DEPSEC ZOELLICK REVIEWS INVESTMENT BARRIERS,

UNCLAS SECTION 01 OF 02 PARIS 000798 SIPDIS SENSITIVE SIPDIS STATE FOR D, E, EB, EUR/WE AND EUR/ERA STATE FOR EB/OIA (SCHOLZ & ROSELI) STATE PASS USTR FOR LEHMANN AND DONNELLY TREASURY FOR OFFICE IF INTL. INVESTMENT - GAY SILLS COMMERCE FOR ITA E.O. 12958: N/A TAGS: ECON PREL OTRA ETRD EINV EFIN EUN FR SUBJECT: DEPSEC ZOELLICK REVIEWS INVESTMENT BARRIERS, FRENCH REFORMS AND DOHA ROUND WITH FRENCH TRADE MINISTER REF: PARIS 357 ¶1. (SBU) SUMMARY. Deputy Secretary Zoellick reviewed French economic reforms, new GoF restrictive investment rules, and the current state of the Doha Round trade negotiations with Christine Lagarde, France's Minister-delegate for Foreign Trade. Lagarde said France was "open for business", and interested in increasing its export effort, including in the United States. She said economic reform efforts by Prime Minister Villepin and his predecessor had begun to create momentum on the ground, such as a drop in unemployment and an increase in business confidence. In light of France's new regulation to review and potentially limit foreign investment in "strategic" sectors (reported reftel),Lagarde explained the limited purpose of the decree, and hinted also that the GOF's views on the Arcelor-Mittal steel IPO were cooling. Lagarde, who met recently with USTR Portman in Hong Kong and Davos, noted her renewed optimism for the Doha Round negotiations and stressed the importance for France of progress on trade i n services. END SUMMARY. ¶2. (SBU) France's Minister-delegate for Foreign Trade Christine Lagarde met with Deputy Secretary Robert Zoellick in Paris February 3. Lagarde was accompanied by Xavier Musca, Director-General for the Treasury and Economic Policy, and Philippe Favre, Stanislas Pottier and Eric Peters of her cabinet. The Deputy Secretary was accompanied by Ambassador Craig R. Stapleton, EUR/PDAS Kurt Volker, D Executive Assistant Michael Matera, Special Assistants Christine Davies and Taiya Smith, Public Affairs Advisor Richard Mills and Emboff Adam Shub (note taker). FRANCE OPEN FOR BUSINESS -------------- ¶3. (SBU) Lagarde explained her goal in accepting her position in June 2005 to begin to bring some flexibility to the French economy, and to ensure that France became more competitive. She said she felt her background (as a corporate lawyer specializing in labor and antitrust issues) on both sides of the Atlantic could make a difference. She said that both Prime Minister Dominique de Villepin's efforts since June 2005 as well as those of his predecessor Jean-Pierre Raffarin were beginning to show results, as unemployment rates have been declining for nine months to 9.5 percent, and business confidence was increasing. France, she said, "was open for business", and the government was encouraging exports, including to the United States, a key market for French wine, perfume, fashion and luxury goods. TAX AND EMPLOYMENT MEASURES -------------- ¶4. (SBU) Lagarde said the GOF was focusing on youth employment programs and tax measures to encourage France's competitiveness. While France's controversial wealth tax on assets (including real estate) of more than 720,000 Euros (840,000 USD) could not be abolished for political reasons, the GOF had reduced the professional tax and applied a 60 percent "shield" as the maximum overall tax rate paid. The highest income tax rate in France is still 40 percent. She said the government was also addressing ways to increase youth and senior employment, both groups that fare poorly in the French job market, as highlighted by the European Commission's annual Lisbon Process reports on competitiveness. The youth employment scheme gives employers the flexibility to fire employees without cause during the first two years of employment. "ECONOMIC PATRIOTISM" AND FOREIGN INVESTMENT -------------- ¶5. Lagarde said the GOF is currently re-examining a controversial decree that enables it to automatically prescreen and potentially prevent investment in 11 "strategic" sectors. These include specific security services, cryptology, eavesdropping communications and production and sale of armaments. The decree, part of Prime Minister de Villepin's "economic patriotism" policy, was motivated in part by a rumor last summer that U.S. food and beverage giant PepsiCo was seeking to acquire French dairy and bottled water conglomerate Danone. ¶6. (SBU) The Deputy Secretary noted his firm views on the PARIS 00000798 002 OF 002 importance of encouraging open investment and described recent U.S. experiences with foreign investors such as the UNOCAL/CNOOC buyout last year. He noted that the U.S. CFIUS approach was pointedly not a prescreening procedure like the French proposal. Lagarde and her staff appeared uninformed about the results of the attempted UNOCAL buyout by CNOOC and appreciated DepSec Zoellick's explanations. In the UNOCAL case, he had understood the concern of many regarding CNOOC's opaque links to the PRC government and the Communist Party. STEEL: ARCELOR AND MITTAL -------------- ¶7. (SBU) Regarding Mittal's IPO for European steel giant Arcelor, Lagarde hinted that temperatures in Paris on this issue had cooled somewhat, following initial heated GOF criticism of the offer. Xavier Musca, DG for Treasury and Economic Policy, noted that Prime Minister Villepin had most recently told the press he believed Arcelor's decision was up to the shareholders. Lagarde said despite Arcelor's multinational ownership, the company still had 28,000 French employees, and a history of having received substantial French subsidies for restructuring over the years. Lagarde also said the GOF had expressed concern over Mittal's strategy for the Arcelor properties. (Note: Mittal also owns seven steel plants in France itself.) DOHA ROUND AND THE WTO -------------- ¶8. Lagarde said she was increasingly optimistic on prospects for the Doha trade round since the recent ministerial meeting in Davos and the Hong Kong ministerial. She said she was supportive of the proposed "parallel orchestration" of agriculture and non-agricultural market access (NAMA) talks. She stated clearly that France has strong offensive interests in the services sector, and wondered out loud to what extent the U.S. and France (or the EU) could work together, officially or unofficially. She said France's core interests included banking and financial services, water and utility services, professional services and telecommunications. She said France's ambition was to increase access to markets with high non-tariff barriers. DepSec Zoellick explained his view of some of the challenges that WTO negotiators faced, including the structural difficulties of working within the WTO system, the institutional complexities posed by the cross-cutting nature of services, and the political challenges of working wi th middle emerging economies and the G90 group. On services, he thought it would be useful to consolidate into four or five core areas, and identify and focus on 20 key markets. COMMENT: -------------- ¶9. (SBU) Lagarde, a transatlantic corporate lawyer with no public sector experience, is a breath of fresh air in an often thankless job. Energetic and disarmingly straightforward about France's faults, her comments and experience demonstrate a broad and deep knowledge of the global economy and international business practices. Brought in to the cabinet by Economy Minister Thierry Breton (another public sector novice),she is at her best when explaining France to outsiders. Her growing profile on trade suggests she appears to be in the process of developing a more astute sense of French political realities, which in the end will have a greater impact on her success. ¶10. This message has been cleared by the party. Please visit Paris' Classified Website at: http://www.state.sgov.gov/p/eur/paris/index.c fm Stapleton