I think the issue here is that humans aren't rigid bodies. That means the analysis is more difficult.
Let's leave aside arm wrestling for now and imagine a single box being pushed on by two people Alice and Bob, from opposite sides. Alice exerts a $50 N$ force, Bob exerts a $40 N$ force. What happens?
- Alice experiences a $90N$ force. So does Bob. This is the sum of the force exerted by the other party as well as the reaction force exerted by the box.
- The box experiences a net $10N$ force and moves towards Bob's side.
- Alice is "winning" because she's capable of withstanding the $90N$ force while Bob isn't. It doesn't necessarily mean Alice is stronger than Bob, but it does mean that Bob (for whatever reason) is unable to resist being pushed.
The last bullet point is crucial. To illustrate it further, let's say you're standing still and I push you. Do you fall over? Not necessarily. If I push with a very small amount of force (e.g. I blow on you) then your muscles are more than capable of maintaining position. If I push harder, then you might have to brace yourself - e.g. move your legs such that one leg is behind you, and then using that leg to push back against the force I'm exerting. This position lets your muscles more effectively fight back against me. However if I'm much stronger than you, then even this might not work, and you'll fall over.
We can make this situation more artificial as well. To go back to Alice and Bob, suppose Bob is wearing roller skates. This means the friction he has with the ground is much weaker. Alice can easily push the box towards Bob's side because Bob can't get enough traction to push back. You can see that a large part of our ability to resist being toppled while standing comes from friction, and just because the box moves towards Bob's side doesn't mean Bob is physically weaker.
The same thing is happening in arm wrestling, except this time the ability to resist being pushed mainly comes from the muscles of the arm.