FOREIGN INVESTMENT & NATIONAL SECURITY CONFERENCE

UNCLAS SECTION 01 OF 02 PARIS 006995

SIPDIS

SENSITIVE

STATE FOR EB/OIA - WES SCHOLZ AND JAMES ROSELL
TREASURY FOR OFFICE OF INTERNATIONAL INVESTMENT - GAY SILLS
STATE PASS USTR

E.O. 12958: N/A
TAGS: EINV ETRD ECON FR EUN
SUBJECT: FOREIGN INVESTMENT & NATIONAL SECURITY CONFERENCE


SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION

Refs: A) Paris 5441
B) Paris 6570

SUMMARY
--------------

1. (SBU) A parliamentary conference on foreign investment
and national security on October 10 has helped to inject
some market sense into Prime Minister Villepin's "economic
patriotism" agenda, although it also highlighted
shortcomings in the French approach to protecting firms from
foreign investment. Separately, the PM named Bernard
Carayon, the organizer of the conference, to lead a mission
to implement reforms needed to protect national security.
We met with Carayon to voice our concerns about
protectionist trends, participated in his conference, and
plan to assist him as he undertakes his new mission. END
SUMMARY.

Conference Highlights
--------------

2. (SBU) Bernard Carayon (UMP) organized a conference
October 10 at the National Assembly (the lower chamber of
Congress) to discuss foreign investment and national
security. Carayon is a leading protagonist of French
economic intelligence, which forms a key part of the
"economic patriotism" that Prime Minister Villepin has been
pushing as part of his economic and security agenda.
Carayon prepared a report in 2003 with a number of
recommendations for the GOF.


3. (SBU) Before the conference, the Ambassador made a point
to meet with Carayon to advocate the USG view of economic
patriotism (e.g., a market-based approach),and the effort
paid dividends at the conference. Although the conference
examined US practices in depth, Carayon emphasized that
economic patriotism does not translate into protectionism.
In his opening remarks at the conference, he mentioned the
recent failed Chinese bid for UNOCAL, as well as the ongoing
Boeing-Airbus trade dispute, but said he hoped the lessons
learned would be applied in the fight by countries that
share the same values against the new threats to collective
security, such as terrorism.


4. (U) French Minister of Defense Michele Alliot-Marie
opened the conference in a speech assailing protectionism.
She noted protectionism is counter-productive, and that in
defense matters, future needs must be considered. She
argued that France should control its spending, and select
its strategic interests carefully. She argued against
creating any new bureaucracy to screen foreign investments,
and urged creating a European industrial strategy. She
emphasized that France needs research and technology, which
she was pursuing in defense. Econ M/C followed with an
explanation of US investment policy and national security
review mechanisms, stressing the U.S. system's openness and
efficiency.


5. (U) The conference had three thematic panels, one on
balancing interests, one on the US and French systems, and
one on practical considerations.


6. (U) At the first panel, one member of the National
Assembly, Axel Poniatowski (UMP),argued that the US is more
protectionist than the EU, tax schemes such as the Foreign
Sales Corporation (FSC) hinder liberal trade principles, and
the dollar is undervalued, yet the EU is accused of being
more protectionist. Clara Gaymard, head of the French
Agency for Investment promotion (AFII),picked up this theme
to argue that France needs to do a better job in
communication. She said it has become hard to sell the
image of France as a country that has implemented reforms
when every investor asks about the Pepsi-Danone flap (where
the PM spoke out against a possible acquisition). The Econ
MC commented that in the US, Danone could have bought Pepsi.
Jean-Louis Gergorin, VP of EADS, said EADS is guided by
patriotism, since if it were guided by pure profit motives
it would have moved labor out of France long ago. He noted
that export controls are a bigger problem than investment
controls, since the State Department clearances take too
long. He added Boeing would not have been able to launch
its fleet without billions in Pentagon R&D funds, and said
the GOF should promote European pension funds. A venture
capitalist, Phillipe Pouletty, countered that the French
economic model is protectionism in disguise, and France does
not need to subsidize its firms any more, but should spend
more on R&D and facilitate private investment in profitable
firms.


7. (U) At the second panel, Gay Sills from the US Treasury
spoke of the procedures of the Committee on Foreign
Investment (CFIUS),founded on the principles of an open
investment climate. Vincent Guitton, from the French
Ministry of Economy and Finance, explained French
legislation, and spoke in very general terms about the
objectives of impending regulations modifying the French
investment regime. (The draft decree reportedly will shield
ten sectors France considers strategic: defense,
biotechnology, space technology, telecommunications,
casinos, encryption IT security and antidote production).
Frederic Puaux, deputy of the director for economic
intelligence in the Ministry of Defense (an office created
in response to the Carayon report),stated French rules do
not allow for mitigation, but do allow for appeal (whereas
the US system allows for mitigation, but no appeal from a
Presidential determination). The US system cannot be
transposed to France because of EU rulings requiring precise
definition of national security. No other state has a more
precise definition than France. (NOTE: The positive
portrayal of the US non-definition of "national security"
reflected French congressional concerns that the GOF was
going to make the French investment regime too restrictive,
which in their view would be counterproductive. END NOTE.)


8. (U) The Ambassador closed the conference with a speech
vigorously defending the open investment climate in the US,
expounding on the virtues of an open investment policy, and
warning against protectionist trends.

Man on a Mission
--------------

9. (SBU) On October 3, the PM named Carayon to head a
legislative mission to not only explore implementing
controls on foreign investment, but also to explore the
creation of rules and the greater involvement of the private
sector in international negotiations, particularly in
Europe. We spoke with Carayon about this new mission, and
offered assistance in arranging a possible visit to USG
officials.

Comment
--------------

10. (SBU) We greatly appreciate the assistance from the
Department and the participation of Treasury official Sills
in this conference. The debate easily could have swung to
bashing the USG (at least one major French firm, Thomson,
had a bruising experience with CFIUS),but our active
advocacy forestalled that result. Nevertheless, we were
struck by the pessimism expressed across the board by how
the French are protecting their national security. We
accordingly will remain engaged, since protectionist
sentiments in France continue to be stoked by sluggish
economic growth and persistently high unemployment rates.
STAPLETON