BRIEFING PAPER trade and investment series

Volume 5 Number 1 • June 2004 Public auto insurance and trade treaties by Steven Shrybman and Scott Sinclair

Summary beyond the scope of this report. Finally, we note that any damages assessed under NAFTA investment , or other Canadian provinces, can rules would be payable by the federal, not the establish a public automobile insurance system provincial, government. without being deterred by the North American Free Trade Agreement (NAFTA) or the General Agree- GATS ment on Trade in Services (GATS). While creating In the mid-1990s, Canada made GATS market public auto insurance would raise trade treaty issues, access and national treatment commitments the federal government has both the capability and covering motor . The GATS market the responsibility to ensure that these are addressed access rule disallows monopolies in sectors where and resolved. The Bernard Lord government’s deci- governments have made commitments, unless they sion to back away from this important public policy are listed as exceptions in a country’s schedule. initiative in the face of insurance industry threats is Canada listed an exception for public auto insurance regrettable. monopolies, but it only protects existing public auto insurance systems in certain provinces -- it does not provide the fl exibility to create new systems. NAFTA Furthermore, the GATS governmental authority The most serious risk of NAFTA disciplines being exclusion cannot be relied upon to exclude New invoked to challenge the establishment of a public Brunswick’s creation of a public auto insurance sector insurance plan by New Brunswick is that of a system. claim for damages by a foreign investor under the Consequently, creating a public auto insurance Treaty’s investment disciplines. While the costs, risk, system in New Brunswick would be inconsistent and notoriety of such a claim may discourage a U.S. with Canada’s existing GATSGATS commitments. or Mexican-based insurance company from invoking Nevertheless, New Brunswick can proceed with NAFTA dispute procedures, the industry has already public auto insurance without being deterred by the indicated that it is actively considering this option. GATS. The federal government can simply change If in fact such a claim is made, it would its 1997 fi nancial services commitments. There is a represent a worrisome international precedent special GATS procedure that allows Canada to do which would seek to expand the scope of foreign so. Canada would be expected to increase its GATS investor rights which have to date been recognized coverage in other sectors to compensate affected under international law. Given the tenor of recent WTO member governments for any lost “market arbitral awards, it would be unwise to discount the access” in insurance. This procedure to modify GATS possibility that such a claim might succeed. schedules was recently invoked for the fi rst time by However, the risks and consequences of the European Union. such claims, if they materialize, should also not be overstated. A signifi cant number of insurance Conclusions companies operating in New Brunswick’s market New Brunswick can proceed with public auto may have some diffi culty qualifying as foreign insurance despite the impediments posed by the investors under NAFTA. Accurate monetary services and investment provisions of NAFTA and the quantifi cation of these risks is also important, but GATS. These trade treaty obstacles are navigable.

national offi ce • bureau national • 410 – 75 rue Albert Street • Ottawa, ON K1P 5E7 tel: 613-563-1341 • fax: 613-233-1458 • [email protected] • www.policyalternatives.ca The debate over New Brunswick’s proposed public Drivers could also purchase optional additional auto insurance program, and the Lord government’s insurance for collision, theft and comprehensive decision not to proceed, underline how the latest coverage. Under the new system, the average auto generation of services and investment treaties insurance premium is estimated to fall from $1,212 increasingly impede legitimate public policy to $993. options. Changes in Canada’s existing trade treaty Public auto insurance would be provided commitments and its objectives in ongoing trade through a new Crown Corporation, the New talks are essential to secure stronger protection for Brunswick Public Insurance (NBPI), that will be a public services and to prevent future interference not-for-profi t entity operating at arms-length from with democratic decision-making. the provincial government. Substantial premium savings are expected to be achieved “through lower Background administrative costs and the not-for-profi t mandate of a sole provider Crown corporation.” The basic The Select Committee on Public Automobile mandatory insurance and optional vehicle damage Insurance (“the Committee”) was appointed by coverage will be provided exclusively through NBPI. resolution of the Legislative Assembly of New This aspect of the system will be a public monopoly. Brunswick on August 5, 2003. The Committee’s Private agents and brokers would continue to mandate was “to explore the most suitable form play a signifi cant role in the distribution of the public of a public insurance system for New Brunswick product. The public automobile insurance product should the province conclude that a public system will be distributed though private insurance agents is required.” After months of public consultation, and brokers, who will receive a 7% commission for expert testimony and deliberations, the Committee their services. Under the proposals, certain types submitted its fi nal report in early April 2004. of optional insurance (e.g., own-vehicle damage, The Committee unanimously recommended including collision, theft and comprehensive) could a “made-in-New Brunswick model of public be purchased solely from NBPI, while other types automobile insurance.” The key features of the (e.g., additional injury benefi ts, additional third- recommended system include “a public system that party liability coverage) could be purchased either offers extensive coverage at an affordable rate for all from NBPI or from private insurers in competition drivers with: with it. • no reference to age, gender, marital status, As the Committee notes, “insurers writing territory, payment history or lapses in insurance automobile policies in New Brunswick include to determine insurance costs; Canadian subsidiaries of large United States and • rates to be determined by driving record, Europe headquartered companies.”2 The creation of vehicle usage, vehicle make and model, optional the public auto insurance system to offer “services coverage purchased; previously provided solely by the private sector”— • oversight of the public utilities board for including foreign investors and service providers— mandatory and optional insurance rates. would therefore raise trade treaty issues. • pure, no-fault injury benefi ts with no option to On June 30, 2004 Premier Bernard Lord sue; announced that his government would not adopt • vehicle registration and insurance sold through the public auto insurance system recommended brokers and agents at a 7% commission; by the all-party committee. During the debate, the • mandatory vehicle coverage, additional injury insurance industry assailed the proposed system and and income replacement benefi ts, third-party threatened trade treaty litigation if New Brunswick liability coverage and collision, theft and went ahead.3 comprehensive sold by the Crown corporation This briefi ng paper analyses the trade treaty through private sector agents and brokers; and implications of the proposed scheme. This analysis • additional injury and income replacement was provided to the New Brunswick government in benefi ts and third-party liability coverage are May, 2004 prior to their decision not to proceed. sold by private insurers in competition with the Crown corporation.”1 Analysis

The proposed system would consist of a basic The international trade implications of creating no-fault mandatory auto insurance, including a public insurance scheme for New Brunswick personal injury protection and third-party liability. are briefl y described on pp. 20 and 21 of the

2 Committee’s report. We concur with its conclusion Moreover, federal treaty-making power does that: “It is clear that the NAFTA and the GATS do not not accord it the right to alter the division of expressly prohibit New Brunswick from establishing constitutional powers nor to implement international and maintaining a public automobile insurance treaty obligations in areas of provincial competence. regime. Both agreements do, however, contain Nevertheless, the federal government has the power rules that would apply to the creation of the Crown to make international commitments relating to corporation (NBPI) and its activities.”4 Our purpose matters of provincial jurisdiction, even though it in preparing this report is therefore two-fold. may have no constitutional authority to implement First, the legal opinions and advice received them. Indeed, the federal government has done by the Committee have not to our knowledge so with respect to numerous matters falling wholly been made public. It may be helpful, therefore, to or partially within the constitutional domain of the explicate some of the key trade issues that arise in provinces; auto insurance is one example. this context for those who are not privy to these Thus, while the federal government has no confi dential documents and advice. authority to compel the provinces to carry out Second, the Committee recommended that their policy and legislative functions in accordance the government of New Brunswick work closely with Canada’s international commitments, it is with federal offi cials to design a strategy to ensure nevertheless liable under international law for any that a new public automobile insurance system failure on the part of provincial governments to do will be consistent with Canada’s international trade so. obligations. This raises two concerns. The fi rst is that the province not unnecessarily compromise Uncertain outcomes its public policy objectives because of Canada’s It is also important to qualify any assessment ill-conceived international trade commitments. about the likely outcome of claims arising under The second has to do with the need for action by NAFTA or WTO rules because of the unprecedented, the federal government, not compromise by the ill-defi ned, and often untested character of many province, to address the constraints imposed by the international trade disciplines, particularly those former’s commitments under the GATS. concerning investment and services. In addition, the It would also be wise for New Brunswick to be principle of binding precedent (stare decisis) does cautious in dealing with federal trade offi cials who not apply in the area of international commercial are the authors of the trade disciplines that are now arbitration or trade adjudication. The potential proving so problematic, and who remain committed for inconsistent rulings has already become quite to pursuing further trade liberalization objectives. apparent in the decisions of the ad hoc arbitral The following assessment focuses on the tribunals convened to determine NAFTA investment two most likely points of confl ict with Canada’s claims. international trade obligations: 1) the NAFTA investment rules because they can be invoked NAFTA analysis directly by U.S. and Mexican investors, and 2) Canada’s 1997 GATS fi nancial services commitments The question we address is this: would the and the rules on public sector monopolies. establishment of a public automobile insurance Before addressing these issues, two preliminary system by New Brunswick expose Canada to comments are warranted. The fi rst concerns damage claims by foreign companies under NAFTA provincial prerogatives under the constitution. The investment rules? Relevant provisions are set in other concerns the diffi culty of making confi dent Chapter 11 (foreign investment); Chapter 14 predictions about the effects of trade rules that are (fi nancial services); and Chapter 15 (competition unprecedented and untested. policy, monopolies, and state enterprises). While other potential risks exist,5 narrowing Provincial jurisdiction the focus of concern to foreign investor claims As a preliminary matter, it is important to stress is reasonable in light of the extraordinary right that there is no legal, and certainly no constitutional accorded foreign investors under Section B of impediment to implementing a provincial public Chapter 11. These for example, accord U.S. and auto insurance scheme. The establishment of a Mexican-based companies the right to sue Canada Crown corporation to provide automobile insurance for damages arising from any alleged breach by it is clearly a matter falling within provincial authority of the expansive and investor-rights granted by the under the Constitution. treaty.6

3 When they arise, such disputes are decided, commercial transactions or impose not by our courts or judges, but by international quotas, fees or other charges; arbitration panels (Article 1120) operating in accordance with procedures established for resolving We are aware of no plans to invest New international commercial disputes of a private, not Brunswick’s public insurer with such authority. public, character.7 Furthermore, with the solitary The right to establish new Crown corporations exception of government measures implemented under Chapter 15 is also to prevail in the event of under the Investment Canada Act8, there is no confl icts with NAFTA investment rules. Article 1112: exception from the application of these dispute Relation to Other Chapters, provides: resolution provisions. In the event of any inconsistency between While the threshold for qualifi cation is modest, this Chapter [Chapter 11] and another to have standing to bring such a suit the investor Chapter, the other Chapter shall prevail must qualify as an investor of another NAFTA to the extent of the inconsistency. party. Neither Canadian nor European-based insurance companies would have direct access to There is an argument that this provision these dispute procedures, although they may have precludes investor claims relating to the recourse through U.S.-based subsidiaries or related establishment of a Crown corporation because corporations. exposing governments to such claims is inconsistent While there are few impediments to invoking with explicitly acknowledging their right to establish investor-state procedures, there are reasons that such a public monopoly. However, it is at least as may discourage a foreign investor from pursuing likely that a tribunal would fi nd the two provisions this remedy. First, international litigation is expensive compatible: Article 1110 doesn’t preclude the and likely to be protracted. Should the investor establishment of a new public insurance monopoly, succeed, the award may subsequently be tied up in it simply requires compensation to those foreign judicial proceedings challenging its validity. Second, investors adversely affected by such a measure. to bring an investor-state claim, the disputing investor must waive its right to sue for damages in Potential investor-state claims Canadian courts. Finally, the notoriety of challenging The establishment of such a public automobile a popular public auto insurance scheme may insurance plan would, in trade jargon, be a measure undermine the company’s good will in a market that relating to investments in fi nancial institutions and may still be important. cross-border trade in fi nancial services.10 For this The right to establish new Crown corporations is reason, NAFTA investment disciplines come into explicitly preserved by NAFTA play only to the extent that they are covered by The Committee states that: “It is clear that the Chapter 14 (Financial Services). Accordingly, the NAFTA and the GATS do not expressly prohibit New establishment of a public auto insurance scheme can Brunswick from establishing and maintaining a be challenged by foreign investors for violating only public automobile insurance regime.” In fact, NAFTA certain NAFTA investment disciplines.11 Of these, the explicitly preserves the right to establish new federal most problematic would be a claim that, by creating and provincial Crown corporations. Thus Article a public insurance monopoly, the province had 1503:1 (State Enterprises9) provides that: expropriated the investments of foreign companies Nothing in this Agreement shall be in the business of providing those same insurance construed to prevent a Party from products. maintaining or establishing a state NAFTA Article 1110 provides that: enterprise. 1. No Party may directly or indirectly nationalize or expropriate an investment The only signifi cant constraint imposed on the of an investor of another Party in its exercise of this right is that such Crown corporations territory or take a measure tantamount act in a manner consistent with NAFTA investment to nationalization or expropriation of and fi nancial services disciplines where: such an investment (“expropriation”), [the Crown corporation] exercises any except: regulatory, administrative or other governmental authority that the Party (a) for a public purpose; has delegated to it, such as the power (b) on a non-discriminatory basis; to expropriate, grant licenses, approve (c) in accordance with due process of

4 law and Article 1105(1); and on payment when Belgium acquired the majority of shares of a of compensation in accordance with competitor and then substantially reduced prices for paragraphs 2 through 6. competing services. Belgium also granted subsidies to the company it had acquired, but not its UK- 2. Compensation shall be equivalent to based competitor. the fair market value of the expropriated In considering the UK claim on behalf of a investment immediately before the foreign investor, the Court rejected the contention expropriation took place (“date of that good will is a property right capable, by itself, expropriation”), and shall not refl ect of being expropriated. It found that a granting of any change in value occurring because a de facto monopoly did not constitute a violation the intended expropriation had become of international law, stating that “it was unable known earlier. Valuation criteria shall to see in [claimant’s] original position--which was include going concern value, asset characterised by the possession of customers-- value including declared tax value of anything in the nature of a genuine vested right” tangible property, and other criteria, as and that “favourable business conditions and good appropriate, to determine fair market will are transient circumstances, subject to inevitable value. changes.”14 Less closely related to the establishment of 3. Compensation shall be paid without public auto insurance plans, several NAFTA cases delay and be fully realizable. have considered the nature and scope and Article 1110. In at least two of these, tribunals have Article 1110 establishes the right to considered foreign investor claims that sought compensation, at fair market value, in every case to characterize government interference with that expropriation is deemed to have occurred. the companies’ market access or market share This right to compensation represents a substantial as expropriation. In neither were these interests departure from Canadian legal principles concerning deemed suffi cient of themselves to found such a expropriation, which have always reserved to claim for expropriation, and no expropriation was Parliaments and legislatures the right to determine found to have taken place. when and to what extent compensation will be paid In the Pope and Talbot case, the tribunal when governments expropriate property. Moreover, did conclude that “access to the U.S. market is the broad defi nition accorded investments under a property interest subject to protection under NAFTA, which includes intangible property and Article 1110.” But it then went on to add that the virtually all equity, debt and contractual interests in “terminology [market access] should not mask an investment, signifi cantly expands the ambit of the fact that the true interests at stake are the interests that might be entitled to compensation in Investment’s assets base, the value of which is cases of expropriation. largely dependent on its exports business.”15 In the S.D. Myers case, the Tribunal recognized that “there The cases [were] a number of other bases on which SMDI [S.D. Myers Inc.] could contend that it has standing In considering this problem, the Committee to maintain its claims including that . . . its market correctly noted that the creation of a provincial share in Canada constituted an investment,”16 but Crown corporation offering services previously the tribunal did not elaborate on this point. provided solely by the private sector has never It may be worth noting that the market for been challenged under the WTO nor NAFTA. But of auto insurance in N.B. and elsewhere in Canada course no public insurance scheme has been created is subject to government regulation, in particular since the advent of these disciplines. However, the obligation to have certain insurance coverage. some comfort might be taken from the fact that Private insurance companies have been the there appears to be no other precedent under benefi ciaries of such government intervention in international law for such a claim.12 the market, and should not arguably be entitled to The case closest on point was decided damages whenever the nature of that intervention many decades ago by the Permanent Court of shifts in a way that may be adverse to their interests. International Justice.13 That case concerned the Most government measures affect the market, interests of a British shipping company which sometimes to the benefi t of certain businesses, the United Kingdom claimed was forced to close sometimes not. It is clear from the cases cited that

5 more is required to found a successful claim for expropriation under the NAFTA includes expropriation. covert or incidental interference with This point was made in another NAFTA case, the use of property which has the effect Marvin Roy Feldman Karpa v. United Mexican of depriving the owner, in whole or in States.17 In that case, the foreign investor argued signifi cant part, of the use of reasonably that its investment in a trading company that to be expected economic benefi t of exported cigarettes had been expropriated when the property. This defi nition is suffi ciently company was allegedly denied certain tax refunds. broad to include a legitimate rezoning by The tribunal found that there was no expropriation a municipality or other zoning authority. since: However, the defi nition of expropriation “the regulatory action has not is a question of law with which this deprived the Claimant of control of Court is not entitled to interfere under his company, interfered directly in the the International Commercial Arbitration internal operations of the company or Act.19 displaced the Claimant as the controlling shareholder. The Claimant is free to Finally, on the subject of investor-state litigation, pursue other continuing lines of business the UPS case must be noted, because it is the activity . . . Of course, he was effectively fi rst to invoke NAFTA investment disciplines to precluded from exporting cigarettes challenge the provision of public services by a . . . However, this does not amount to Crown corporation: Canada Post. The UPS claim Claimant’s deprivation of control of his alleges that Canada and Canada Post are in breach company.”18 [emphasis added] of NAFTA obligations concerning National Treatment (1102), Minimum Standard of Treatment (1105), Our understanding is that the foreign and restrictions concerning the actions of Crown companies now selling automobile insurance to corporations under Articles 1503(2) and 1502(3)(a). New Brunswickers have diversifi ed product portfolios The case clearly belies repeated federal government and would, under present proposals, still continue to assurances that public services would not be provide non-monopoly auto insurance services, and sacrifi ced to its trade liberalization agenda, but for other insurance products as well. Both the Karpa and the moment this case has no immediate relevance to Pope and Talbot cases suggest that these ongoing the issue at hand. business interests may present grounds for resisting In sum: to succeed with a claim under NAFTA, a claim for expropriation under NAFTA. a U.S. or Mexican-based insurance company would Nevertheless, the Metalclad case illustrates have to overcome signifi cant hurdles, including the willingness of investor-state tribunals to give the absence of any precedent in international law, NAFTA’s rule on expropriation broad reading. to support its claim. However, given the rulings of More troubling is a subsequent ruling by the B.C. investor-state tribunals to date, there is a real risk Supreme Court indicating that such tribunals will that such a claim would succeed. Nevertheless, as be given broad latitude, even where their decisions our review of the relevant jurisprudence indicates, transgress reasonable limits. The Supreme Court there are substantial grounds for defending New Justice in that case upheld the tribunal’s fi ndings Brunswick’s proposed initiative as being compatible that the state government had expropriated with Canada’s obligations under NAFTA. Obviously, a U.S. company’s investment in establishing a the federal government should be encouraged to hazardous waste dump (which had never gained vigorously do so. local approval or been operated) by creating an It is also important to note that there are ecological preserve that proscribes use of the site for steps the federal government can take to avert hazardous waste management purposes. This is how the possibility of a Chapter 11 claim by soliciting the judge described the tribunal’s view of NAFTA’s the agreement of its NAFTA partners to issue an expropriation provision: interpretation under Article 1131, which would be The Tribunal gave an extremely broad binding on any tribunal established the Chapter, defi nition of expropriation for the that expropriation will not occur when a Party purposes of Article 1110. In addition exercises it authority under Chapter 15 to create a to the more conventional notion new public corporation. The federal government has of expropriation involving a taking previously made similar efforts to contain the scope of property, the Tribunal held that of this provision, which it could be encouraged to renew.

6 However, should those efforts fail, damages illustrates how the latest generation of services and would be payable by the federal, not provincial investment treaties increasingly impede legitimate government. Given repeated assurances by federal and proven public policies, interfering with offi cials that government policy and law concerning democratic decision-making. Concerted changes public services are unconstrained by international in Canada’s existing trade policy commitments and trade deals, the federal government may be seen to its objectives in ongoing trade talks are therefore have both a legal and moral obligation to save New essential to secure stronger protection for public Brunswick harmless from the adverse consequence services and to prevent future problems. of doing no more than exercising its sovereign constitutional authority in the public interest. Analysis New Brunswick’s proposed public auto GATS analysis insurance system raises certain GATS issues. These are dealt with, in turn, below. Overview Is the creation of a public auto insurance system a The GATS issue “measure affecting trade in service” within the scope of In the mid-1990s, Canada made GATS market the GATS? access and national treatment commitments The scope of the GATS is very broad. It applies 20 covering motor vehicle insurance. The GATS market to all government measures affecting trade access rule disallows monopolies in sectors where in services. No measures are excluded a priori. governments have made commitments, unless they Moreover, the GATS applies to measures taken by all are listed as exceptions in a country’s schedule. levels of government, including provincial and local 21 Canada listed an exception for public auto insurance governments. monopolies, but it only protects existing public The GATS defi nes “trade in services” broadly to auto insurance systems in certain provinces; it does include all the different ways (or “modes”) that a not provide the fl exibility to create new systems. service can be delivered internationally. The GATS Furthermore, the GATS governmental authority defi nition of “trade in services” includes services exclusion is highly qualifi ed and can’t be relied upon provided though a “commercial presence,” for to exclude New Brunswick’s creation of a public auto example, through a branch offi ce of a foreign- insurance system. owned insurance company established within the territory of another WTO member government. Moving forward: how to address the GATS issue As the Committee Report notes, “insurers writing Fortunately, in sectors where specifi c automobile polices in New Brunswick include commitments have already been made, a special Canadian subsidiaries of large United States and 22 GATS procedure enables governments to modify Europe-headquartered companies.” Because the their schedules in order to create new public subsidiaries of foreign companies are active in the monopolies. If New Brunswick decides to proceed New Brunswick market, there is “trade” in insurance with public auto insurance, Canada could use this services, within the meaning of the GATS. special process. Canada would be required to: GATS Article I:3 excludes services provided in • notify the WTO prior to the intended granting the “exercise of governmental authority.” Such of monopoly rights; services are further defi ned as services provided • consult with other member governments who “neither on a commercialcommercial basis nor in competition believe their service suppliers are affected; and with one or more services suppliers” (GATS Article 23 • negotiate with them to try to arrive at trade- I:3.c). The scope of this governmental authority related compensatory adjustment. exclusion as it applies to fi nancial services, including If no mutually acceptable agreement is reached, insurance services, is more precisely defi ned in the the matter could be referred to WTO arbitration for GATS Annex on Financial Services (the Annex). resolution. By this specialized defi nition, only those insurance services “forming part of a statutory Further ahead: rebalancing trade treaties system of social security or public retirement plans” New Brunswick, and other provincial or “other activities conducted by a public entity governments, can proceed with public auto for the account or with the guarantee or using the 24 insurance despite trade treaty impediments. fi nancial resources of government” are excluded. Nevertheless, the case of public auto insurance

7 An argument might be made that the creation exclude New Brunswick’s creation of a public auto of a public auto insurance scheme by New insurance system. Creating such a public auto Brunswick falls within the latter category. The GATS insurance monopoly would almost certainly be “a Financial Services Annex section 5(i) further defi nes measure affecting trade in services” covered by the “public entity” as: GATS. “(i) a government, a central bank or a monetary authority, of a Member, or an Canada has made GATS-specifi c commitments covering entity owned or controlled by a Member, motor vehicle insurance. that is principally engaged in carrying If the governmental authority exclusion does out governmental functions or activities not apply and the creation of a provincial Crown for governmental purposes, not including corporation to provide public auto insurance is a an entity principally engaged in supplying measure affecting trade in services within the scope fi nancial services on commercial terms. of the GATS, the next step is to determine which (emphasis added)” GATS rules would apply and, in particular, whether Canada took specifi c commitments covering auto As a legal opinion prepared for the Atlantic insurance. Canada Insurance Service Harmonization Task Force The most restrictive GATS rules apply only to observes, to fall within the governmental authority government measures affecting trade in services exclusion, New Brunswick’s public insurance in sectors where member governments make monopoly must meet the following conditions: specifi c commitments. These rules are often referred “(i) the provider is considered to be to as “bottom-up,” because they apply only to a “public entity,” i.e. it is owned or those sectors that governments expressly agree to controlled by government, it is principally cover. The most important bottom-up obligations engaged in carrying out governmental are “national treatment” (GATS Article XVII) and functions or activities for governmental “market access” (GATS Article XVI).28 purposes, and it is not principally A member government’s “specifi c engaged in supplying fi nancial service commitments” are defi ned in its GATS schedule.29 on commercial terms; (ii) its activities are Examining Canada’s schedule confi rms that Canada conducted for the account or with the has taken market access and national treatment guarantee or using the fi nancial resources commitments with respect to motor vehicle of the government; and (iii) private insurance.30 insurance providers are not permitted In 1994, Canada listed insurance, including to conduct such activities in competition motor vehicle insurance, in its GATS schedule. with the public entity.”25 In February 1998, at the conclusion of further GATS negotiations on fi nancial services, Canada A key condition is “not principally engaged in submitted a revised GATS fi nancial services supplying fi nancial service on commercial terms.” schedule in accordance with the Understanding Because NBPI would be a not-for-profi t corporation, on Commitments in Financial Services (“the it could be argued that its services are not supplied Understanding”). “on commercial terms.” On the other hand, because The Understanding is an “alternative approach” NBPI would charge consumers premiums and would to scheduling that entails more far-reaching GATS be providing services previously provided by the commitments applying to fi nancial services. The private sector, it is very likely that a WTO dispute Understanding applies only to those WTO members settlement panel would fi nd that the governmental who expressly adopt it. Canada’s fi nancial services exclusion does not apply. commitments, including its motor vehicle insurance This narrow view of the governmental authority commitments, are undertaken in accordance with exclusion is reinforced by the fact that, in 1995, the Understanding.31 Canada scheduled GATS exceptions (“limitations”) Canada’s 1998 GATS commitments open for existing provincial public insurance monopolies.26 the motor vehicle insurance market to foreign These exceptions, further discussed later in insurance companies, provided that they establish this paper, would not be necessary if the GATS a commercial presence within the province where governmental authority exclusion applied.27 they are selling insurance services.32 The GATS governmental authority exclusion is highly qualifi ed and cannot be relied upon to

8 Canada’s GATS “limitation” protects existing provincial as it would affect foreign service providers, it would public auto insurance programs, but not new ones. still be inconsistent with GATS Article XVI.36 When a government makes specifi c To sum up, GATS Article XVI (Market Access) commitments in a sector, it has a one-time disallows monopolies in sectors where governments opportunity to protect non-conforming measures by have made specifi c commitments. Monopolies can inscribing them as “limitations” in its GATS schedule. only be maintained if they are listed as exceptions A limitation is a country-specifi c exemption. in a country’s schedule. Because Canada has made There is a limitation in Canada’s GATS schedule specifi c commitments covering motor vehicle that exempts the provision of motor vehicle insurance, and its limitation only protects existing insurance by public monopolies in the provinces public insurance monopolies, the creation of a of , , , and British public insurance monopoly by New Brunswick Columbia.33 This limitation protects these public would be inconsistent with Canada’s existing GATS auto insurance programs from challenge as commitments.37 violations of the national treatment and market access provisions of the GATS. Moving forward: how to address the GATS This limitation, however, only exempts the issue existing public auto insurance monopolies in If New Brunswick decides to create a new public those four provinces. This reading is reinforced automobile insurance monopoly, there are special by one of the additional commitments that the GATS procedures that the federal government federal government assumed in 1998 as part of can use to change Canada’s GATS schedule. the Understanding. The Understanding contains a When Canada makes the necessary changes to its “standstill” provision that reads, “Any conditions, schedule, New Brunswick’s new public insurance limitations and qualifi cations to the commitments monopoly will be GATS-consistent. noted below shall be limited to existing non- 34 conforming measures (emphasis added).” There is a procedure for modifying GATS schedules so The Understanding contains another that governments can create a monopoly in sectors extraordinary provision that stipulates that each covered by existing commitments. member government must list existing fi nancial There is a procedure by which Canada can service monopolies and “shall endeavour to modify its commitments covering auto insurance to 35 eliminate them or reduce their scope.” While, in permit the creation of a public insurance monopoly. legal terms, this is simply a “best-efforts” obligation, In fact, the GATS monopolies article anticipates the it emphasizes the GATS architects’ underlying situation where “after the date of entry into force of hostility towards public monopolies. the WTO Agreement, a Member grants monopoly rights regarding the supply of a service covered by The GATS disallows monopolies in sectors where a its specifi c commitments.”38 government has made specifi c commitments. In order to modify or withdraw its existing GATS GATS Article XVI prohibits member governments commitments covering auto insurance, Canada that have made specifi c commitments in a sector would follow the procedures outlined in GATS from maintaining or adopting, in that sector, Article XXI. It must: certain types of measures that the GATS defi nes as • notify the WTO prior to the intended granting “market access” barriers. All such measures must be of monopoly rights, inscribed as limitations in a country’s GATS schedule • consult with other member governments who or eliminated. In trade policy jargon, they must be believe their service suppliers are affected, and “listed or lost.” • negotiate with them to try to arrive at trade- GATS Article XVI.2 (a) expressly disallows related compensatory adjustment.39 “limitations on the number of services suppliers, whether in the form of numerical quotas, Notifi cation must occur at least three months monopolies, exclusive service suppliers, or the prior to the intended date of implementation requirements of an economic needs test (emphasis of such modifi cation or withdrawal.40 Any other added).” member government that considers that its It should be noted that Article XVI bans such interests under the Agreement may be affected by measures, whether they are discriminatory or not. the proposed modifi cation has 45 days to submit In other words, even though the creation of a “claims of interest.” public monopoly would affect Canadian and New Brunswick service providers in exactly the same way

9 This is then followed by a period (normally three to reach agreement on appropriate compensatory months) of negotiations between the “modifying adjustments. A number of governments, including Member” (in this case Canada) and any “affected the United States and Canada, indicated their claim Members.” If the modifying Member can reach of interest and requested negotiations with the EC agreement with all the affected Members on with a view to reaching agreement on any necessary appropriate “compensatory adjustment,” then it compensatory adjustment. The deadline to agree can proceed with the modifi cation immediately. bilaterally on compensation was June 1, 2004. Compensatory adjustment refers to new After the June deadline, if any affected WTO commitments in a country’s GATS schedule to members are dissatisfi ed with the EC’s offer compensate affected members for their lost market of compensation, they can refer the matter to access. arbitration. Because this is the fi rst time GATS If agreement cannot be reached, then any Article XXI has ever been invoked, there are affected Member can refer the matter to WTO many uncertainties regarding how the level of arbitration. The mandate of the arbitration panel is compensation is to be determined. It would appear to “examine the compensatory adjustments offered to be in New Brunswick’s interest (and in the [by the modifying Member] or requested [by the interests of other provinces that might wish to have affected Member] and to fi nd a resulting balance public auto insurance in the future) to intervene to of rights and obligations which maintains a general ensure that the federal government takes a fl exible level of mutually advantageous commitments approach with the EC in establishing the new not less favourable to trade than that provided ground rules for “compensatory adjustment.” for in Schedules of specifi c commitments prior to negotiations.”41 Conclusions Once a modifying Member complies with the fi ndings of the arbitration, then it can proceed New Brunswick, or indeed other Canadian with the proposed modifi cation to its schedule. If it provinces, can establish a public auto insurance refuses to comply with the fi nding of the arbitration system without being deterred by NAFTA or the panel, then affected Members can retaliate by GATS. While New Brunswick’s initiative would “modifying or withdrawing substantially equivalent raise signifi cant trade treaty issues, the federal benefi ts in conformity with those fi ndings.”42 government has both the capacity and the In short, Canada can modify its existing schedule responsibility to ensure that these are addressed and to make certain that New Brunswick’s creation of a resolved. public auto insurance monopoly is GATS-consistent. To As the Select Committee’s report ably do so, Canada would negotiate with affected WTO demonstrates, the advantages of a made-in-New Member governments to come up with new GATS Brunswick public insurance system recommend it commitments that are substantially equivalent to highly. Regrettably, however, aggressive threats those being withdrawn. of trade treaty litigation -- and behind-the- scenes lobbying by federal trade offi cials -- have The special GATS Article XXI procedure has recently contributed to the Lord government’s decision been invoked for the fi rst time. to back away from this important public policy In July 2003, the European Communities (EC) initiative. gave notice that it intended to modify or withdraw This case aptly illustrates how the latest GATS commitments. The changes relate to the generation of services and investment treaties 1995 enlargement of the EC to include Austria, have reached far beyond strictly trade matters to Finland, and Sweden.43 In July 2003, after a long impede proven and legitimate instruments of public delay, the EC provided a proposed consolidated policy, such as using monopolies to provide public GATS schedule for the original 12 member countries services. Furthermore, it demonstrates how treaties, of the European Communities and the three new negotiated exclusively by the federal government, members. The consolidated schedule contains intrude on matters within provincial jurisdiction. several changes, mainly related to the extension More generally, it underlines how broadly worded of the EC’s existing market access and national trade treaties interfere with democratic decision- treatment limitations to apply to Austria, Finland making. and Sweden.44 Ultimately, despite this setback, the decision GATS Article XXI requires the EC to enter whether to create a public auto insurance system into negotiations with any WTO member still lies with New Brunswick’s citizens. Trade treaties government that feels they are affected, in order

10 should not interfere with -- or even infl uence -- this contractual relationship with the claimant. Nor do policy decision. It is a democratic policy choice to investors have any obligation to exhaust domestic be made by the citizens of New Brunswick and their remedies before resorting to international dispute resolution [Article 1121]. duly elected representatives. 7 These are the regimes established pursuant to the ICSID Unfortunately, the rapidly expanding reach of convention, and UNCITRAL Arbitration Rules, recourse international trade treaties has, very inappropriately, to which is provided by Article 1120. transformed this domestic policy debate into an 8 Annex 1138.2. international trade treaty issue. To avoid this in 9 State enterprises means a Crown corporation future, more balanced treaties and trade negotiating established under relevant federal or provincial agendas are urgently needed.45 In the meantime, legislation see Annex 1505. 10 Article 1401:1. New Brunswick’s citizens should continue to pursue 11 Article 1101.3. This Chapter down not apply to a public auto insurance system -- without being measures adopted or maintained by a Party to the deterred by the federal government’s trade treaty extent that they are covered by Chapter Fourteen commitments. (Financial Services). Several Chapter Eleven disciplines are incorporated to Chapter Fourteen, Article 1401:2 provides: Articles 1109 through 1111, 1113, 1114 and Steven Shrybman is a Partner at Sack, Goldblatt and 1211 are hereby incorporated into and made a part of this Chapter. Articles 1115 through 1138 [investor- Mitchell. Scott Sinclair is a Senior Research Fellow with state suit provisions] are hereby incorporated into and the Canadian Centre for Policy Alternatives. made a part of this Chapter solely for breaches by a Party of Articles 1109 through 1111, 1113 and 1114, as The authors thank Morna Ballantyne, Bruce Campbell, incorporated into this Chapter. Ed Finn, Blair Redlin, and Matthew Sanger for their 12 Note that existing public auto insurance schemes advice and valuable suggestions on the paper. Jim would have not been vulnerable to such claims under NAFTA because of exemptions relating to existing non- Grieshaber-Otto ably edited the GATS sections of the conforming provincial measures. paper. Any errors or omissions remain the responsibility 13 Oscar Chinn, 1934 P.C.I.J ser A/B, No. 63. As cited in of the authors. We are also grateful to Kerri-Anne Finn OECD, DAFFE/IME/WD(2004)2, Indirect Expropriation and Ed Finn for their help in preparing the paper for and Governmental Measures Not Requiring publication. This study was done by the Canadian Compensation: Criteria to Articulate the Difference, Centre for Policy Alternatives (CCPA). We are grateful Mar. 26, 2004. 14 to the members of the CCPA’s Trade and Investment Idem. 15 Pope and Talbot, Inc. v. Canada, Interim Award (June Research Project, including the Canadian Union of 26, 2000), paras. 96-98. Pope and Talbot challenged Public Employees, for their ongoing fi nancial assistance Canada’s allocation of export quotas under the Canada- and support. US Softwood Lumber Agreement. 16 S.D. Myers, Inc. v. Canada, (November 13, 2000) Endnotes Partial Award, 232, International Legal Materials 408 1 Legislative Assembly of New Brunswick, Select para 232. S.D. Myers challenged a decision by Canada Committee on Public Auto Insurance, “Final Report on to close the border to PCB exports to the US for a brief Public Auto Insurance in New Brunswick,” April 2004, period in the mid 1990s. 17 p. 26. ICSID Case No. ARB(AF/99/1, Award of 16 December 2 Ibid., pp. 2-3. 2002, pp. 39-67. 18 3 Luke Eric Peterson, “International treaty implications Idem, at p. 59. 19 color Canadian province’s debate over public auto The United Mexican States vs. Metalclad Corporation, insurance,” Investment Law and Policy Weekly News 2001 BCSC 664, reasons for judgement of the Bulletin, May 11, 2004, at International Institute for Honourable Mr. Justice Tysoe, released May 22, 2001 at Sustainable Development, www.iisd.org/investment. para. 99. 20 4 Legislative Assembly of New Brunswick, op. cit., p. 20. “Measure means any measure by a Member, whether in 5 NAFTA investment rules may be invoked in State to the form of a law, regulation, rule, procedure, decision, State disputes as well, as might other provisions of administrative action, or any other form.” GATS Article NAFTA. In this regard Article 1404 prescribes measures XXVIII, Defi nitions. 21 that restrict cross border trade in services, such as the GATS Article I:3 (a)(i) reads: “For the purposes of cross border sale of auto insurance by US companies this Agreement: (a) ‘measures by Members’ means to New Brunswick consumers. But the application of measures taken by: (i) central, regional or local Article 1404 is unlikely because of historic constraints governments and authorities.” 22 on the cross border sale of such services. Legislative Assembly of New Brunswick, Select 6 Under Article 1122 Canada has unilaterally consented Committee on Public Auto Insurance, “Final Report on to international arbitration for claims arising under Public Auto Insurance in New Brunswick, April 2004. the Chapter notwithstanding the absence of any pp. 2-3.

11 23 Even if this exclusion could be used for public auto rules because they apply to all government measures insurance, it arguably would not apply, since the service and all service sectors. The most important top-down would be provided on a commercial basis, with NB obligations are most-favoured-nation treatment and drivers paying premiums. transparency. 24 GATS Annex on Financial Services, Article 1 (b). The 29 A government’s GATS schedule forms an integral part of Annex on Financial services applies to measures the GATS (GATS Article XX:3). affecting the supply of fi nancial services. It was adopted 30 Canada, Schedule of Specifi c Commitments, in 1995 at the end of the Uruguay Round and is an supplement 4, 26 February 1998. integral part of the GATS. The Annex defi nition of 31 See Canada, Schedule of Specifi c Commitments, services provided in the exercise of governmental supplement 4, 26 February 1998. authority also excludes “ activities by a central bank 32 Canada’s GATS schedule contains a horizontal limitation or monetary authority” but this is not relevant to auto applying to all provinces that stipulates that insurance insurance services. services “must be supplied through a commercial 25 McCarthy Tetrault, Memorandum prepared for the presence.” ibid. Atlantic Canada Insurance Harmonization Task Force, 33 “Motor vehicle insurance (Quebec, Manitoba, September 9, 2003 Saskatchewan, and ): Motor vehicle 26 The McCarthy Tetrault memorandum notes that under insurance is provided by a public monopoly.” Ibid. “paragraph 1 of the Understanding on Commitments Canada lodged the same limitation in its original 1995 in Financial Services, notwithstanding the provisions GATS schedule. of paragraph 1(b) of the Annex on Financial Services, 34 Understanding on Commitments in Financial Services, WTO Members are required to list on their schedules in The Results of the Uruguay Round of Multilateral pertaining to fi nancial services existing monopoly rights Trade Negotiations, Legal Texts, World Trade and shall endeavour to eliminate them or reduce their Organization. scope. This obligation to list applies to the activities 35 Ibid. Article B. described in paragraph 1(b)(iii) of the Annex above. 36 “Another confusion that sometimes arises is the idea This could explain why Canada took reservations in that only discriminatory measures should be scheduled respect of public automobile insurance monopolies under Article XVI. This is not the case. Article XVI in British Columbia, Saskatchewan, Manitoba, and covers all measures that fall within the six categories Quebec in its GATS Schedule of Commitments, even listed, whether they are discriminatory or not.” WTO, though they may have been considered to be ‘services Committee on Specifi c Commitments, “Revision of supplied in the exercise of governmental authority’ Scheduling Guidelines: Note by the Secretariat,” 5 and therefore excluded from GATS disciplines.” This March 1999, S/CSC/W/19. p. 6. suggestion, however, overlooks that Canada scheduled 37 Provided that the pubic monopoly is not excluded by the reservations for public auto insurance monopolies the governmental authority exemption as discussed in 1995, before the 1997 Understanding had been previously. negotiated. See McCarthy Tetrault, p. 5, note 9. 38 GATS Article VIII.4 27 The federal Department of International Trade (formerly 39 GATS Article XXI, paras. 2-4. DFAIT) does not appear to believe that the expansion 40 WTO, Procedures for the Implementation of Article XXI of a public monopoly to areas previously covered by of the GATS: Modifi cation of Schedules, 29 October private insurance would be excluded by the GATS 1999. paras. 1-2. S/L/80. governmental authority exclusion. In Q&As on its 41 Ibid. para. 13. public web site it states: Question: “What about private 42 Ibid. para. 16. health insurance in the GATS?” Answer: “In 1997, 43 The 1994 enlargement increased the EU from 12 to 15 Canada made market access and national treatment members. On May 1, 2004, an additional 10 countries commitments with respect to private health insurance joined the EU, and it now stands at 25 members. such as that provided by Blue Cross. Commitments 44 Interestingly, one of these is a limitation on market made on private health insurance do not undermine access exempting public utility services subject to or require us to change our public health insurance monopolies or to the granting of exclusive rights to system.” Question: “What if the Government decides private operators. to expand public health insurance?” Answer: “Should 45 Several concurrent shifts are desirable. Those existing Canadian governments decide to expand public trade treaty commitments that pose problems for policy health insurance to areas previously covered by private fl exibility need to be changed. In order to achieve more health insurance, the GATS has procedures to modify effective safeguards in ongoing and future negotiations, our commitments as necessary. (emphasis added)” Canada’s negotiating goals and strategies should be http://strategis.ic.gc.ca/epic/internet/instp-pcs.nsf/en/ overhauled. Finally, Canada should champion longer- h_sk00152e.html. Accessed May 1, 2004. term changes in the international system to ensure that 28 The GATS also contains certain rules that apply across- the protection and expansion of public services does the-board to government measures affecting all trade not take a back seat to commercial and investor rights. in services. These are often referred to as “top-down”

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