VZCZCXRO9816
OO RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHFR #0798/01 0391149
ZNR UUUUU ZZH
O 081149Z FEB 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4000
INFO RUCNMEM/EU MEMBER STATES
RUCPDOC/DEPARTMENT OF COMMERCE WASHDC
RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEHGV/USMISSION GENEVA 2265

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