Revisiting Embedded Liberalism: Does the Theoretical Possibility Meet Empirical Validity? Analyzing Labor Laws and Preferential Trade Agreements

Abstract

Extant scholarship on embedded liberalism (EL) emphasizes whether governments keep their promises to protect the risk-bearers of economic liberalization but overlooks its liberalization effect. In particular, scholars rarely explore how EL solves the time-inconsistency problem plaguing economic liberalization, i.e., governments may ex post renege on their policy promises made prior to the liberalization. To fill this void, in this study, I look into how social insurance shapes efforts to liberalize trade. I argue that institutionalized social consensus such as labor market institutions (LMIs) mitigates the time-inconsistency problem and encourages trade liberalization. I test this argument by examining how LMIs affect the making and design of preferential trade agreements (PTAs). Leveraging comprehensive datasets on labor laws and PTAs, an endogenous count model analysis finds that strong labor laws are positively associated with the growth of PTAs. Furthermore, robust labor laws tend to produce deeper PTAs with rigorous enforcement mechanisms. These effects dominate in democracies and are not a function of policy substitution. The empirical findings remain considerably consistent across alternative econometric estimators, variable measures, and model specifications, except those concerning enforcement-related hypotheses. Overall, this study demonstrates that pre-committed social protection facilitates economic liberalization, corroborating the core thesis of EL.