SWP570

Public Assistance to Industriesand Trade Policy in France

Bernard Bobe

WORLD BANK STAFF WORKING PAPERSNumber 570

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WORLD BANK STAFF WORKING PAPERSNumber 570

Public Assistance to Industriesand Trade Policy in France

Bernard Bobe

The World BankWashington, D.C., U.S.A.

Copyright ( 1983The International Bank for Reconstructionand Development / THE WORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

First printing September 1983All rights reservedManufactured in the United States of America

This is a working document published informally by the World Bank. Topresent the results of research with the least possible delay, the typescript hasnot been prepared in accordance with the procedures appropriate to formalprinted texts, and the World Bank accepts no responsibility for errors. Thepublication is supplied at a token charge to defray part of the cost ofmanufacture and distribution.

The views and interpretations in this document are those of the author(s) andshould not be attributed to the World Bank, to its affiliated organizations, or toany individual acting on their behalf. Any maps used have been preparedsolely for the convenience of the readers; the denominations used and theboundaries shown do not imply, on the part of the World Bank and its affiliates,any judgment on the legal status of any territory or any endorsement oracceptance of such boundaries.

The full range of World Bank publications is described in the Catalog of WorldBank Publications; the continuing research program of the Bank is outlined inW'rld Bank Research Program: Abstracts of Current Studies. Both booklets areupdated annually; the most recent edition of each is available without chargefrom the Publications Distribution Unit of the Bank in Washington or from theEuropean Office of the Bank, 66, avenue d'Iena, 75116 Paris, France.

Bemard Bobe is professor of economics at the University of Paris-Nanterreand a consultant to the Economic Analysis and Projections Department of theWorld Bank.

Library of Congress Cataloging in Publication Data

Bobe, Bernard.Public assistance to industries and trade policy

in France.

(World Bank staff working papers ; no. 570)Bibliography: p.'1. France-Commercial policy. 2. Subsidies--

France. I. Title. II. Series.HF1543.B58 1983 338.944'02 83-14827ISBN 0-8213-0200-0

A Set of RelatedWORLD BANK STAFF WORKING PAPERS

Public Subsidies to IndustryThe Case of Sweden and Its Shipbuilding Industry

Number 566

The Political Economy of Protection in ItalySome Empirical Evidence

Number 567

Bureaucracies and the Political Economyof Protection

Reflections of a Continental EuropeanNumber 568

Economics and the Politics of ProtectionSome Case Studies of Industries

Number 569

Public Assistance to Industriesand Trade Policy in France

Number 570

The Structure of International Competitivenessin the Federal Republic of Germany

An AppraisalNumber 571

AKNOWLEDGEMENTS

I am grateful for the comments of Helen Hughes, Jean

Waelbroeck, Lutz Hoffman and Vincent Cable. I am, of course, solely

responsible for any errors, and all opinions are mine.

TABLE OF CONTENTS

I INTRODUCTION .................................................... P

II INDUSTRIAL STRUCTURE AND THE PATTERN OFSPECIALIZATION ......................................... 3

Geographical Trade Patterns ....................... 3

III SUBSIDIES TO INDUSTRIES ............................. 9

Institutional Aspects ........ . . . . . . . . . . . . . . . . . . . . . 9Sectoral Distribution of the Public Subsidies *.... 13The Reform of Public Assistance for Industry ...... 20Some International Comparisons .................... 21

IV FRENCH INTERNATIONAL TRADE POLICY ........ ........... 28

Financial Assistance for Exports .................. 28Some Aspects of French Trade Policy ................ 35

V CNLSOSumr .......................................... 42

REFERNCLUIOS ........................................... 44

LIST OF TABLES

Page

1 Trade Balance with OECD and EC Countries, 1973-80 ... 4

2 Trade Balance with Some Industrial Countries(CIF/FOB), 1970-80 ........... . . *. . .. . . .. . . ............. 5

3 Trade Balances with Non-OPEC Developing Countries andCentrally Planned Economies (CIF/FOB), 1970-80 ...... 5

4 Trade Balance for Manufactured Products, 1970-78 .... 7

5 French Openness to the World Economy, 1970-78 ....... 8

6 Budgetary Appropriations for Government EconomicIntervention, 1980 ............................ 14

7 Budgetary Appropriations for Public Assistance toIndustry, 1979 .... .................................. 14

8 Sectoral Distribution of Public Assistance toIndustry, 1972-76 ............. *.......... *........ 15

9 Financial Assistance to Private Industrial Firms(Excluding Nationalized Companies) .................. 16

10 Distribution of Assistance to Industry, 1976 ........ 17

11 Subsidies to the Industrial Sector in the FederalRepublic of Germany, 1978 ........................... 23

12 Government Assistance to U.K. Industry, 1977-78 ..... 25

13 Sectoral Distribution of Public Assistance to Industryin the U.K. Industry Act of 1972, 1972/73-1977/78 ... 26

14 Export Assistance ........... . .. . .. . .. . . .. . .. . .. . .. . . 33

LIST OF TABLES (Cont'd)

Page

15 Export Credits to Developing Countries Benefitingfrom Public Assistance (Loans for 5 Years and More),1981 Levels ***************..*** .................. 33

16 Geographical Distribution of Mid- and Long-TermLoans of the BFCE (End of 1977) * ..................... 34

17 Tariff Averages for the Main Industrial Sectors,1976 ***e********.. *a****... .e*****..e*.....*........ 36

18 French Tariff Protection, 1978 ...................... 38

19 Effective Exchange Rates (Relative to a Basket ofCurrencies Weighted by the World Export Structure) ... 39

ABSTRACT

This report is part of an inquiry undertaken by the World Bank

in conjunction with scholars from 12 industrial countries into the

penetration of the markets of industrial countries by export of

manufactures from developing countries. The project sought to establish

the shares of industrial country markets held by the developing

countries, changes in such shares in the 1970s, and why they vary among

industry groups and countries. The aim is to assist developing and

industrial countries to improve their policies through a better

understanding of trade patterns and protectionist pressures.

This paper examines trade policy in France and the tools,

particularly public subsidies, used to support industry. It begins by

looking at the nature of France's international commerce as it evolved

in the 1970s and at French trade policy. Attention is paid to the

institutional structure through which trade policy is decided on and

implemented. It concludes by assessing probable future trends. As a

major objective of the work was to gather information on trade policy

and its implementation, to a large extent the material is descriptive.

In the 1970s, the bulk of France's international trade was with

developed countries. Trade with developing countries was mainly with

France's former possessions. Other developing countries have

encountered quite restrictive attitudes on France's part.

Just 20% of France's trade falls under the Common External

Tariff. Among the measures it has used to influence imports have been

quantitative restrictions, exchange rate policy, "safeguard" measures

and non-tariff barriers. Subsidies to industry have also been used

extensively. The system of subsidies is complex, involving numerous

measures and institutions that have evolved piecemeal over 20 years.

The same complexity has also characterized government assistance for

exports.

Beginning in 1981, the government decided to reform the system

of public assistance to industry. The effort involved three lines of

endeavor: the simplification and harmonization of the system,

decentralization of the allocation of assistance to the regions, and

greater selectivity in allocations.

The new government, while more disposed toward intervention,

will probably support this reform program. Moreover, the importance of

trade to France's economy will tend to discourage a return to greater

protectionism. Another limiting factor is the Community-wide tariffs.

At the same time, protectionist pressure remains strong and has support

among the public and some politicians, as well as the "bureaus."

Combined with protectionist moves in other developed countries, this

could lead to greater protection.

Trade will also be influenced by the extension of the

nationalized sector. The priorities, however, are likely to remain the

same, e.g., there will be continued support for high technology sectors.

I INTRODUCTION

Government intervention in France has been important since the

early stages of commercial and industrial growth.-/ Accordingly, in the

1970s, public assistance was a significant instrument of French trade

policy. This was particularly true since France had been facing

2/substantial fiscal pressures-/ and had an important nationalized

3/sector.-

It is within this context that public subsidies in France are

analyzed in this paper*.4/ The changes in industrial structure and

patterns of specialization during the 1970s are reviewed briefly,

followed by a discussion of the subsidies to industry. Finally,

financial assistance for exports is addressed, along with trade

policy. As one purpose of this initial analysis was to gather

1/ Non-French-speaking readers can refer to C. P. Kindleberger,Economic Growth in France and Britain, 1851-1950, Cambridge,Mass.: Harvard University Press, 1964; and R. Cameron, ed., Essaysin French Economic History, Homeward, Ill.: R. D. Irwin for theAmerican Economic Association, 1970.

2/ Taxes and social security contributions represented 42 percent ofGNP in 1980.

3/ During 1977, productive investment represented 10.9 percent of GNP(with 11.3 percent of GNP represented by collective investments andhousing). Twenty percent of productive investment came from thenationalized companies and 80 percent from private firms.

4/ This paper describes public assistance to industries and tradepolicy in France up to May 1981, when a socialist government waselected. Policies since that time have been in a state of flux,and it is too early to make an assessment of the new orientationsand their implications.

statistical information,-Y the material is rather descriptive. However,

the findings can be interpreted within the general framework of

commercial policy as developed by Baldwin and Corden.2/

1/ The data-gathering was completed in the summer of 1981.

2/ R. E. Baldwin, "Non-Tariff Distortions of International Trade," TheBrookings Institution, Washington, D.C., 1970; and W. M. Corden,Trade Policy and Economic Welfare, Oxford: Clarendon Press, 1974.

II INDUSTRIAL STRUCTURE AND THE PATTERN OF SPECIALIZATION

International trade and the pattern of industrial

specialization in the French economy changed rapidly during the 1970s.

Two aspects are worth noting here. First, most French international

trade was with developed countries and took place at a deficit. The

main commercial surplus came from trade with non-OPEC developing

countries, a fact that underscores the importance to France of good

relations with the developing countries. The surplus arose mainly in

France's trade with its former possessions, most of which were little

industrialized. As a result, France was quite free to be restrictive in

its trade policies with the other developing countries, as they could

not easily retaliate against its trade restrictions (or buy off the

restrictions by offering contracts).

The second point is that France's economy rapidly became more

specialized, and presumably more "efficient," through better use of the

trading opportunities offered by the rest of the world. The need to

safeguard this efficiency has emerged as a constraint that discourages a

backslide into protectionism.

Geographical Trade Patterns

Nearly 70 percent of France's international trade is carried

out with the OECD countries, with EC countries accounting for almost 50

percent of it. The deficit, noted earlier, is shown in Table 1. It

began to grow very quickly at the end of the last decade and was very

important to the trade in industrial products (intermediate or capital

Table 1: TRADE BALANCE WITH OECD AND EC COUNTRIES, 1973-80(billions of current francs)

1973 1974 1975 1976 1977 1978 1979 1980

Trade balance(CIF/FOB)

OECD -4.0 -6.3 -6.9 -28.8 -20.9 -17.8 -22.2 -50.1EC -2.5 -4.1 -3.5 -17.8 -14.0 -8.6 -8.7 -22.5

Imports (CIF)/exports (FOB) (%)

OECD 96.8 96.3 96.3 86.6 91.3 93.3 93.2 86.9EC 97.3 96.6 96.9 88.3 91.8 95.5 96.2 91.4

Source: Customs Administration (Administration des Douanes).

goods), particularly with Federal Republic of Germany, the Netherlands

and the United States.

Table 2 shows that France had a surplus in its trade with Italy

(growing because of exports of automobiles and energy) and with the

United Kingdom (declining because of oil imports and a decline in

exports of automobiles).

As shown in Table 3, the total trade balance with the non-OPEC

developing countries and with the centrally planned economies was

positive. Where the trade balance was positive for industrial products,

it was because of surpluses with the developing countries, mainly those

in the French franc area and in North Africa. The trade balance with

Asian countries was positive until 1979 but became negative in 1980.

Table 2: TRADE BALANCE WITH SOME INDUSTRIAL COUNTRIES(CIF/FOB), 1970-80

(billions of current francs)

1970 1973 1976 1977 1978 1979 1980

Germany, F.R. -2.9 -6.7 -13.2 -10.7 -10.2 -11.1 -16.8

Italy 1.3 3.7 1.6 -0.5 0.3 1.5 5.2

Japan -0.2 -0.5 -3.9 -4.5 -4.6 -4.8 -7.1

Netherlands -0.3 -1.3 -5.1 -5.2 -4.2 -5.2 -8.0

U.K. -1.4 2.4 1.0 2.2 4.7 6.5 2.0

U.S. -5.2 -6.3 -10.5 -8.0 -7.6 -14.0 -24.6

Source: Customs Administration (Administration des Douanes).

Table 3: TRADE BALANCES WITH NON-OPEC DEVELOPING COUNTRIES AND CENTRALLYPLANNED ECONOMIES (CIF/FOB), 1970-80

(billions of current francs)

1970 1973 1976 1977 1978 1979 1980

Centrally plannedeconomies

Trade balance 1.1 1.3 4.3 2.4 1.9 3.3 -3.1Imports/exports (%) 137 125 141 120 115 121 87

Non-OPEC developingcountries

Trade balance 3.6 4.4 12.8 12.1 16.7 18.6 20.1Imports/exports (%) 133 128 145 137 152 147 142

Source: Customs Administration (Administration des Douanes).

To an extent, bilateral trade balances influence trade

policies. The reason is that the deficit country tends to feel that it

has less to lose from a trade dispute than does the country against

which it is seeking to discriminate. Given the geographical pattern of

French trade, this fact may help account for the resilience of

protectionist sentiment in France. However, the favorable trade balance

surplus in industrial products with the non-OPEC developing countries

may have moderated these tendencies, encouraging France's "pro-South"

political stance.

As remarked above, a detailed analysis of French trade patterns

suggests that the second factor did not strongly limit protection for

manufactured goods. Policy-makers were aware, however, that there was

much to gain from allowing French international trade specialization to

increase. The contribution to growth in France that had resulted from

the international specialization in recent years was recognized.

France's international specialization was studied recently in

detail.-1 The research showed important trends in specialization for

industrial products.2/ The surplus in industrial products had been 5.7

1/ CEPII (Centre d'Etudes Prospectives et d'InformationsInternationales [Center for Prospective Studies and InternationalData]), "Specialisation et Adaptation Face a la Crise" [Speciali-zation and Adjustment in Response to the Crisis], EconomieProspective Internationale (January 1980); and B. Bobe and S.Becuwe, "Nouvelles Specialisations Internationales et StructuresIndustrielles de la Region Nord-Pas de Calais" [New Patterns ofInternational Specialization and Industrial Structure in Nord-PasCalais], mimeo, Universite de Lille, Lille, 1980.

2/ This very brief analysis does not address the French trade balanceand the important surpluses in food products and services.

billion francs in 1970, but was 43.10 billion in 1978 (in current

prices).

Table 4 summarizes the trade balance for manufactured products

from 1970-78: it became positive for intermediate goods and even more

positive for equipment goods, but negative for consumer products.

However, this specialization, which reflects a better adjustment to the

pattern of international demand, is less important if volume data

(measured in constant francs) rather than values are taken into account.

Table 4: TRADE BALANCE FOR MANUFACTURED PRODUCTS, 1970-78(billions of current francs)

1970 1971 1972 1973 1974 1975 1976 1977 1978

Intermediategoods -4.5 -4.5 -5.5 -7.1 -6.8 0.7 -8.1 3.2 4.6

Equipment goods 5.5 7.3 7.5 7.0 10.5 28.9 26.5 40.1 41.4

Automobiles 5.2 6.1 7.1 7.5 8.7 10.2 11.1 14.2 16.1

Others 0.3 1.2 0.4 -0.5 1.8 18.7 15.4 25.9 25.3

Consumer goods 4.7 4.9 5.1 5.9 4.7 4.3 -1.1 -2.6 -2.9

Source: National accounts.

Table 5 shows that the French economy became increasingly open

to foreign trade, another indication of its adjustment to the

international markets.

Table 5: FRENCH OPENNESS TO THE WORLD ECONOMY, 1970-78

Penetration () a/ Export intensity(x) Z1970 1974 1978 1970 1974 1978

10 Iron basic industries 24.8 25.4 29.4 26.1 30.3 34.011 Steel basic industries 16.7 22.4 29.7 24.4 32.9 41.513 Non-ferrous metals and basic products 45.5 56.5 47.8 31.1 44.5 42.615 Construction materials and ceramics 9.1 10.4 10.8 6.9 8.3 9.216 Glass and glass products 16.3 20.3 19.3 26.5 30.5 30.2

171 Inorganic chemical products 17.2 21.0 21.1 21.2 22.6 21.0172 Organic chemical products 49.8 50.8 54.3 47.6 51.0 57.218 Paints, soaps. cosmetics, perfumes and

miscellaneous chemical products 12.6 16.1 20.6 16.5 19.9 25.819 Pharmaceutical products 1.6 1.7 3.3 13.4 14.8 16.020 Foundry products 2.6 3.6 3.6 5.2 7.8 8.6

21 Fabricated metal products 7.8 11.1 13.0 7.8 11.4 14.222 Agricultural machinery 27.0 30.8 26.3 20.7 22.0 19.923 Machine-tools 38.2 40.2 40.8 28.0 33.4 41.624 Industrial equipment 29.9 31.2 36.2 29.3 33.6 44.125 Handling equipment for mines, iron

industries, construction 28.2 33.8 40.6 37.4 45.2 59.0

27 Office and data processing equipment 57.6 77.3 63.6 47.7 68.6 56.528 Electrical machinery and apparatus 12.9 15.2 19.5 19.6 23.7 32.3

291 Professional electronic equipment 25.1 30.1 30.3 23.5 30.6 32.6292 Household electronic equipment 33.0 46.4 49.9 18.7 20.6 20.630 Household appliances 27.0 33.3 35.8 17.6 24.9 31.6

311 Automobiles, cycles and motorcycles 19.1 23.0 26.3 34.0 38.8 42.0312 Railroad equipment 6.1 10.8 5.5 30.5 45.7 32.533 Manufacture of aircraft 32.2 37.3 30.4 37.7 37.1 48.934 Precision instruments 32.9 37.1 40.1 27.8 35.2 37.643 Artificial and synthetic fibers and threads 30.5 38.1 52.3 32.4 36.6 50.8

441 Finished natural textiles, threads, spun yarn 7.9 12.7 14.5 20.7 22.2 23.8442 Hosiery products 18.5 23.3 30.5 20.8 24.9 25.4443 Thread 18.6 28.2 37.3 24.5 27.0 31.9451 Leather and skins 24.0 28.7 36.1 33.4 33.8 30.7452 Leather articles 7.0 11.2 20.4 13.2 13.9 16.8

46 Footwear 11.4 16.3 24.4 20.6 23.1 19.647 Wearing apparel 6.2 9.8 13.4 11.2 17.6 17.448 Wood and wood products 11.4 15.4 16.0 7.1 10.1 12.949 Furniture 12.7 13.8 17.5 4.0 5.0 7.250 Paper and paperboard 19.6 22.6 23.3 9.7 12.4 13.9

51 Printing, publishing and allied industries 7.7 8.5 7.9 6.7 8.0 7.952 Tires and other rubber products 16.4 19.4 22.5 25.8 31.5 33.453 Plastic products 16.4 20.1 21.5 14.0 17.9 18.254 Miscellaneous manufactured products 23.4 27.8 33.0 27.5 27.2 28.2

a/ Imports - Production + imports - exports.T/ Exports - Production.

Source: Input/output tables, National Institute of Statistics and Economic Studies(INSEE [Institut National de la Statistique et des Etudes Economiques]).

III SUBSIDIES TO INDUSTRIES

A thorough analysis of subsidies requires detailed statistical

information on each sector in order to compute the sectoral rates of

assistance..& So far, such detailed information has not been available

for France because of a long tradition of secrecy. However, as

background to further analysis, it is useful to describe the system of

public subsidies to industries. (The subsidies given via government

procurement, fiscal exemptions2/ and transactions of nationalized

companies have not yet been covered.)

This section begins with a description of some institutional

aspects of the subsidization program, followed by an evaluation of the

subsidies, and concludes with some brief international comparisons.

Institutional Aspects

The present system of assistance to industry is characterized

by institutional complexity. As is well-known in the French bureaucracy

1/ On this matter, see Industries Assistance Commission, "Assistanceto Australian Manufacturing Industries, 1974-75 to 1977-1978,"Canberra, 1980; and K. H. Juttemeier and K. Lammers, "Subventionenin der Bundesrepublik Deutschland" [Subsidies in the FederalRepublic of Germany], Institut fUr Weltwirtschaft, Discussion Paper63-64, Kiel, November 1979.

2/ The effects of tax exemptions on international competition could beanalyzed only by taking into account the full effects of a fiscalsystem on external trade, something that has never been carried outfully. Little attention has been given to this topic, except by J.Maurice and P. Villa "Fiscalit& et Choix de la Tecnique deProduction Vus I Travers une Reforme de l'Assiette des ChargesSociales [Fiscal Policy and Choice in Production Techniques ViewedThrough Reform of the Basis for Social Payments], Annales del'INSEE 38-39 (September 1980).

- 10 -

(and as is probably true in other countries as well), a new

"institution" is created whenever a problem has to be solved. This

institution is very often inter-ministerial because several ministries

are usually involved. However, all important decisions are made by the

Ministry of Economics and Finance (Ministere de l'Economie et de

Finances) and, more particularly, by the Treasury (Direction du Tresor).

The main institutions and means for administering public

assistance to industry are:

(1) The Fonds de D6veloppement Economique et Social (FDES)

(the Fund for Economic and Social Development). Created

in 1955, the FDES receives budgetary appropriations, and

its principal function is to provide low-interest

loans.L/ Its Direction Committee is chaired by the

Ministry of Economics and Finance.

(2) The Comite Interministeriel pour l'Amenagement des

Structures Industrielles (CIASI) (Inter-Ministerial

Committee for - Industrial Structural Adjustment).

Created in 1974 and chaired by the Ministry of

Economics, the CIASI is responsible for finding

solutions for firms in trouble. Very often it

recommends loans from the FDES or other financial

institutions, and budgetary subsidies from the Fonds

d'Intervention pour l'Amenagement du Territoire (FIAT)

(Fund for Assistance in Territorial Management) and from

1/ Sometimes the loans will never be reimbursed, as in the case of thesteel industry.

the Ministry of Industry (Minist're de l'Industrie) via

its "industrial policy assistance loans" or "regional

development premia. '/

(3) The Fonds Special d'Adaptation Industrielle (FSAI)

(Special Fund for Industrial Adjustment). It is chaired

by the Treasury. Created in 1978, the FSAI helps French

industry adapt to international competition. It is

authorized to:

* Gather financial means for investment in competitive

industries creating long-term jobs.

* Allocate investments to areas where there is a

shortage of jobs, in particular to the northern and

eastern parts of France (in the iron and steel and

textiles industries), and in the western and southern

areas in the shipbuilding industry. Its coverage is

therefore extremely broad, an illustration of how

difficult it is politically to give assistance

selectively.

The goal of the FSAI is to assist investment projects

which create 50 or more jobs lasting at least three

It is claimed that the CIASI is very efficient for a bureaucraticagency. For each franc of public funds, 8 francs come from othersources (Le Nouvel Economiste, January 29, 1979). Decision-makingin the CIASI is decentralized to the Comites Departementauxd'Examen des Problemes de Financement des Entreprises (CODEFI)(Departmental Committees for the Review of Business FinancialProblems). The CODEFIs allocate loans from the FDES in amounts ofless than 500,000 francs per firm. According to official sources,the CIASI has helped 504 firms and created 230,000 jobs in fouryears (this does not mean that 230,000 jobs have been saved); loansfrom the FDES represent 4,500 francs per job.

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years in developing sectors, irrespective of the capital

intensity, by means of:

* Subsidies of up to 25 percent of investment,

and

* Long-term loans with low interest rates and delayed

reimbursement.

Investment projects have been mainly in such sectors

as mechanical engineering, motor vehicles and

electronics. It is felt that FSAI assistance has a

leverage effect on private financing. Up to now,

however, this type of assistance seems to have been very

costly in terms of the capital expended per capital job

created.

(4) The Institut de Developpement Industriel (IDI) (the

Institute for Industrial Development). Its goal is to

increase the capital equity of middle-sized firms. The

IDI buys shares, lends funds and plays the role of

"partner" with some leading firms in their specialized

markets 1/

(5) Various institutions such as the Cr6dit National

(National Institute for Credit to Industry), the Caisse

Nationale des March&s de l'Etat (National Agency for

Because of its small size, the IDI's activities are ratherlimited. From its creation under President Pompidou in 1970 toJanuary 1, 1978, it had invested 723.5 million francs in 106enterprises.

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Public Procurement), the Societes de Developpement

Regional (Societies for Regional Development), etc.

(6) Various means such as

• Subsidies for regional development of up to 12,000

francs or 19,000 francs per job.

* Subsidies from the Ministry of Industry.

• Budgetary grants and interest rebates.

Sectoral Distribution of the Public Subsidies

As the above general description of the French system of public

assistance to industry suggests, there is a lack of coherence. The

system amounts to complex set of measures and institutions which have

been implemented over 20 years,. which have many goals in mind and which

have never been subjected to a general review. There are obvious

conflicts between the Ministry of Economics and Finance, the Ministry of

Industry and the Ministry of International Trade.

Public subsidies to industry have been only a part of a

broader, general system of government economic intervention, as can be

seen from Table 6, where they represent only 20 percent of the total

amounts. Direct subsidies to private industrial firms have, however,

accounted for a major part of the public assistance to industry: 60

percent of the budgetary appropriations in 1979, or 1.1 percent of GDP

(Table 7).

Assistance to private industries has fluctuated between 2.2

percent and 2.6 percent of industrial value added and between 20.4

percent and 21.4 percent of industrial gross investment. As is shown in

- 14 -

Table 6: BUDGETARY APPROPRIATIONS FOR GOVERNMENT ECONOMICINTERVENTION, 1980(billions of francs)

Amount %

Housing 27.6 30

Industry 19.1 20

Transportation 14.6 15

Agriculture 13.1 14

Energy 10.8 11

Job training 6.0 6

Other 4.0 4

TOTAL 95.2

Source: General Planning Commission (Commissariat General du Plan).

Table 7: BUDGETARY APPROPRIATIONS FOR PUBLIC ASSISTANCETO INDUSTRY, 1979

(billions of francs)

Type of assistance Amount %

Assistance to competitive sector 16,413 62.2Assistance to public firms 6,412 24.3Assistance to exports 3,563 13.5

TOTAL 26,388

Source: Ministry of Finance (Ministere de Finances), S.I. 4732,September 1980.

- 15 -

Table 8, it rose from 7.73 billion francs in 1974 to 12.13 billion in

1977, for a rate of growth of 15 percent a year.

According to an unpublished report from the Ministry of Finance

which was partly rewritten for the Finance Committee of the National

Assembly.11 from 1972-1976 this assistance was distributed as indicated

in Table 8. As these relative shares have been computed without

including the costs of interest rebates on export credits, some look

quite high, especially that of the aircraft industry 2/ It should be

noted that Table 8 takes into account the mining industry and energy

Table 8: SECTORAL DISTRIBUTION OF PUBLIC ASSISTANCE

TO INDUSTRY, 1972-76a/

Industry %

Mining 18.1Energy (including nuclear energy) 9.7Metals and steel 3.7Mechanical (general and precision) 5.0Road motor vehicles 2.6Shipbuilding 9.3Aircraft 29.6Electrical materials 4.1Electronic and computers 12.2Chemicals, rubber, glass and plastic 2.0Textiles and other 3.7

TOTAL 100.0

a/ These figures exclude the cost of export credit subsidies, whichwere large.

Source: National Assembly, Finance Committee (Assemblee Nationale,Commission des Finances).

1/ See Le Monde, September 27, 1979 and December 25, 1979.

2/ Based on data from Table 9 for the years 1974-77, the share ofthe aircraft industries can be computed as 31 percent whenassistance for exports is excluded, and as 20 percent if it isincluded.

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(including nuclear energy). They are not included in Table 9, however,

which shows assistance to private industrial firms.

Table 9: FINANCIAL ASSISTANCE TO PRIVATE INDUSTRIAL FIRMS(EXCLUDING NATIONALIZED COMPANIES)

(millions of francs)

Financial assistance 1973 1974 1975 1976 1977

Specific sectoral assistance-/ 3,509 4,463 5,290 5,997 5,522

Aircraft industry 1,507 1,992 2,294 2,170 1,793Shipbuilding 626 784 1,124 1,071 964Electronics andb/computers 215 329 701 1,228 741Steel industry- 530 760 570 1,260 1,618Others 135 172 206 193 194Capital subsidies 496 426 395 75 212

Non-specific assistance 1,625 3,269 4,058 5,694 6,612

Regional development 453 435 256 213 447Research-innovation 154 179 417 494 408General industrial policy

expenditures 107 109 148 141 106Investment assistance 240 283 401 515 864Assistance for exportsc/ n.a.-d 2,199 2,764 4,250 4,742Other 62 64 72 81 45

TOTAL 5,134 7,732 9,348 11,691 12,134

Total -- value addedof industry (%) n.a. 2.2 2.4 2.6 2.4

Total -- gross investmentof industry (%) n.a. 16.6 20.4 21.3 21.4

a/ As nationalized companies are not covered, the subsidies to coal mininghave not been included.

b/ Loans from the FDES are included at their full share, as reimbursement isnot likely. This assistance was likely to be much more important in 1978(according to the adjustment plan of 1978).

c/ An important part of this assistance is accounted for by the costsconnected with export credits (see below.)

d/ The costs of the exports predits were not available. Other assistance toexports was 609 billion francs.

Source: Ministry of the Economy (Ministere de l'Economie et Finances) andDepartment of Foreign Economic Relations (Direction des RelationsEconomiques Exterieures).

- 17 -

According to the same source, whose figures are consistent with

those in Table 9 (with some minor changes), the distribution of

assistance for 1976, including some nationalized companies (coal,

nuclear energy), was as shown in Table 10.

Table 10: DISTRIBUTION OF ASSISTANCE TO INDUSTRY, 1976

(billions of francs)

Amount %

Specific sectoral assistance 9.5

Aircraft 2.2 14.6

Coal 2.4 15.9

Shipbuilding 1.1 7.3

Electronics and computers 1.2 7.9

Nuclear 1.0 6.4

Steel industry 1.3 8.6

Other 0.3 2.0

Non-specific assistance 5.6

Exports 4.0 26.5

Other 1.6 10.6

Total 15.1

Source: National Assembly, Finance Committee (Assemblee Nationale,Commission des Finances), as reported in Le Monde, December 25,1979.

- 18 -

Assistance for exports accounted for more than 25 percent and

grew faster than other types of assistance during 1974-1978. This

reflects Giscard d'Estaing's policy of stabilizing the franc despite

significant inflation. It may be observed that as in other industrial

countries, the lion's share of specific assistance (31.8 percent of the

total and 50.5 percent of the specific assistance) has been going to

declining sectors, with a large share going to coal mining.

A feature of France's public assistance to private firms is its

high concentration ratio. According to an unpublished report on public

assistance to industry, six industrial groups -- which employed 10

percent of the industrial workers, exported 11 percent of the total

exports, invested 2 percent of the total industrial investment and

created 10 percent of the industrial value added -- received 50 percent

of the total public assistance.-/ Of the total public assistance to

industry, 56 percent went to 9 industrial groups, 5 of which were

private groups.-/

The concentration of public assistance for exports may be

easily explained: 56 percent of total French exports came from 100

first exporters, while industrial groups (subsidiaries at least 10

1/ Le Monde, September 25 and December 25, 1979.

2/ Since nationalized.

- 19 -

percent of whose capital shares were held by such groups) exported 84

1/percent of total French exports.-

With respect to assistance to high technology, French

administrators have followed accepted dogma in focusing on:

* Computers and microelectronics

* Space and aircraft industries

* Sea industries, and

* Biotechnology.

On the eve of the last elections, in a somewhat unusual move, textiles

were added to these high priority sectors. Clearly, political necessity

makes its own laws.

The tables also show that an effort was made to stimulate

growth in the sectors of the future (sectors with high technology, high

productivity and fast growth in the international markets). This policy

has probably been desirable, although here waste is also possible (for

example, there was the largely unsuccessful "Plan calcul" for the

1/ STISI (Service du Traitement de l'Information et des StatistiquesIndustrielles [Service for the Analysis of Industrial Informationand Statistics]), Minist're de l'Industrie [Ministry of Industry],"Les Exportateurs de l'Industrie: Entreprises, Groupes, Filiales deGroupes Etrangers" [Industrial Exporters: Firms, Conglomerates,Subsidiaries of Foreign Conglomerates], Paris, March 1980.

- 20 -

computer industry). Adjustment for workers who have to find new jobs

has been left to the labor market 1/

The Reform of Public Assistance for Industry

Reform of the system of public assistance to industry was

initiated at the beginning of 1981. The basis for the reform was three

rather self-evident but hard to implement principles:2/

m The system needed to be simplified and contradictory

goals harmonized. (Was this going to be easy, given

the conflicting functions of the various Ministries

and the rivalry between the Ministry of Industry and

the Treasury?)

* The allocation of assistance should be decentralized

to the regions. (This was contrary to French

bureaucratic centralization.)

Assistance should be selective. (It was pointed out

how difficult it is to achieve this goal given the

political interest groups, for whom every act of

assistance is a precedent justifying another one.)

1/ Important social policies have been promulgated in some cases,particularly in the "Steel Plan," which includes subsidies forpeople who volunteer to leave their jobs or allows retirement before65 years of age with 70 percent of former wages. No estimates havebeen found of the trade-displacement costs for French workers, ashas been done, for instance, in Canada or the United States.

2/ Defined during the meeting of the Central Planning Council [ConseilCentral de Planification], held at the Presidency on September 4,1979.

- 21 -

Given that the new French government is more disposed to

intervention than that which it replaced, it is not about to dismantle

the system as a whole. It does, however, believe that support for

particular sectors can be provided at a reasonable cost, and it

undoubtedly shares the above three objectives. Even the significance of

nationalization should not be overrated. The groups which have been

taken over were so dependent on assistance and so tied by "contrats de

programme" that they were already subject to a good deal of government

control.

It is clear that, at present, French industrial policy is in a

state of flux, with some advisers and members of the government

advocating policies which are not drastically different from those

pursued in the past, while others favor a new interventionist

approach. So far, President Mitterand has favored a cautious and

moderate approach, and the two devaluations of the franc may have helped

to reduce the need for subsidies, following the steep rise in subsidies

that occurred after the change of government. It is not, however,

possible to predict which way French economic policy will go if there is

a serious economic crunch.

Some International Comparisons

Not only are data on assistance scarce, but differences in

economic structure also need to be taken into account, especially in

terms of the effects the fiscal system has on international trade. In

France, some would argue that the value-added tax, the corporate income

tax regime for subsidiaries and the territory principle (French firms do

- 22 -

not pay taxes on profits earned abroad, except when there is a bilateral

treaty) have had a favorable effect on exports. French industrialists

counter that claim by noting that firms pay 75 percent of all French

taxes, including social security contributions.

Appraising these arguments would require judgements about the

incidence of these taxes which are beyond the scope of this paper. Here

attention is focused only on the subsidies, although it should be

remembered that they are only part of the picture.

The French administration has been very sensitive to the view

often expressed abroad that France is exceptionally generous in granting

subsidies. However, an unpublished French report notes, with reference

to an EC report, that in 1977 direct financial assistance (excluding tax

exemptions) represented 7 percent of all investment in West Germany

(where tax exemptions are important), 11 percent in France, 13 percent

in Italy, 12 percent in the United Kingdom and the Netherlands and 20

percent in Belgium .1/ Nevertheless, there is truth in the French

assertions, as pointed out below.

Public assistance to industries in Britain and West Germany has

been studied extensively, particularly in Corden and Fels and Peacock.2/

Their work provides some rough figures.

1/ It is sometimes said that French assistance for exports (3.7 billionfrancs in 1979, or 0.88 billion U.S. dollars) is less than the taxexemption for DISCs (Domestic International Sales Corporation) alone(1.2 billion U.S. dollars according to one French official, and 0.70billion dollars according to the U.S. Treasury, as reported in Le

Monde, April 24, 1980).

2/ W. M. Corden and G. Fels, Public Assistance to Industry London:Westview Press, 1976; and A. Peacock, Structural Economic Policiesin West Germany and the U.K., London: Anglo-German Foundation forthe Study of Industrial Society, 1980.

- 23 -

According to Peacock,A/ in 1978 the subsidies to the industrial

sectors in West Germany represented 10,632 billion DM, 2,588 billion DM

of which were direct payments (grants and loans), while 8,044 billion DM

came from tax allowances. The sectoral distribution of the direct

payments is shown in Table 11.

Table 11: SUBSIDIES TO THE INDUSTRIAL SECTOR IN THE FEDERALREPUBLIC OF GERMANY, 1978

Millions % ofSubsidies of DM direct payments

Direct payments

Mining 1,323 51.1

Energy and raw materials 379 14.7

Aerospace and innovation 321 12.4

Special technological support 35 1.3

Regional structural measures 193 7.4

Other 337 13.1

Subtotal 2,588

Tax allowances 8,044

TOTAL 10,632

Source: A. Peacock, Structural Economic Policies in West Germany andthe U.K., London: Anglo-German Foundation for the Study ofIndustrial Society, 1980, p. 51.

1/ Ibid., Peacock.

- 24 -

The relative size of the subsidies to the mining industries

should also be noted. If tax allowances (75 percent of total

assistance) are added, particularly for regional structural development

(6,175 billion DM out of 8,044 billion DM), it can be seen that regional

intervention has been a crucial feature in German industrial policy.

This situation is very different from that in France, where in 1977

assistance for regional development accounted for just 3.7 percent of

total assistance (Table 9) and tax allowances were almost negligible

(mostly for regional development and amounting to 0.5 billion

francs in 1977). This is because of the well-known French

centralization, which the present government is planning to reduce.

With respect to the United Kingdom, the relative importance of regional

support and of assistance to the labor market can be observed in Table

12, whereas Table 13 provides a breakdown of industrial assistance,

which may be compared, to some extent, with that in Table 11 for the

Federal Republic of Germany.

For the three countries -- France, the United Kingdom and West

Germany -- public subsidies to industry amounted to, respectively,

26,388 million francs in 1979, 2,321 million pounds in 1977-78 and

10,632 million DM in 1978. In U.S dollars, the subsidies were $6.20

million for France, $5.80 million for West Germany and $4.46 million

for the United Kingdom. While the methodologies used to obtain these

figures were quite different, and although it was not possible to

examine the figures for the United Kingdom and Germany from an inside

1/ The differences are even smaller as a fraction of per capita GNP.

- 25 -

Table 12: GOVERNMENT ASSISTANCE TO U.K. INDUSTRY, 1977-78

Goverment assistance Millions of i

Regional support and regeneration 518 23.32

Industrial innovation 275 11.85

General support for industry 427 18.40

Nationalized industries (transport excluded) 115 4.85

International trade 110 4.74

Functioning of the labor market 876 37.74

TOTAL 2,321

Source: A. Peacock, Structural Economic Policies in West Germany andthe U.K., London: AngIo-German Foundation for the Study ofIndustrial Society, 1980, p. 60.

- 26 -

Table 13: SECTORAL DISTRIBUTION OF PUBLIC ASSISTANCE TO INDUSTRY IN THEU.K. INDUSTRY ACT, 1972, 1972/73-1977/78

Regional Selective Selective/ Sectoral-/ Totaldevelopment regional investment assistance

SIC orders grants assistance scheme schemes(Section 7) grants under

Section 8

II Mining and quarrying 80.0 1.4 - - 82.2

III Food, drink andtobacco 132.9 9.6 1.1 8.2 151.8

IV Coal and petroleumproducts 75.5 0.2 - - 75.7

V Chemicals 271.6 19.1 5.0 - 295.7

VI Metal manufacture 283.9 11.2 0.1 83.0 378.2

VII Mechanical engineering 80.4 32.1 1.3 19.9 133.7

VIII Instrumentalengineering 10.1 2.6 1.5 14.2

IX Electrical engineering 51.3 32.9 0.4 4.0 88.6

X Shipbuilding andmarine engineering 36.7 6.2 - 42.9

XI Vehicles 41.1 16.3 2.3 - 59.7

XII Metal goods, n.e.s. 38.1 7.6 0.6 - 46.3

XIII Textiles 50.5 18.7 0.2 17.8 87.2

XIV Leather, leathergoods and fur 2.8 3.0 - - 5.8

XV Clothing and footwear 14.5 2.9 - 5.7 13.1

XVI Bricks, pottery,cement, glass 50.6 4.4 0.8 - 55.8

XVII Timber, furniture, etc. 24.0 5.2 - - 29.2

XVIII Paper, printing andpublishing 51.7 7.6 10.5 11.5 81.3

XIX Other manufacturingindustries 34.5 13.8 1.3 - 49.6

XX Construction 105.6 1.9 - 107.5

Other 17.3 6.9 - - 24.2

TOTAL 1,454.0 203.7 23.7 151.6 1,833.0

a/ Offers of assistance.

NDte: - Means zero.

Source: U.K. Industry Act of 1972, Annual Abstract of Statistics, Annual Reports, as quoted inA. Peacock, Structural Economic Policies in West Germany and the U.K., London: Anglo-German Foundation for the Study of Industrial Society, 1980.

- 27 -

point of view, the contrast is striking. It would be very worthwhile to

undertake careful research on this topic, so that the subsidies granted

in the three countries could be studied and their impact on trade be

evaluated.

- 28 -

IV FRENCH INTERNATIONAL TRADE POLICY

This section addresses some elements of French trade policy, a

topic which has been little studied. Particular attention is paid to

financial assistance for exports and measures taken at the national

level, i.e., decided in Paris and not in Brussels.

Financial Assistance for Exports

The General Framework

The general framework for financial assistance for exports is

very complex. There are more than 16 types of procedures for aiding

exports, and most are either obsolete or without significance from a

financial point of view. This assistance will be examined under three

headings:1/

Financial assistance for investment

Special loan procedures for exports and

* Export insurance.

Financial Assistance for Investment. Financial assistance for

export-linked investment in France and abroad includes:

1/ See Conseil Economique et Sociale (Economic and Social Council],"Les Petites et Moyennes Entreprises et l'Exportation" [Small andMedium-Size Businesses and Their Exports], Journal Officiel(December 15, 1980); P. Remond, "Les Procedures d'Aide et deFinancement du Commerce Exterieur" [Procedures for Assistance toand Financing of Foreign Trade], a paper presented at the Colloquede l'Institut de Sciences Mathematiques et Economiques Appliquees(ISMEE) sur les Formes Actuelles de la Concurrence dans lesEchanges Internationaux (a symposium of the Institute for AppliedMathematical Sciences and Economics on Current Forms of Agreementamong International Exchanges), Paris, March 1980.

- 29 -

(1) Special loans to finance investments meant to

promote exports on the condition that the export

share of shipments outside the EC increase by at

least 2.5 points in 4 years (available since March

1974);

(2) Increased shares of capital held by the CIDISE

(Comite Interministerial de Developpement

Investment et de Soutien d'Emploi) (Inter-

ministerial Development Committee for Investment

and Support of Employment);

(3) Subsidies for investments made to adapt products to

meet the requirements of some foreign markets

(e.g., special weather conditions and special

standards). This subsidy is to be reimbursed in

cases of successful adaptation.

Financial aid for French investment abroad includes:

(1) Loans to finance commercial subsidiaries abroad.

The interest rate is less than the market rate (2.5

percent for small firms, 1.8 percent for large

firms). Since 1976, these loans have been

guaranteed by a special state fund.

(2) Loans to finance industrial subsidiaries abroad.

These long-term loans are subject to the same

interest rate prevailing in France but are not.

subject to the Bank of France credit ceiling.

- 30 -

(3) Some tax allowances for investments outside the EC.

Special Loan Procedures for Exports. The Banque Franvaise du

Commerce Exterieur (BFCE) (French Bank for Foreign Trade), created in

1946, is both a state bank for financing external trade and a private

bank specializing in international trade. It competes with other banks,

whether nationalized or not. The BFCE borrows in monetary and financial

markets and lends to firms. It also gives technical assistance and

specialized information to exporters.

Loans for exports are mainly extended through the BFCE,

although other banks and financial institutions such as the Credit

National also grant such loans.

There are several types of loans:

(1) Pre-financing loans, which generally may be

refinanced with the Central Bank. These loans have

two advantages: most are not covered by the Bank

of France credit ceiling and the interest rate is

lower than the market rate. Pre-financing loans

are related to long-term exports contracts l/

(2) Refinancing of loans to enable exporters to

mobilize short-term credits (less than 18 months)

granted to a foreign customer. These loans bear a

market interest rate, but are not included under

the credit ceilings.

1/ If a loan runs more than 18 months, the refinancing is carried outby the Central Bank; if the duration exceeds 7 years, therefinancing is accomplished by the BFCE.

- 31 -

(3) Mid-term and long-term loans. These have become

more and more important. They are allocated by the

Banque de France through the BFCE and Compagnie

Fransaise d'Assurance pour le Commerce Exterieur

(COFACE) (French Insurance Company for Foreign

Trade) (see below). There are two kinds of these

loans:

* Supplier loans, allocated to French

exporters. Although subject to some

restrictive conditions, these credits may be

discounted with the BFCE.

* Customer loans, allocated for foreign

customers; the export firm is paid in cash.

The interest rates on these loans are lower than market

interest rates and are financed through budget appropriations. Rates

are defined according to the OECD consensus on export credits, which

sets minimum rates and maximum durations for three kinds of countries:

rich, middle-income and poor.

Export Insurance. Export insurance is organized through the

COFACE, which was created in 1946. Like the BFCE, the COFACE is both a

public company responsible for long-term insurance against political

risks abroad, under the strict supervision of the government, and a

private business firm that takes the usual risks of an insurance

company.-

1/ The shareholders are the French government, with a five-sixthsinterest, and a private insurance company, with one-sixth.

- 32 -

The COFACE has four types of insurance coverage:

(1) Risks in exploring foreign markets, including

international fairs, with coverage for up to 70

percent of expenses.

(2) Risks on loans linked to international trade (see

above). The risks may be political, as in Iran, or

from natural disasters or the financial

difficulties of customers.

(3) Since 1960, "economic risks" encountered by

exporters with long-term export contracts. They

are safeguarded against the sharp increases in

production costs resulting from internal

inflation. Since 1977, however, firms have had to

cover 70 percent of the cost of wage increases

exceeding the rise in the cost of living.

(4) Foreign exchange rate risks. This insurance

guarantees an exporter against exchange rate

fluctuations beyond given limits.

The Functioning of the System. The French system of assistance

for exports is, as noted, quite complex. However, two types of aid are

particularly important: (1) interest rebates and insurance of export

credits, and (2) guarantees against "economic risk." These are shown in

Table 14, in terms of their cost to the budget.

French economic policy calls for extensive use of interest

rebates. In 1979, 43.8 percent of all loans were allocated with

interest rates below the market rate. Rebates have been especially

- 33 -

Table 14: EXPORT ASSISTANCE

(millions of francs)

1974 1976 1978

Costs of export credit interest rebates 1,320 1,543 2,593

Costs of export credit insurance 53 - 316 a/ 621

Costs of insurance for market surveytrade fairs 37 48 49

Costs of guarantees for "economic risk" 645 2,175 1,154

TOTAL 2,055 3,450 4,417

a/ Payments by companies exceeded the compensation they received.

Source: Banque de France [Bank of France].

important for exports, housing and public goods, affecting 78 percent,

85.3 percent and 76.9 percent of all loans, respectively.±/

With respect to export credits, the OECD has made some detailed

international comparisons, as shown in Table 15.

Table 15: EXPORT CREDITS TO DEVELOPING COUNTRIES BENEFITINGFROM PUBLIC ASSISTANCE (LOANS FOR 5 YEARS AND MORE),

1981 LEVELS

(billions of dollars)

Total OECD France Germany, F.R. U.K. U.S. Japan

13.4 3.0 1.3 0.5 1.7 2.1

Source: OECD.

1/ See Banque de France [Bank of France], "Place des Credits a TauxPrivil6gi& dans le Financement de l'Economie" [Share of Low-Interest Credit In the Financing of the Economy] BulletinTrimestriel (June 1980).

- 34 -

The geographical distribution of the mid- and long-term loans

made by the BFCE at the end of 1977 is shown in Table 16. More than

half the loans involved Eastern European countries and Africa.

Table 16: GEOGRAPHICAL DISTRIBUTION OF MID- AND LONG-TERM LOANSOF THE BFCE (END OF 1977)

(percent)

Eastern European countries 24

Africa 29

Middle East and Asia 16

OECD 19

South America 12

Source: BFCE, Annual Report, Paris, 1977.

In analyzing France's assistance to exports, it is important to

look at it as a part of a general system of assistance to industry.

Further, the analysis should be related to recent changes in French

specialization. Many issues need further research. It has been

claimed, for example, that subsidies are more efficient than tariffs

are2! In addition, research in progress suggests that the geographical

pattern of French exports is unusually unstable, especially for equip-

ment goods. This may be related to the emphasis in French commercial

policy on close involvement by high officials and ministers in the

negotiation of big contracts, an approach that amounts to using the

system of assistance to provide France with an edge over its

1/ Corden, op. cit.

- 35 -

competitors. Such a policy may lead to less stable trade than one which

is grounded in a country's natural comparative advantages.

Some Aspects of French Trade Policy

Although France's trade policy has been protectionist for much

of its economic history, trade liberalization has been a fundamental

choice since the foundation of the Common Market.i! Traditional

attitudes die hard, however, and protectionist sentiment remains fairly

widespread among the public and policy-makers. Judging by such

indicators as the number of quantitative restrictions that have not been

put under the EC and that are still administered by member states and

not the EC, as well as the use of such devices as Article 115 of the

Rome Treaty to protect its domestic market, France has, by EC standards,

a restrictive trade stance. Although tariffs and many quantitative

restrictions, notably for textiles, are determined at the EC level, the

French government still retains the ability to set trade policy to some

extent.

France and the Common External Tariff

As a result of the successive rounds of the GATT negotiations,

culminating in the Tokyo Round of 1 9 7 3- 7 9 r 2/ EC external tariffs have

fallen to low levels, as in other industrial countries (Table 17). In

1/ For a good survey of French trade policy during the 19th century,see P. Bairoch, Commerce Exterieur et Developpement Economique del'Europe au XIX'eme Sibcle [Foreign Trade and Economic Developmentin Europe during the 19th Century], Paris: Mouton, 1976, chaps. 3and 11.

2/ See GATT, "Les Negociations Commerciales Multilat6rales du TokyoRound" [The Multilateral Trade Negotiations of the Tokyo Round],vols. I and II, Geneva, 1979 and 1980.

- 36 -

Table 17: TARIFF AVERAGES FOR THE MAIN INDUSTRIAL SECTORS, 1976

Industry U.S. Japan Canada EC

Steel 5.2 7.7 3.9 4.7

Textiles, clothing, shoes 18.2 16.0 19.0 13.3

Mechanical and electrical

products 6.7 10.7 7.7 8.7

Chemicals 8.3 9.9 6.9 10.8

Source: Senat [Senate], Rapport du Comite du Senat pour le CommerceExterieur [Report of the French Senate Committee onInternational Trade], Vols. I and II, Paris, October 1978.

addition, the tariffs apply to only some of the EC's trading

partners. Associated countries and those of the European Free Trade

Area (EFTA) are exempted, as are imports under the Generalized System of

Preferences (GSP). Thus only 20 percent of French external trade is

directly affected by the Common External Tariff.

Transfer of control over tariffs to a supra-national agency was

the foundation on which the EC was built. However, there is reason to

wonder whether the tariff instrument transferred to Brussels is still

one of the major instruments of economic policy; an illustration of

this was that the EC tariffs could not be explained in this study by

regressions involving French social and political variables. It may be

that the pattern of the Common External Tariff does reflect some

European average of political and social forces, but it does not seem to

be related to those which pertain to France. From the perspective of

the French political process, the Common Tariff looks both small and

- 37 -

irrelevant to the country's problems. (See Table 18 for figures on the

level of French tariff protection by industrial classification.)

The Exchange Rate

Exchange rate policy has been a very important tool of trade

policy. France has used it somewhat more freely than other countries to

gain a competitive edge. However, since the 1973 oil price increase,

the government has given more emphasis to maintaining the stability of

the franc. The outcome can be seen in Table 19, which shows, for main

currencies, the changes in effective exchange rates relative to a basket

of currencies, weighted by the world export structure.

As can be seen, depreciation of the French franc was much lower

during 1970-1978 than it was during 1964-1978. While France used

depreciation of the exchange rate during the 1970s more than West

Germany or Japan did, it did so, less than the United States, Italy or

Britain.

These changes in exchange rates have impacts on trade which

exceed by far those of the Tokyo Round agreements. Of course, the

exchange rate adjustments were made in support of many goals. It does

appear, however, that to some extent they were used to promote domestic

activity by cutting down imports and pushing up exports.

Other Measures at the National Level

It was not possible to complete an exhaustive inventory of

French trade policy measures during the 1970s. However, some important

decisions were identified, and these are discussed below. A distinction

is made between the use of safeguard measures and some non-tariff

barriers.

- 38 -

Table 18: FRENCH TARIFF PROTECTION, 1978

(percent)

French Industrial Classification Nominal rates

10 Iron basic industries 3.1311 Steel basic industries 3.9013 Non-ferrous metals and basic products 0.4115 Construction materials and ceramics 2.5816 Glass and glass products 7.18

171 Inorganic chemical products 2.87172 Organic chemical products 3.4918 Paints, soaps, cosmetics, perfumes and miscellaneous

chemical products 6.6619 Pharmaceutical products 1.8820 Foundry products 3.15

21 Fabricated metal products 3.5322 Agricultural machinery 6.9923 Machine-tools 2.3424 Industrial equipment 2.1325 Handling equipment for mines, iron industries,

construction 3.37

27 Office and data processing equipment 3.4228 Electrical machinery and apparatus 2.92

291 Professional electronic equipment 5.28292 Household electronic equipment 7.8930 Household appliances 3.21

311 Automobiles, cycles and motorcycles 5.29312 Railroad equipment 1.7033 Manufacture of aircraft 0.4134 Precision instruments 4.5543 Artificial and synthetic fibers and threads 2.21

441 Finished natural textiles, threads, spun yarn 1.68442 Hosiery products 6.92443 Thread 7.26451 Leather and skins 2.26452 Leather articles 5.53

46 Footwear 7.7547 Wearing apparel 5.1948 Wood and wood products 0.9849 Furniture 6.3150 Paper and paperboard 3.86

51 Printing, publishing and allied industries 1.2752 Tires and other rubber products 3.7753 Plastic products 7.2954 Miscellaneous manufactured products 4.10

Note: The nominal rates of protection are the "actual rates," computed asfiscal revenues from tariffs on imports from non-EC countries.

Source: Author's calculations.

- 39 -

Table 19: EFFECTIVE EXCHANGE RATES (RELATIVE TO A BASKET OF CURRENCIESWEIGHTED BY THE WORLD EXPORT STRUCTURE)

(percent)

1964-78 1970-78

DM 51.2 38.0

Yen 31.1 30.2

Franc - 17.1 - 6.6

U.S. dollar - 23.9 - 24.4

Italian lira - 44.0 - 44.2

British pound - 47.3 - 39.5

Source: Ministry of Finance (Ministare de Finances).

Safeguard Measures. Safeguard measures may be taken under the

safeguard clauses in the GATT (Article XIX) or in the EC Treaty.

Article XIX, the main safeguard clause of the GATT, has been invoked 80

times by industrialized countries between 1947 and 1977, particularly by

the EC on behalf of Italy in 1973 (for tape recorders), for the United

Kingdom in 1977 (for television sets), and for West Germany and

France.±' It is, however, rather complicated to involve Article XIX,

and the Multi-Fibre Arrangement (1973 and 1977) contains safeguard

1/ During 1977 it was invoked one time by Canada, two times by theUnited States and five times by Australia. See Senat [Senate],Rapport du Comite du Senat pour le Commerce Exterieur [Report ofthe French Senate Committee on International Trade], vols. I andII, Paris, October 1978, p. 36.

- 40 -

clauses and voluntary exchange restraints that are exceptions to Article

XIX.

The safeguard clauses of the Rome Treaty are mainly defined by

Articles 107, 108, 109 and 115 (and 223 for military security). France

has invoked Article 115 a great deal: 19 times in 1973, 10 times in

1974, 24 times in 1975, 24 times in 1976, 35 times in 1977, 74 times in

1978, 124 times in 1979, and 81 times in 1980.-k

French officials say it is usually very difficult to obtain

safeguard measures at the EC level. In part, this is because of

resistance by less protectionist partner countries such as West Germany,

Denmark and Holland. When countries ask for protective measures, the EC

does not react rapidly and efficiently. Thus the EC appears to be an

institution which curbs the protectionist pressures coming from

individual countries.

Some Recent Non-Tariff Measures. Recently, France has used a

number of non-tariff measures for specific products. It should be noted

that some of the measures have not been oriented toward developing

countries but toward an EC country. This occurred with some imports

from Italy -- shoes (in 1976) and clothing or knitted goods (in 1977 and

1979).

1/ See Senat [Senate], Rapport du Comite du Senat pour le CommerceExt6rieur [Report of the Senate Committee on International Trade],vols. I and II, Paris, October 1978, p. 42; and W. Hager and R.Taylor; "The Geography of Protectionism: The Community'sInstruments and Options," EEC Protectionism: Present Practices andFuture Trends, Vol. 2, European Research Associates, Brussels,1982, p. 287.

- 41 -

The compulsory certificate of origin can be interpreted as a

general protectionist measure (a step toward a "Buy French Act"?), and

the EC Commission has attacked it, as requested by Italian and German

manufacturers.

The imposition of a "prior technical visa" for imports,

ostensibly a surveillance measure, probably generates a temporary

decrease in imports that lasts until importers become accustomed to

filling out the import declaration forms needed to obtain a technical

visa.

Summary

The free trade choice of France has often been reasserted,

particularly by Prime Minister Raynaud Barre. However, it is certain

than when trade diversion becomes important for a product, the French

administration will ask for protection, as French governments have

repeatedly asserted. As elsewhere, protectionist pressures from

industries are strong, and they find support in the political system.

In the former parliamentary majority, the UDF (Giscard d'Estaing's

party) was free trade-oriented, while the RPR (the former Gaullist

party) was mainly protection-oriented. In the new majority, the

Socialist party is free trade-oriented, with a rather important

protectionist fringe; the Communist Party is protection-oriented.

- 42 -

V CONCLUSIONS

Because of the fast, recent changes in French specialization

and because of its capital goods exports, particularly to the developing

countries, France cannot afford to close itself to foreign trade.

However, protectionist pressures remain strong and find support among

the public and some politicians. A special factor is the "bureaus,"

which have traditionally played a leading role in running the French

state. As stressed by another paper in this volume,l/ it is likely that

their role in trade policy favors protectionism.

The major political changes which occurred in 1981 may increase

the danger of a slide into protectionism. France will make strong

efforts to obtain concessions from countries such as Japan, with which

it has a large bilateral deficit 'and will feel that it should retaliate

strongly against restrictions imposed by such countries as the United

States, which seem to French officials to be more protectionist than

France. The current fashionable "drive to recapture the domestic

market" has caused concern even among France's EC partners, although the

government has asserted that it will not violate EC rules against trade

restrictions between member countries.

The extension of the nationalized sector will have an impact on

trade, and the system of assistance to industry will be reformed.

1/ See P.A. Messerlin, "Bureaucracies and the Political Economy ofProtection -- Reflections of a Continental European," World BankWorking Paper No. 568, Washington, D.C., June 1983.

- 43 -

France will adopt a more protectionist stance within the EC. However,

the priorities, in particular those in favor of high technology sectors,

are not new, the structure of the trade balance does not permit any very

fast moves, and EC rules will serve as a brake on a major shift in

policy.

In conclusion, more protectionist attitudes can be expected, on

a moderate scale, and a sharp move away from what is, after all, a

strikingly open trading system is improbable.

- 44 -

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Baldwin, R. E. "Non-Tariff Distortions of International Trade." The

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- 46 -

R&mond, P. "Lee Procedures d'Aide et de Financement du Commerce

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[Ministry of Industry]. "Les Exportateurs de l'Industrie:

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NEW Prospects for Partnership: The Structure of ProtectionIndustrialization and Trade in Developing Countries

Patterns of Barriers to Poldes in the 19700 Bela Balassa and othersTrade In Sweden: A Study In Helen Hlughes, editor The Johns Hopkins Uniuersity Press,the Theory of Protection The Johns Hopkins University Press, 1971, 394 pages (including 5 appen-Lars Lundberg 1973. 310 pages. dlxes, Index).This report Is part of an Inquiry being LC 72-12369. ISBNl 0-8018-1498-7, LC 77-147366. ISBN 0-8018-1257-7,undertaken by the World Bank In con- $20.00 (W12.00) hardcover. $25.00 (&15.00) hardcouerJunction with scholars from twelveIndustrial countries Into the penetra- ISBN 0-8018-1500-2, $6.95 (&4.25) Spanish: La estructura de la protecci6ntion of the markets of Industrial paperback. en pafses en desarrollo. CEMLA, Depar-countries by exports of manufactures Spanas pestivas del comerclo tamento de Pubilcaclones, Durango 54.from developing countries. inpeacn alh: Las espetrivasdlz6 coerl Mexico 7. D.I., Mexico. 1972.World Bank Staff Working Paper lo. polfticas comerciales en la decada de494. October 1981. 35 pages (including los 70. Editorial Tecnos, 1974. The Tokyo Round: Results3 appendixes). ISBll 84-309-0497-2, 575 pesetas. and Implications forStock No. WP-0494. $3.00. Developing Countries

Ria KemperThe Political Economy of NEW World Bank Staff Working Paper No.Protection In Belgium On Protectionism In 372. February 1980. 111 + 35 pages9 iK. M. Tharakan the Netherlands (nldn ne)World Bank Staff Working Paper K.A. Koekkoek J. Kol, and Stock No. WP-03 72. $3.00.No. 431. October 1980. 22 pages L. B. M. Mennes(Including statistical appendix, This report Is part of an Inquiry being Trade AdJustment Policiesreferences). undertaken by the World Bank In con- and Income Distribution inStock No. WP-0431. $3.00. Junction with scholars from twelve Three Archetype Developing

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The Political Market for World Bank Staff Working Paper Nlo. World Bank Staff Working Paper to.Protection in Industrial 493. October 1981. It + 68 pages 442. December 1980. 91 pagesCountries: Empirical (including 3 annexes, references). (Including appendixes, references).Evidence Stock No. WP-0493. $3.00. Stock lo. WP-0442. $3.00.Kym Anderson andRobert E. Baldwin NEW Trade among DevelopingThis report Is part of an Inquiry being Countries: Theory,undertaken by the World Bank in con- Policy Issues, andJunction with scholars from twelve Shadow Prices for Trade Principal Trendsindustrial countries Into the penetra- Strategy and Investment Picia s andtion of the markets of Industrial Planning In Egypt MOl Havrylyshyn andcountries by exports of manufactures John Page, Jr. Martin Wolffrom developing countries. This paper presents estimates of effi- A background study for WorldWorld Bank Staff Working Paper No. clency and social accounting prices Development Report 1981. Presents492. October 1981. 28 pages (including for commodities and factors of pro- the results of empirical work on tradereferences). duction In Egypt that are appropriate among developing countries. Basedrefernces)l. duc0492.93.00.for the pergod 1979-198t . on data derived from a sample ofStock No0. WP-0492. $3.00. frtepio19-95.thirty-three developing countries

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Trade and Employment Donald B. Keesing Greoinginl the 39S3s?Polides for Industrial World Bank Staff Working Paper N10. World tant geprant SJries: Waumber 194.

Development 353. August 1979. viu + 264 pages Reprinted hom The World Economy (JuneKeith Marsden (including references). 1981):127-47.

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PUB HG3881.5 .W57 W67 no.570

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