By Greg Ip 

Britain's vote to leave the European Union has cast a shadow over the global economy. How deep a shadow depends crucially on how the rest of the world responds, which will be driven by politics, not economics.

The referendum's key takeaway is that sovereignty and nationalism now rival economics as drivers of voter sentiment. That is likely to tilt politics in the direction of less openness, slower growth and less predictable policies.

The initial drops in the pound and global stock markets were severe, but not cataclysmic. Worries of a financial panic similar to the bankruptcy of Lehman Brothers or default of Greece look unfounded for now. The Bank of England and its foreign counterparts signaled a readiness to lend banks what they need to cover any temporary cash outflow. Yields on British government bonds went down, not up, evidence of strong buying demand and no sudden flight of foreign capital.

Nonetheless, the drop in stocks is a sign of new risks surrounding the global economic outlook. The vote ushers in two or more years of uncertainty as Britain renegotiates its trade relations with the rest of the world and writes rules to replace EU edicts. The uncertainty had already depressed business investment.

Economists have predicted a British exit would knock 1% to 6% off U.K. gross domestic product: anything from a moderate slowdown to a deep recession. The International Monetary Fund predicts a hit to global economic growth outside the E.U. of zero to 0.2 percentage point.

Yet these exercises are largely guesses and can't quantify the more far-reaching consequences of 'Brexit.' In a nutshell, the referendum is a watershed in two related trends: the rising clout of antiestablishment politics and the retreat from globalization.

Globalization's retreat has been under way at least since 2008, when global finance nearly froze and the Doha Round negotiations for lower trade barriers collapsed. That was followed by a sovereign debt crisis that has nearly destroyed the euro, the European Union's crowning achievement.

These crises, and the economic slump that followed, fueled disenchantment with the established political order. Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, tracks the average approval rating of governments in 20 major democracies. It has been sliding steadily since 2010.

Yet it took another factor -- a backlash against immigration, fueled in part by homegrown Islamic terrorism in Europe and the U. S. -- to elevate populism from the fringes to center stage.

Last week was the first time in the postwar era that voters in an advanced economy have affirmatively decided to withdraw from a free-trade area (other than for a better one).

To be sure, there were reasons highly specific to Britain for the vote. Traditional British euroskeptics are free traders, not protectionists. They support globalization of goods and capital, but not people or regulations. The EU is more vulnerable to nationalist backlash than, say, the World Trade Organization precisely because it is much more ambitious (some might say overreaching). Faced with financial and refugee crises, some EU members have come to regret giving up control over their monetary policy and their borders.

Nonetheless, Brexit could accelerate the retreat from political and economic consensus around the world. History is replete with examples of political contagion: the fall of communist regimes in Eastern Europe in the late 1980s; the rise of left-wing populism in Latin America in the 2000s; and, more recently, the Arab Spring.

On Friday, Brexit spurred leaders of far-right populist parties in the Netherlands and France to reiterate demands for referendums on those countries' membership in the EU, which would revive yet again the threat of a euro breakup and an accompanying crisis. Donald Trump, the presumptive Republican nominee, drew parallels to his own campaign: "People want to take their country back," he said in Scotland on Friday.

Brexit also signals the waning influence on voters of economic forces. Elections and referendums often pit fear of economic isolation and impoverishment against more traditional, and visceral, considerations of national security and identity. Fear usually wins, which explains why Scotland voted in 2014's referendum to stay in the United Kingdom and why Greeks, despite suffering grievously in the eurozone, don't want to leave.

But in Britain last week, "Project Fear" lost. The bloodless recitation of economic studies couldn't compete with the conviction of many voters that they had lost control of their own country -- to Brussels, or to immigrants -- and hadn't shared in the benefits that globalization has showered on elites. Michael Gove, a conservative cabinet minister and leader of the Leave movement, said, "I think people in this country have had enough of experts."

Elections are usually fought on the familiar terrain of liberal versus conservative and big government versus small. That is now shifting to nationalist versus internationalist and ordinary workers versus elites.

This has become plain in the U.S. presidential election. Mr. Trump last week delivered his most explicit embrace of protectionism yet, even invoking the authority of George Washington and Abraham Lincoln.

"Globalization...wipes out our middle class and our jobs," he declared in a speech last week. "Our country will be better off when we start making our own products again, bringing our once great manufacturing capabilities back to our shores." As president, he promised, low-paid immigrants would no longer take jobs from Americans, and "massive new factories will come roaring into our country."

These promises aren't based on sound economics. The principle cause of falling manufacturing employment is increased productivity, which means fewer workers produce more goods, and a shift in consumer spending toward services. Higher tariffs on China and Mexico are more likely to provoke retaliation that leaves everyone poorer rather than bring back jobs. Hillary Clinton, Mr. Trump's Democratic rival, has launched her own version of Project Fear, warning that Mr. Trump's economic policies are "reckless" and will trigger another "economic crash."

But the Brexit debate has demonstrated the limits of warning of economic catastrophe, especially to the older, less educated workers who have benefited least from globalization. Mrs. Clinton has already bowed to this reality, recanting her previous support for the Trans-Pacific Partnership, a 12-nation accord covering trade, labor rights, intellectual property and investment for which President Barack Obama is seeking congressional approval.

For businesses and investors, every election in coming years brings the risk of more nationalist policies that further impair the free flow of goods, capital and people. The financial shock of last week's Brexit vote will eventually fade, but it is unlikely to be the last.

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

June 26, 2016 14:08 ET (18:08 GMT)