This article has been written by Shivam Chauhan, currently in Semester 8 of the BBA LLB program at Auro University.
Introduction
In today’s world, countries trade with each other to grow their economies. Free Trade Agreements are special deals between countries that make trade easier by removing taxes and restrictions on imports and exports. Developing countries often join these agreements to increase their trade, attract investment, and boost their economies. However, FTAs also come with challenges, such as increased competition, job losses, and dependence on bigger economies.
This blog explores how FTAs help developing countries, the difficulties they face, and real-life examples of their impact.
What Are Free Trade Agreements?
FTAs are agreements between countries that reduce trade barriers like tariffs (taxes on imports and exports). These agreements can be between two countries (bilateral) or many countries (multilateral). Some well-known FTAs include:
- North American Free Trade Agreement
- European Union Free Trade Agreements
- [1]Comprehensive and Progressive Agreement for Trans-Pacific Partnership
- African Continental Free Trade Area
Developing countries join FTAs hoping to increase exports and improve their economies. However, these agreements can also create challenges that must be managed carefully.
Benefits of FTAs for Developing Countries
- More Trade and Export Growth
One of the biggest benefits of FTA is that they allow developing countries to sell their goods in larger markets without high taxes. This increases exports and helps businesses grow.
For exam[2]ple, Vietnam’s participation in CPTPP has helped it export more textiles, electronics, and agricultural products. Similarly, Mexico’s involvement in NAFTA boosted its exports to the U.S. and Canada, making it a key manufacturing hub.
- More Foreign Investment
FTAs attract foreign companies that want to invest in countries with easy trade access. This investment creates jobs, improves infrastructure, and helps industries grow.
For example, India’s trade agreements with ASEAN countries have led to major investments in its automobile and technology sectors. Companies prefer to set up factories in India due to its trade benefits and lower costs.
- More Jobs and Economic Growth
With more exports and investments, industries expand, creating job opportunities. More people working means better incomes and economic growth.
For instance, Bangladesh’s textile industry has benefited from trade agreements with the European Union. This has provided jobs to millions, especially women, improving their economic status.[3]
- Increased Competitiveness
When local businesses compete with international companies, they are encouraged to improve their products, adopt new technologies, and increase efficiency. This helps them grow and compete in global markets.[4]
Countries like South Korea and Taiwan used FTAs to build strong manufacturing and technology industries, turning them into high-income economies.
- Technology Transfer and Innovation
Many developing countries benefit from FTAs by gaining access to better technology and new production methods. When foreign companies invest in a country, they bring advanced technology and expertise, helping local industries improve.
For example, Malaysia’s involvement in various FTAs has allowed its electronic and semiconductor industries to adopt modern technology, making the country a key player in global supply chains.
Challenges of FTAs for Developing Countries
- Competition from Foreign Companies
While FTAs help trade, they also bring in strong foreign companies that can outcompete local businesses. Small and medium-sized businesses in developing countries may struggle to survive.
For example, India decided not to join the RCEP (Regional Comprehensive Economic Partnership) because it feared that cheaper Chinese goods would harm local manufacturers and farmers.
- Loss of Government Revenue
Many developing countries rely on tariffs (import taxes) as a major source of income. When FTAs remove these tariffs, governments may lose money that could be used for healthcare, education, and infrastructure. Some African countries under worry about losing tariff revenues, which are important for their economies.
- Dependence on Bigger Economies
FTAs can make developing nations too dependent on a few major trade partners. If these partners face an economic crisis or change trade policies, it can hurt the developing country’s economy.[5]
A good example is Mexico’s dependence on the U.S. under NAFTA. When the U.S. imposed tariffs on certain Mexican goods, it created economic problems for Mexico.
- Exploitation of Workers and the Environment
To attract foreign companies, some developing countries relax labour laws and environmental protections. This can lead to poor working conditions, low wages, and environmental damage.
For example, Cambodia and Vietnam’s textile industries have faced criticism for poor labour conditions and environmental pollution due to intense global competition.
- Limited Benefits for Small Farmers
In many developing countries, small-scale farmers struggle to compete with large agricultural corporations from developed nations. FTAs sometimes allow big foreign companies to dominate markets, making it harder for local farmers to sell their products.
For example, Kenyan farmers have faced challenges under certain trade agreements, as cheap imported food products have reduced demand for local produce.
Case Studies
- Success: South Korea’s Economic Growth: South Korea used FTAs to expand its economy. By signing trade agreements with the U.S., the EU, and ASEAN countries, it became a global leader in technology and automobiles, with companies like Samsung and Hyundai benefiting greatly.
- Success: Chile’s Trade Expansion: Chile has signed multiple FTAs with major economies, including the U.S., China, and the EU. This has allowed Chilean businesses to export copper, fruits, and seafood globally, significantly improving its economy.
- Failure: Ghana’s Struggles with EU Trade Agreements: Ghana signed a trade agreement with the European Union expecting economic benefits. However, an increase in cheap European agricultural imports hurt local farmers, leading to job losses and economic problems.
- Failure: The Impact of NAFTA on Mexican Farmers: While NAFTA helped Mexico’s industrial sector, it harmed small farmers who could not compete with large-scale U.S. agricultural companies. Many rural farmers lost their livelihoods as cheaper imported food replaced local products.
How Can Developing Countries Benefit More from FTAs?
To make the most of FTAs while avoiding risks, developing countries should:
- Negotiate better trade terms to protect key industries.
- Expand trade partners to avoid being too dependent on one country.
- Support local industries by improving infrastructure and skills training.
- Enforce labour also environmental protections to ensure fair business practices.
- Reduce tariffs gradually to give local businesses time to adjust.
- Invest in education and technology to help businesses compete globally.
- Ensure fair treatment for farmers and small businesses to prevent market domination by large corporations.
Conclusion-
Free Trade Agreements can provide great benefits to developing economies by increasing trade, attracting investment, and creating jobs. However, they also pose risks such as job losses, dependence on larger economies, and environmental concerns.
To get the most out of FTAs, developing countries should:
- Carefully negotiate agreements to protect important industries.
- Strengthen local businesses before fully opening their markets.
- Invest in education and skill development to compete globally.
- Monitor trade policies to ensure sustainable and fair practices.
- Balance economic growth with environmental and social responsibility.
[1] https://www.transnationalmatters.com/free-trade-agreements-and-bilateral-investment-treaties/
[2] Mukhopadhyay, K., & Thomassin, P. J. (2018). The impact of Trans-Pacific Partnership agreement on the Canadian economy. Journal of Economic Structures, 7(1). https://doi.org/10.1186/s40008-017-0102-y
[3]Economics Observatory. (2025, March 26). What’s happening in Bangladesh’s garment industry? – Economics Observatory. https://www.economicsobservatory.com/whats-happening-in-bangladeshs-garment-industry
[4] impact-of-free-trade-agreements-for-bangladesh-businesses. (2024, March 6). https://www.dhl.com/discover/en-bd/small-business-advice/business-innovation-trends/impact-of-free-trade-agreements-for-bangladesh-businesses#:~:text=For%20instance%2C%20under%20the%20SAFTA,industry%20on%20a%20global%20scale.
[5] https://foreignpolicy.com/2020/11/23/why-india-refused-to-join-rcep-worlds-biggest-trading-bloc/