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Remarks by Franklin L. Lavin
Under Secretary of Commerce for International Trade

Euro-American Press Club
Paris, France
Thursday, October 19, 2006
As Prepared

Thank you very much for having me here today. It is a pleasure to be back in Paris and a particular delight to meet with the Euro-American press club.

I would like to talk to you about today the Franco-American economic relationship with particular regard to our economies.

Good News in the Franco-American Relationship

I’d like to begin by discussing some very positive aspects of our relationship. On both a political level and in economic matters, we have a lot of good news in our relationship, though we have challenges as well.

On the political side, the relationship between our two countries is better than it has been for a number of years. Although we have had our differences, most notably over Iraq, on most issues we face today, France and the U.S. have common objectives. Indeed, on many key issues we are close partners. For example:

  • France and the U.S. stand together in Kosovo and in Afghanistan;
  • We both understand the critical importance of Iran not acquiring a nuclear capability;
  • Both our nations strongly seek to end the genocide in Darfur;
  • We have worked together to lift up central Europe after decades of communist mis-rule;
  • We both seek a sustainable peace in the middle east;
  • We both seek to end nuclear proliferation in North Korea;
  • And allow me to thank the French people and the French military for their assistance to us after Hurricane Katrina.

Taking these points together, we come to the conclusion that I believe is noteworthy: our two nations have successfully adjusted foreign policies that were devised for the Cold War to the 21st century. Our main focus today is not European security, how to deal with the Soviet Union, or the internal mechanics of NATO. Rather, we are focused on the challenges around the world we both face regarding issues such as regional stability, terrorism and nuclear proliferation.

On economic issues, there is also much good news in the bilateral partnership. We have one of the larger financial relationships to be found anyplace in the world, with more than $200 billion in bilateral investments between our two countries.

In trade, we see continued, significant increases in both exports and imports, and this year the total will exceed $60 billion. While about 11 percent of America’s GDP is generated from exports, France enjoys twice that success, with 22 percent of its economy being driven by exports.

Beyond the trade flows, this connectivity extends to a personal level. Each year, more than three million people cross the ocean to visit, work or study in the other country. Indeed, more than one million people work for a French company in the U.S. or for a U.S. company in France.

Challenges We Face

Although there is much to be proud of in our relationship, we should also examine some of the challenges we face. Both our countries face structural challenges in our economies. For example, in the U.S. we have twin deficits of budget and trade. And we have other challenges, such as old age pensions, what we in America call Social Security. On the French side, we also see a variety of challenges. I’d like to take a few moments to discuss four of them.

The first challenge is that the French economy has been underperforming its potential
Although predictions are for just over two percent growth this year, economic growth in France has averaged below two percent for the past five years, which is about half that of the U.S. during the first half of this year. Yet our growth is only half that of developing countries like China and India.

To put it in perspective, at current rates, France will create another French economy about every 40 years. The U.S. will “grow” by the size of an entire French economy about every four years. France’s slow rate of growth means less opportunity for French workers, fewer jobs created for people entering the workforce, and less prosperity for all.

A second challenge is an inflexible labormarket
Labor flexibility in France remains a stubborn problem. Inflexible work rules, high benefits, and the difficulty in adding or reducing workers have all combined to create high structural unemployment. According to the World Bank’s Competitiveness Index, France ranks 134 th out of 177 countries in the category of regulations for employing workers and labor force competitiveness. As a reference point, Sweden is 13 and Canada is 4.

Perhaps of greater concern is that much of France’s unemployment is long term or structural: while the median length of unemployment in France is more than 32 weeks, it is 8.9 weeks in the U.S. In France, t he unemployment rate among youth is 22 percent, and among immigrant youth estimates are around 40 percent.

To put the unemployment situation in perspective, consider this. In 2005, the United States suffered a tremendous natural disaster with Hurricane Katrina. It caused substantial damage to the state of Louisiana. Even with all devastation and the displacement, even with all of the management failures that took place, unemployment in Louisiana peaked in December 2005 at 12.1 percent. And what is the unemployment rate today in France? It is just slightly lower than the unemployment rate in Louisiana after Hurricane Katrina. That is the rate of unemployment that you experience here in France, everyday.

Structural unemployment creates an unhealthy unemployment subculture. Those who are unemployed need to be thinking about how they can partake in society, but unemployment frequently leads to alienation and even resentment. So for those who argue that all of this is acceptable because France offers a better social model, I believe they have it exactly backward. The best social model is one that allows people to stand on their own two feet, to provide for themselves and their family, and to be able to go as far as their dreams allow them to go. True job security comes through prosperity and a growing economy. High youth unemployment is not very social and is not a model.

A third challenge is high taxes
Lowering taxes spurs economic growth. If we add up the corporate tax burden, personal taxes and social security contributions, it is no surprise that the tax burden in France is one of the highest in the EU, and the EU is not known for low taxes.

One of the most important reasons why some of the brightest entrepreneurs leave France is due to the high tax rate, which when combined with the other reasons I have mentioned provide a package of disincentives for the most ambitious who want to pull themselves up, create businesses and build value for themselves and for society.

In a 2005 survey by Le Point, 3500 people who moved to Quebec from France were interviewed. Ninety percent said they moved for economic reasons. One migrant from France was one of eBay’s founders, Pierre Omidyar. One can only imagine what he and thousands of other talented entrepreneurs could have added to France’s prosperity.

The final challenge is to find a way for France to create a culture of innovation
Why doesn’t the country that invented the word entrepreneur have more of them? One simple answer is that it can’t be legislated, and governments can’t mandate it. It must be derived organically, created by private industry.

For example, in France you have government directed “poles of competitiveness,” an attempt to create centers of innovation throughout France. This is the wrong approach, in my opinion.

In my country we also have “poles of competitiveness,” but they originated in the private sector. For movies, we call it Hollywood. For finance, we call it Wall Street. And for computers, we call it Silicon Valley. No one in government said “I want to create a Hollywood” or “I want there to be a Silicon Valley”. These centers of excellence were not led by government, but by private industry and entrepreneurs. This is the best way to become competitive and create centers of innovation.

France is home to some of the most successful companies in the world. Over the past few decades, however, it seems that some of the dynamism has been lost. Most of these well known companies were established quite some time ago… where are the new innovative and successful French companies that will lead its economy tomorrow?

The crux of the problem is not that France’s economy is declining, or that it society faces a crises. Precisely the opposite. France remains one of the most successful economies in the world. But these economic problems are slowly taking away France’s competitive advantage. These problems are taking place in slow motion, and with the emergence of Asian economies, the price to be paid for under performance will continue to grow.

I have a very simple view of what our goal should be: I would like every French business to have unimpeded access to the American market, and every American business to have similar access to the French market. In general, this is largely where we are today, but there are a few areas where we might be able to improve access.

We are concerned that some of the EU’s directives might not be based on sound science and unduly burden business. We are concerned about recent copyright legislation that could be harmful to many companies, including Apple’s effort to sell music for its I-Pod in Europe. We would like to see an Open Skies agreement in civil aviation between the U.S. and the EU. And wouldn’t it be helpful if we could find more ways to harmonize or eliminate some of the differences in standards and regulations that hinder normal business in and between our economies? It is both our consumers and our economies that suffer from these problems, and it is they who will benefit from their resolution.

I remain an optimist about both about our countries and our relationship. We both have a great deal of resilience and many strengths, and when France and America both have successful economies and are working together, our ability to tackle problems at home and abroad is tremendously enhanced.