The U.S. has long regarded South America as its business backyard. But while Congress and the Clinton Administration dither over moves to create a free-trade bloc covering the hemisphere by 2005, the European Union is barging in and bolstering its economic links with the region.

Europeans have won many of the top privatization deals since the early 1990s, when governments in South America began opening their markets. Now, they are swooping into private-sector businesses from banking to food. "We can't be left on the sidelines," frets U.S. Commerce Secretary William M. Daley.

FREE-TRADE FACTIONS. While Washington is focused almost exclusively on the 2005 deadline to create the Free Trade Area of the Americas (FTAA), the EU is adopting a piecemeal approach that is winning friends. By 1999, the EU and Mercosur, led by Brazil and Argentina, are expected to begin talks that could lead to a free-trade area. The U.S., meanwhile, hasn't yet agreed with Latin American nations on the objectives, structure, or approach of the FTAA talks scheduled to start next year.

Europe is making diplomatic gains, too. While President Bill Clinton will not make his first trip to South America until October, European and Latin American leaders visit each other often. French President Jacques Chirac and Spanish Premier Jose Maria Aznar both toured the region this year, and Argentine President Carlos Menem went to Germany in May and invited German companies to take part in Argentina's remaining privatizations.

Chile, for one, seems close to throwing in the towel with Washington. Its bid to join NAFTA has been stalled for more than two years while Clinton tries to get fast-track negotiating authority from Congress. Fed up with the wait, Chile has moved closer to Europe and its own neighbors. It has now joined Mercosur as an associate member. And in June, it started formal talks on a separate trade deal with the EU.

Of course, the U.S. is still Latin America's biggest overall trade and investment partner because of Mexico's NAFTA membership. But Europe is pulling ahead in Mercosur, which excludes Mexico. Mercosur's two-way trade with the EU totaled $43 billion in 1995, vs. $29 billion with the U.S.

Europe is winning the race for megabuck contracts to rebuild South America's infrastructure. Spain's Telefonica de Espana, for example, has spent $5 billion buying telephone companies in Brazil, Chile, Peru, and Argentina, where France Telecom and STET of Italy are active, too. France's Electricite de France and Lyonnaise des Eaux have taken over state-owned utilities. And Spanish energy company Endesa owns electric companies in Argentina and Peru.

SUPERMARKETS. In some countries, Europeans have built enormous power bases in the corporate sector. In Brazil, South America's biggest market by far, 7 of the 10 largest private companies are European-owned, while just two are controlled by Americans. Europeans dominate huge swaths of the economy, from auto makers Volkswagen and Fiat to French supermarket chain Carrefour and Anglo-Dutch personal-care products group Gessy Lever.

Not everything between the EU and Latin America is hunky-dory. Brazil, for example, is complaining about European barriers to its coffee exports. But the EU has laid enough groundwork to protect its interests if the U.S. and South America ever succeed in setting up a trade bloc.

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