Andy Burnham wants to redesign and rebuild Britain. But outdated trade rules could stand in the way of the economic transformation he has promised.
Plans to bring Thames Water into public ownership, for example, have stalled amid fears of legal challenges. However, the stall exposes a wider constraint on his plans for change. If government is to overhaul failing infrastructure, accelerate the green transition and reshape strategically important industries like water and energy, it needs the freedom to act without facing billion-pound claims from foreign investors. A little-known area of trade policy hides this particular weapon: Investor-State Dispute Settlement (ISDS).
Written into trade deals, ISDS grants foreign investors the power to sue governments in private – tribunals outside national legal systems – over policies they allege damage their interests. Dubbed “litigation terrorism” by Nobel laureate Joseph Stiglitz, companies can claim not just for sunk costs but all future profits they expected to make, meaning that awards often run into the billions. It’s the taxpayer that foots the bill. We’ve seen challenges to everything from minimum wage rises to plain packaging on cigarettes to fracking bans.
The template was drawn up in 1959 by Hartley Shawcross, a Shell executive, and Hermann Abs, chairman of Deutsche Bank during the Nazi period. Abs wanted a “Magna Carta for capitalism”: to shield European colonial assets in countries about to gain independence. We now see a ‘boomerang effect’: rules written to discipline post-colonial states now discipline us.
A majority of Thames Water shareholders are based in countries where the UK has signed a treaty granting ISDS rights. This gives them a potential avenue to challenge intervention that bypasses the British courts. Shares already written down to zero make for a more tenuous claim, so a “Special Administration Regime” is a harder target. But the creditors bidding to take over Thames Water include US vulture funds with a record of using ISDS, and well versed in routing their holdings through letterbox companies to acquire relevant treaty rights.
This is far from an imagined threat: ISDS cases against the UK are snowballing. Investors in the quashed Cumbria coal mine are suing for £300m via a Singaporean hedge fund. Billionaire Russian oligarch Mikhail Fridman is challenging sanctions imposed on him after the full-scale invasion of Ukraine.
In June, Chinese investor Jingye threatened a £1bn ISDS claim over Keir Starmer’s steel takeover. This should raise clear alarm bells around Burnham’s mission to “safeguard sovereign manufacturing”.
The solution cannot be to roll back ambition. We must tackle trade rules in tandem with domestic measures to revitalise British industry. As our utilities flounder and climate destabilisation escalates, the state must be able to protect our public services and security without being held to ransom.
ISDS is written into trade deals but can be written out. This is what countries like Australia and New Zealand are doing: committing to no new ISDS and reviewing, renegotiating and terminating existing treaties. The Starmer government failed to follow that lead. In May it concluded a trade deal with the Gulf states including ISDS. That text has not been signed: we could still remove that chapter. To safeguard his promised economic transformation, Burnham must break with this approach: the moment demands that we remove the shackle on our sovereignty and step away from ISDS for good.
This article first appeared in Spotlight on Economic Growth: Rethinking New Paths to Prosperity
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