Overview

U.S. commercial ties with France are extensive, mutually profitable, and growing. Each country has an increasingly large stake in the health and openness of the other's economy. While the relationship dates back to the colonial period, it is also constantly evolving.
The U.S. and French economies share many similarities. Based on a gross domestic product (GDP) in 2008 of $14.3 trillion, the United States is the world's largest economy. France with a GDP of $2.9 trillion is the world's sixth largest economy. France's population (2008) of 64.1 million has a per capita income of $32,700 (purchasing power parity basis) while the comparable figure for the United States, based on a population of 305 million, is $47,400. As industrialized economies, both share similar structural attributes where over 75% of the civilian workforce is employed in services and less than 4% in agriculture (1.2% of the labor force in the United States and 3.8% of the labor force in France).
At the same time, the state still plays a larger role in the economy of France than in the United States. This is particularly true in the provision of services such as education and health care, but also in energy, telecommunications, and transport where state-owned companies play a prominent role. Policies geared to supporting national champions in leading sectors, to influencing mergers involving French companies, to screening foreign investments in "strategic" sectors, to sustaining a network of personal relationships linking the heads of large companies with senior civil servants, and to rejecting American-style laissez-faire capitalism all distinguish France from the United States. Yet, prompted by mandates of the European Union's Single Market, the need to reduce budget deficits by raising revenues through privatization efforts, as well as the need to de-regulate the economy, the French government's interventionist capabilities have been weakened in recent years. While President Sarkozy has supported mergers to create "national champions" in nuclear power, energy, and defense, he also has promoted market-oriented domestic reforms to put France's over-regulated economy back on a path of stronger growth.
With the French economy predicted to decline by 3.5% in 2009 due to the global economic crisis, President Sarkozy has reaffirmed his belief in supporting ailing domestic companies and in protecting firms in key sectors from foreign ownership. Although the government has implemented a number of measures to support the unemployed, many of its stimulus measures seek to bolster employment through support to business and investment. The trade unions, which have held strikes this year, are expected to press for more direct supports and benefits for workers. Defusing these social tensions without abandoning his pledge to cut bureaucracy and promote competition will pose a major challenge for President Sarkozy's center-right government.

	Trade Ties

Differences in the role the state plays in the economy, however, have not precluded a growing number and type of international economic transactions from making the two economies increasingly interdependent. In the case of merchandise trade, France is the 8 th largest trading partner for the United States and the United States is France's largest trading partner outside the European Union. As shown in Table 1 , total trade turnover (exports plus imports) totaled $73.2 billion in 2008, with the United States running a $14.8 billion deficit.
Most striking about U.S.-French merchandise trade is the extent to which it is concentrated in similar industries and sectors (so-called intra-industry trade). In 2008, $42 billion or 57% of bilateral trade occurred in major industries such as aerospace, pharmaceuticals, medical and scientific equipment, electrical machinery, and plastics where both countries export and import similar products (see Table A-3 and Table A-4 in the Appendix ). Many of these products are components or capital goods used in the production of finished goods in both the United States and France. Furthermore, due to large amounts of foreign direct investment across both sides of the Atlantic, much of this intra-industry trade takes place as trade between parent companies and their affiliates (so-called intra-firm trade). This kind of trade, where large multinational companies, such as Michelin and General Electric, trade between their affiliates, has accounted for around 50% of total trade turnover in recent years.
The overwhelming role that both intra-industry and intra-firm trade play in merchandise trade tends to limit targets of any potential trade retaliation. This is because restrictions placed on most of these traded items would adversely affect domestic production as well as employment of the country imposing the restriction.
The United States and France also have a large and growing trade in services such as tourism, education, finance, insurance, and other professional services. (With over 70 million tourists per year, France is the most visited country in the world). As shown in Table 2 , the U.S. exported $18.4 billion in services to France in 2007 and imported $15.9 billion in services. These amounts make France the sixth largest market for U.S. exports of services and the seventh largest provider of services to the United States.
While France ran a $1 billion surplus in services trade for the first time in recent history, the United States tends to run small surpluses in services trade with France. These balances, as shown in Table 3 , affect the merchandise trade balance only modestly.

	Investment Ties

While trade in goods and services receives most of the attention in terms of U.S.-France commercial ties, foreign direct investment and the activities of foreign affiliates can be viewed as the backbone of the commercial relationship. Compared to trade flows, the scale of commercial activities of U.S.-owned companies operating in France and French-owned companies operating in the United States outweighs trade flows by a factor of almost five .
This key dynamic of the commercial relationship is illustrated in Table 4 . In 2006, French companies sold $258.9 billion of goods and services to U.S. consumers while U.S. companies sold $236.0 billion of goods and services to French consumers. Of this combined $494.9 billion in sales, only $89.9 billion or 18% was accounted for by international trade (exports of goods and services from French companies to the U.S. and from U.S. companies to France). The vast majority (82%) was due to sales by U.S. foreign affiliates producing and selling in France and French foreign affiliates producing and selling in the United States. The combined U.S.-French annual $494.9 billion sales figure translates into over $1.35 billion in commercial transactions taking place every day of the year.
In the case of foreign direct investment, France in 2006 was the eleventh largest host country for overall U.S. foreign direct investment and the United States was the number one foreign investor with investments valued at $65.9 billion (historical cost basis). During the same year, French companies had direct investments in the United States totaling $147 billion (valued on a historical cost basis), making France the fifth largest foreign investor in the United States in stock terms (see Table A-6 ). Manufacturing accounted for 44% of total French investments.
The assets of some 2,485 French-owned companies operating in the United States (2006 data) totaled $777 billion, up from $176 billion in 1990. The 1,348 U.S.-owned companies operating in France had $294 billion in total assets, up from $78 billion in 1990 (see Table A-8 and Table A-9 ).
The total gross product or value added of French-owned companies operating in the United States in 2006 was $59 billion, up from $19 billion in 1993 (the first year this data was collected). This $59 billion gross product figure is equivalent to the total gross national product of countries such as Morocco, Ukraine, and Vietnam.
Affiliate sales are the primary means by which French companies deliver goods and services to U.S. consumers. In 2006, French affiliate sales totaled $207 billion, a sum that is nearly four times greater than the $51.9 billion in French exports of goods and services to the U.S. Sales of U.S. affiliates operating in France totaled $198 billion in 2006, a figure that exceeds the $38 billion in U.S. exports of goods and services to France by a factor of more than five .
French-owned companies employed some 496,000 workers in the United States in 2006, up from 338,000 in 1990 but down from a high of 655,000 in 2000. The largest French companies such as Lafarge, Michelin, Sodexho (hotels and food service), EADS (European Aeronautic and Defense Company), Pernod-Richard, and Thomson historically account for around three-fourths of the employment. A breakdown of employment by states (see Table A-7 ) indicates that the top 10 states hosting French majority-owned U.S. affiliates subsidiaries (2005 data) are California (55,000), New York (48,000), Texas (37,300), New Jersey (24,300), Pennsylvania (23,200), Florida (16,600), South Carolina (16,200), Massachusetts (16,100), and Ohio (15,400).
U.S. companies invested in France had 651,300 employees in 2006, the vast majority French citizens. Of this total, around 40% were employed in manufacturing industries such as chemicals, computers and electronic products, and machinery. French companies are also active in doing research and development (R&D) in the United States. In 2006 these expenditures totaled $3.3 billion.

	Tensions and Disagreements

France, as a member of the European Union, adopts the same trade policy as other members of the EU. By sharing common tariff and non-tariff policies with other EU members and by adopting EU-wide regulations and standards, there are few trade disputes that can be considered U.S.-French bilateral disagreements per se. Most U.S. trade and investment with France, dominated by multinational companies and intra-firm trade, is non-controversial. Nevertheless, three prominent issues—agriculture, government intervention in corporate activity, and the war in Iraq—have contributed to increased bilateral tensions from time to time.

		Agriculture

Agricultural trade disputes historically have been the major sticking point in U.S.-France commercial relations. Although the agricultural sector accounts for a declining percentage of output and employment in both countries, it has produced a disproportionate amount of trade tensions between the two sides. As trade, as well as agriculture, is under the jurisdiction of the European Commission, the problems, of course, are not technically bilateral in nature.
From the U.S. perspective, the restrictive trade regime set up by the Common Agricultural Policy (CAP) has been the main problem.. It has been a longstanding U.S. contention that the CAP is the largest single distortion of global agricultural trade. American farmers and policymakers have complained over the years that U.S. sales and profits are adversely affected by (1) EU restrictions on market access that have protected the European market for European farmers; by (2) EU export subsidies that have deflated U.S. sales to third markets; and by (3) EU domestic income support programs that have kept non-competitive European farmers in business. From an EU and French perspective, the CAP has been substantially reformed in recent years and cannot be characterized as the largest source of distortions in agricultural trade. On the contrary, under this view there is ample evidence that EU (as well as Australian, New Zealand, and Canadian) farm exports have been hampered by U.S. food aid policies in some developing countries.
France's agricultural sector, which in terms of output and land is the largest in Europe, has long been the biggest beneficiary of the CAP. Over the past several years, French farmers have received about 20 to 25% of CAP outlays that have averaged around $40 billion. Acting to continue benefits and subsidies for its farmers, the French position, which is shared by many other EU members, can determine the limits and parameters of the European Commission's negotiating flexibility on a range of agricultural issues that are of keen interest to the United States. The most prominent and perhaps important example relates to current efforts to get the WTO Doha round of multilateral trade negotiations back on track by reducing agricultural subsidies and other barriers to market access. Other examples where the French position, backed by many other EU members, arguably has made settlement of disputes more difficult include expanded trademark protection for wines, cheeses, and other food products linked to specific regions, and a ban on the importation of beef treated with hormones.

		Government Intervention in Corporate Activity

Despite significant reform and privatization over the past 15 years, the French government continues to play a larger role in influencing corporate activity than does the U.S. government. This difference is manifested not only in the French government's continuing direct control of key companies and its support of "national champions", but also in its continuing proclivity to influence mergers involving French firms. President Sarkozy in a number of ways has continued to support this policy tradition. Nevertheless, although bilateral disputes may be more prone to occur because of the French government's interventionist and regulatory tendencies, the dictates of EU laws as well as the urgent need to raise the revenues through privatization efforts and to enact market-oriented reforms, are weakening the French dirigiste tradition.
In 1997, the then socialist government restarted a process of privatization and opening of government-controlled firms to private investment that had begun in the 1980s, and the program was continued by the center-right government that took power in 2002. In 2003 and 2004, the government reduced its stakes in large companies such as Air France-KLM (to 44.6 from 54.0%), France Telecom (to 42.2 from 54.5%), Renault (to 15.6 from 26.0%), and Thomson (to 2.0 from 20.8%). The government still has stakes in Bull and Safran, and in 1,280 other firms. While the trend has been to privatize many large companies (fully or partially), the government still maintains a strong presence in sectors such as power, public transport, and defense.
Despite its on-going privatization program, the French government continues to promote national champions and "economic patriotism," a concept that has been used to justify opposition to foreign takeovers of French firms. This tendency has been apparent in an effort by the government to strengthen a French takeover law and a parallel effort to scrutinize sensitive foreign investments more closely. In the summer of 2005, the government orchestrated a quick merger of two utilities, publicly traded Suez SA, a French utility, and state-controlled Gaz de France (GDF), to fend off a potential takeover by Enel of Italy. President Sarkozy is now exploring ways to create "national champions" in other industries such as nuclear power and defense. Such mergers would involve Areva, the state-owned nuclear group and other French companies, plus the huge defense/aerospace companies Thales and Safran.
At the same time that Sarkozy is supporting interventionist policies designed to enhance France's economic and industrial strength, he is also promoting market-oriented domestic reforms on issues such as taxation and labor markets. During 2007-2008, the government implemented several important labor reforms, including a de facto extension of the 35-hour work week by allowing employees to work longer hours. While President Sarkozy may view increased competition as a way to get France's over-regulated economy on track for stronger growth, the government has delayed additional reform efforts due to the on-going economic crisis.

		Iraq War

In the era of the Cold War, there was considerable concern that trade disputes between allies could undermine political and security ties. Deep differences over the Iraq war between the United States and many of its allies, particularly France and Germany, reversed this Cold War concern into whether foreign policy disputes can weaken or undermine strong commercial ties.
Specific concerns that divisions over Iraq could spill over into the trade arena arose in early 2003 with reports of U.S. consumer boycotts of French goods and calls from some U.S. lawmakers for trade retaliation against France (and Germany). The spike in bilateral tensions and hard feelings, however, appears not to have had much impact on sales of the products—such as wines, perfumes, handbags, and cheeses—most prone to being boycotted. As shown in Table 5 , U.S. imports of all four of these French products increased in absolute terms from 2003 to 2008. Moreover, the French share of U.S. total imports of these products has increased for cheese and travel goods, stayed about the same for perfumes, and declined only for wines. But the decline in market share for wines (from 35% in 2003 to 31.4% in 2008) started well before the Iraq War. It also should be pointed out that because the euro grew substantially weaker during this 2003-2007 time frame, U.S. demand for these products had to remain strong.
Although there are few signs that goods and services clearly identified with France or the United States are being boycotted, some polls have found evidence of public support among some segments of the U.S. population for expressing opposition to foreign policy disagreements in the shopping malls. Nevertheless, a substantial economic backlash appears unlikely because of the high degree of economic integration. Effective boycotts would jeopardize thousands of jobs on both sides of the Atlantic.

			Appendix. Trade and Foreign Investment Data

Summary:
U.S. commercial ties with France are extensive, mutually profitable, and growing. With over $1.35 billion in commercial transactions taking place between the two countries every day of the year, each country has an increasingly large stake in the health and openness of the other's economy.
France is the eighth largest merchandise trading partner for the United States and the United States is France's largest trading partner outside the European Union. More than half of bilateral trade occurs in major industries such as aerospace, pharmaceuticals, medical and scientific equipment, electrical machinery, and plastics where both countries export and import similar products.
The United States and France also have a large and growing trade in services such as tourism, education, finance, insurance and other professional services. In recent years, France has been the sixth largest market for U.S. exports of services.
Although trade in goods and services receive most of the attention in terms of the commercial relationship, foreign direct investment and the activities of foreign affiliates can be viewed as the backbone of the commercial relationship. The scale of sales of French-owned companies operating in the United States and U.S.-owned companies operating in France outweighs trade transactions by a factor of four and five, respectively.
In 2007, France was the thirteenth largest host country for U.S. foreign direct investment abroad and the United States with investments valued at $68.5 billion was the number one foreign investor in France. During that same year, French companies had direct investments in the United States totaling $169 billion (historical cost basis), making France the sixth largest investor in the United States. French-owned companies employed some 497,000 workers in the United States in 2006 compared to 651,500 employees of U.S. companies invested in France.
Most U.S. trade and investment transactions with France, dominated by multinational companies, are non-controversial. Nevertheless, three prominent issues—agriculture, government intervention in corporate activity, and the war in Iraq—have contributed periodically to increased bilateral tensions. The most pointed perhaps arose in early 2003 with reports of U.S. consumer boycotts of French goods and calls from some Members of Congress for trade retaliation against France (and Germany) due to foreign policy differences over the Iraq War.
The foreign policy dispute, however, appears not to have had much impact on sales of products such as French wines, perfumes and toiletries, travel goods and handbags, and cheeses that are most prone to being boycotted. While some public opinion polls at the time suggested support for economic boycotts as a way of expressing opposition to France's position on Iraq, an economic backlash appears not to have materialized. Effective boycotts would jeopardize thousands of jobs on both sides of the Atlantic. This report will be updated as needed. See also its companion report, CRS Report RL32464, France: Factors Shaping Foreign Policy, and Issues in U.S.-French Relations, by [author name scrubbed].