So what happens in WinUAE when you enable this library?
Nothing. The only difference is that there's a bsdsocket.library in memory. All network applications use this library.
I mean if nothing is installed on my set-up then how does Workbench know what it has to do with TCP requests?
Workbench doesn't handle or know anything about TCP requests.
Workbench 3.1 doesn't include any network applications. You have to install them.