— Paul Amery's Blog

The Brexit vote is the 21st century’s Smoot-Hawley moment

For the 1929 Wall Street crash to turn into a global depression, one extra ingredient was needed: protectionism.

The Smoot-Hawley tariff, applied in June 1930 by the US government to agricultural imports, set in train a cycle of tit-for-tat measures that brought global trade down by a half in two years.

The succession of events that followed is well-known: rising poverty and unemployment, growing left and right-wing extremism throughout Europe, international tensions and, eventually, war.

The pro-Brexit result of last week’s UK referendum is the closest 21st century equivalent to Smoot-Hawley we have yet seen. The symbolic importance of the imminent withdrawal of the world’s fifth-largest economy from its largest tariff-free trading zone is hard to exaggerate.

This shock event has taken place against a rapidly deteriorating outlook for world trade and may well signal the acceleration of the trend. According to a sobering recent research note from Insight Investment, protectionist and discriminatory measures are becoming more commonplace.

The US has introduced 43 trade barriers to protect its steel industry in the past seven years, says Insight, recently culminating in a new tariff on Chinese steel. Over the same time period Europe has introduced 14 new anti-dumping duties.

Last week, the World Trade Organisation (WTO) reported that, between October 2015 and May 2016, members of the G20 group of leading industrialised nations implemented new protectionist measures at the fastest rate since the WTO began keeping records in 2009.

During this period, the WTO said, the G20 economies applied 145 new trade-restrictive measures, equating to an average of almost 21 new measures per month.

Insight’s CEO, Abdallah Nauphal, cites alarming demographic trends and the growth in debt levels as other factors threatening to rend politics more insular and international cooperation much more difficult over coming years.

Global trade volumes, which for decades have risen at a faster rate than GDP, have lagged economic growth rates ever since the financial crisis and are now in decline: the value of global trade fell 14 percent in dollar terms last year. The Baltic Dry index, a barometer of the global shipping market, is bumping along at multi-year lows.

According to a new article by Jeffrey Rothfeder in the New Yorker, the average charter rate for the largest cargo carriers has fallen from two hundred and fifty thousand dollars in 2008 to less than three thousand US dollars per day now, reflecting massive overcapacity in shipping and falling demand. That’s a stunning, 99 percent decline in eight years.

Signalling rising protectionist sentiment, one of the ideological leaders of the Brexit campaign, Chris Grayling, threatened this weekend to restrict agricultural imports from France to the UK if Paris or Frankfurt tries to “emasculate” the UK’s financial sector.

The right-wing members of the Brexit campaign have long agitated for immigration controls, step two in an attack on the EU’s basic principles of free movement for goods, labour and capital.

Boris Johnson, the putative leader of the next Conservative government, sought to play down such fears this weekend, but only by making the absurd claim that UK citizens would be able to enjoy access to the rest of the EU, whether to work or live, while the UK would be able to control movement in the other direction via an immigration points system.

If restrictions on the free movement of goods and people spread across the region and worldwide, limits on capital flows will surely follow. Taken together, these trends threaten an economic recession on a scale not seen since the 1930s.

Brexit is likely to go down in economic and political history as signalling the start of a very dark period.