strong external competitive pressures on the
agricultural sector, and as a result, some inefficient
agricultural production models have been phased out.
Additionally, the USMCA framework also requires
Mexico to improve its high-pollution, high-energy-
consumption industries, environmental and labor
standards, continuously optimize its industrial
structure, and gradually transition to a higher value-
added industrial system.
3.2.2 Employment Growth and Social
Inequality
The implementation of USMCA has contributed to
employment growth in Mexico, especially in the
manufacturing and service sectors. After
implementing USMCA, the inflow of foreign
investment into Mexico increased dramatically,
especially in areas such as automobiles and
electronics. This has not only led directly to the
expansion of firms and thus to a large number of jobs
but has also contributed to an increase in labor
productivity. As a result, Mexico's overall
employment rate has increased.
However, USMCA also poses the challenge of
social inequality in Mexico. While the more
developed northern region has benefited greatly from
the agreement, agriculture and low-skilled labor have
been greatly challenged (Baker & O'Malley, 2020).
The agricultural sector faced strong competitive
pressure from cheap agricultural imports from the
United States and Canada. Small-scale farmers lost
market share and were forced out of the market. This
exacerbated economic disparities between urban and
rural areas, regions and social classes. In addition, the
influx of foreign investment has been concentrated in
industrial parks and free trade zones, where workers
tend to have higher levels of education and skills,
while conversely, low-skilled laborers are under
pressure to lose their jobs and see their wages fall,
further exacerbating social inequality.
3.2.3 Environmental Pollution and
Countermeasures
Although the tougher environmental provisions of the
USMCA compared to NAFTA may have a positive
impact on the environment in Mexico, due to its near
implementation, it cannot reflect the long-term
impact on environment, therefore, this article will
speculate on the possible environmental impacts of
the USMCA through the environmental impacts of
NAFTA on Mexico.
The implementation of NAFTA has led Mexico to
face serious environmental pollution problems. In
order to attract FDI and expand exports, Mexico
relaxed its environmental provisions. At the same
time, the U.S. and Canada moved some highly
polluting industries, such as chemicals, oil and
mining, to Mexico, leading to increased local
environmental pollution. According to data provided
by the Mexican Environmental Protection Agency
(Secretaría de Medio Ambiente y Recursos Naturales,
SEMARNAT), between 1994 and 2008, Mexico's
industrial carbon dioxide emissions increased by
30%. As some local governments in Mexico lack
sufficient resources to implement environmental
protection policies, these highly polluting industries
have caused long-term damage to the ecosystem.
To address this challenge, the Mexican
Environmental Protection Act was amended in 2000
to emphasize industrial pollution control and require
companies to adopt stricter measures for exhaust
emissions. In addition, the Mexican government has
promoted the development of green technology and
renewable energy industries, particularly in the areas
of wind and solar energy. Nonetheless, the
implementation of NAFTA still exacerbated
environmental problems in parts of Mexico,
especially in areas where manufacturing and heavy
industry are concentrated (Kotschwar, 2017). Based
on NAFTA, the USMCA established more stringent
environmental provisions. However, due to Mexico's
high dependence on external economies, balancing
environmental development with economic growth
remains a major challenge for the USMCA to face.
The impact of Free Trade Agreements on Developing Countries: Opportunities and Challenges
457

4 COPING STRATEGIES OF
DEVELOPING COUNTRIES
UNDER THE FRAMEWORK OF
FREE TRADE AGREEMENTS
4.1 Optimizing Economic Structure
Developing countries should improve the
competitiveness of local industries and social security
systems. When signing FTA, low-end industries in
developing countries are often eliminated by fierce
competition, causing the whole economy to be over
dependent on external markets and a greater income
gap as well. So, developing countries should
formulate targeted industrial policies in this regard
and guide foreign investment into high value-added
industries. Governments should also increase their
support for local industries in terms such as tax
incentives, subsidies, technological research and
development, so as to enhance their capacity for
independent innovation and improve the
competitiveness of domestic industries in the world
market, thereby reducing the excessive dependence
on external markets that may be brought about by free
trade liberalization. To minimize the negative impacts
brought by FTA, developing countries can also help
affected groups transform into new industries through
policies such as providing social welfare and
provision of enhanced vocational training.).
4.2 Enhancing Bargaining Power
Developing countries should strive for more
favorable FTA terms for themselves. Compared with
developed countries, in the negotiation process of
FTA, developing countries are usually in a
disadvantaged position. Therefore, developing
countries should strengthen regional cooperation and
jointly participate in negotiations, so as to enhance
their collective bargaining power and strive for more
favorable terms for their own countries. Developing
countries should also strengthen the construction of
expert teams in international economic law, allowing
them to conduct in-depth research on the provisions
of trade agreements and put forward professional and
constructive recommendations to ensure that the
country obtains relatively favorable conditions in
terms of tariffs, intellectual property protection, etc.,
and to identify provisions that could lead to long-term
economic losses for the country.
4.3 Strengthening Environmental
Regulations
Developing countries should strengthen
environmental regulations and promote sustainable
development within their countries. Developing
countries should set stricter pollution control
standards and avoid industrial development at the
expense of the environment. Meanwhile, developing
countries can also use the FTA as a platform for
international cooperation to introduce green
technologies and sustainable development models of
partner countries that are worthy of reference, so as to
promote green ecological development within the
country. In addition, the government can also reduce
the dependence on high-pollution industries and
encourage the development of renewable energy
industries through subsidies for green industries, thus
realizing the coordinated development of the
domestic economy and the environment.
5 CONCLUSION
This article takes USMCA as an entry point, taking
existing literature into consideration and uses textual
analysis and comparative research method to study
the opportunities and challenges brought to
developing countries by FTA from economy, society
and environment, which can be correspondingly
expressed in the upgrading of industries and the
increase of jobs, and the imbalance of regional
development, weakening of economic independence,
rising social inequality and environmental pollution.
Moreover, the article analyzes and raises several
coping strategies that could benefit developing
countries, mainly including optimizing economic
structure, enhancing bargaining power, and
strengthening environmental regulation.
As a crucial tool in promoting global trade
liberalization, FTA plays an important role in
promoting economic growth, attracting FDI,
upgrading industries and improving technology
transfer. Nevertheless, negative impacts brought by
FTA could not be neglected, for instance, the
weakening in competitiveness of local industries,
increased social inequality, environmental pollution,
etc. This article takes USMCA as a case, discusses the
impacts brought to developing countries specifically
on economy, society and environment and puts
forward corresponding policy suggestions to
optimize their economic structure, enhance their
bargaining power and maximize their benefits under
the FTA framework, while avoiding potential risks.
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