Doing business in China is getting harder, but its exports are hard to resist

European companies, many of which have operated in China for decades, are finding it increasingly difficult to do business in the country, another sign of how China's weak domestic economy and opaque regulations are testing even long-standing multinational business ties.

European automakers have been rapidly losing market share and face many political difficulties. Volkswagen agreed last December to sell its factory in northwestern China's Xinjiang region, where Beijing has repressed Muslim ethnic groups. European pharmaceutical and medical imaging equipment companies have found themselves locked out of much of the state-run health system.

An extensive annual survey of businesses released Wednesday by the European Chamber of Commerce in China found that nearly three-quarters said it was getting harder to operate in China. It was the fourth consecutive year that the survey showed deepening corporate pessimism.

The proportion of European companies that plan to expand their operations in China has also fallen to a record low, with just 38% saying that they intend to do so this year. European investment has been important in bringing Western technology to China and in bringing Chinese products to world markets.

The chamber, which has been gauging challenges companies face in China for a quarter century, represents the interests of some 1,700 companies, from industrial giants like VW to small businesses with a handful of employees who are cogs in global supply chains.

The chamber's survey also unearthed a somewhat contradictory trend that could prove troublesome for President Donald Trump's attempt to shield American manufacturing from China's exports with tariffs. Even as European businesses curb their own investments in China, some are also buying ever more components from Chinese companies. That makes their supply chains even more dependent on China.

China has retaliated against Trump's tariffs by imposing its own tariffs on U.S. goods. That has prompted a hunt by European companies in China for Chinese replacements for the few components they were still buying from the United States, said Jens Eskelund, the chamber's president.

A broad fall in prices in China has made Chinese components too good a deal for many European companies to pass up. A recent weakening of China's currency against the euro has made Chinese components even more attractive.

"The one place where they actually get better components at a lower price than anywhere else in the world is here in China ," Eskelund said.

Not only the United States, but the European Union and other countries have imposed tariffs lately in response to China's soaring exports of manufactured goods and tepid demand for imports. European companies that export from China to other markets had long feared possible trade barriers, but some were still caught off guard.

"That fear has turned into a nightmare for many at the moment," said Klaus Zenkel, a businessperson in Shenzhen who is a member of the chamber's South China chapter.

Some companies have set up temporary assembly operations in other countries to bypass American tariffs, Zenkel said. They rent warehouses in places like Taiwan, do the final assembly of Chinese components in the warehouses and then ship the finished goods to the United States with customs declarations that no longer show the goods as coming from China.

The Trump administration is trying to reduce these indirect shipments from China. Trump has threatened high tariffs against countries that run large trade surpluses with the United States.

One category of business conditions has improved very markedly in China in the past year, according to the European chamber's survey.

The share of European companies worried about rising wages has fallen steeply over the past several years, and these now rank among the least of their concerns. Labor costs had been rising along with China's surging housing prices. But that bubble burst in 2021, causing declines in construction that eliminated many jobs.

In turn, flat or even falling wages have contributed to weak demand in China for everything from imported cosmetics to hotel rooms -- resulting in broadly low prices, a potentially dangerous phenomenon known as deflation.

"By a wide margin, it is China's economic slowdown that is seen as having the greatest impact," Eskelund said.

This article originally appeared in The New York Times.