Could U.S. Toughness on Chinese Business Have Unintended Consequences?

At a moment when Washington is trying to reset its tense relationship with China, states across the country are leaning into anti-Chinese sentiment and crafting or enacting sweeping rules aimed at severing economic ties with Beijing.

The measures, in places like Florida, Utah and South Carolina, are part of a growing political push to make the United States less economically dependent on China and to limit Chinese investment over concerns that it poses a national security risk. Those concerns are shared by the Biden administration, which has been trying to reduce America’s reliance on China by increasing domestic manufacturing and strengthening trade ties with allies.

But the state efforts have the potential to be far more expansive than what the administration is orchestrating. They have drawn backlash from business groups over concerns that state governments are veering toward protectionism and retreating from a longstanding tradition of welcoming foreign investment into the United States.

Nearly two dozen mostly right-leaning states — including Florida, Texas, Utah and South Dakota — have proposed or enacted legislation that would restrict Chinese purchases of land, buildings and houses. Some of the laws could potentially be more onerous than what occurs at the federal level, where a committee led by the Treasury secretary is authorized to review and block transactions if foreigners could gain control of American businesses or real estate near military installations.

The laws being proposed or enacted by states would go far beyond that, preventing China — and in some cases other “countries of concern” — from buying farmland or property near what is broadly defined as “critical infrastructure.”

The restrictions coincide with a resurgence of anti-China sentiment, inflamed in part by a Chinese spy balloon that traveled across the United States this year and by heated political rhetoric ahead of the 2024 election. They are likely to pose another challenge for the administration, which has dispatched several top officials to China in recent weeks to try to stabilize economic ties. But while Washington may see a relationship with China as a necessary evil, officials at the state and local levels appear determined to try to sever their economic relationship with America’s third-largest trading partner.

“The federal government in the United States, across branches with strong bipartisan support, has been quite forceful in sharpening its China strategy, and regulating investments is only one piece,” said Mario Mancuso, a lawyer at Kirkland & Ellis focusing on international trade and national security issues. “The shift that we have seen to the states is relatively recent, but it’s gaining strength.”

One of the biggest targets has been Chinese land ownership, despite the fact that China owns less than 400,000 acres in the United States, according to the Agriculture Department. That is less than 1 percent of all foreign-owned land.

Such restrictions have been gathering momentum since 2021 after Fufeng USA, the American subsidiary of a Chinese company that makes components for animal feed, faced backlash over plans to build a corn mill in Grand Forks, N.D. The Committee on Foreign Investment in the United States, a powerful interagency group known as CFIUS that can halt international business transactions, reviewed the proposal but ultimately decided that it did not have the jurisdiction to block the plan. However, the Air Force, citing the mill’s proximity to a U.S. military base, said this year that China’s involvement was a national security risk, and local officials scuttled the project.

Since then, states have been developing or trying to bolster their restrictions on foreign investment, in some cases blocking land acquisitions from a broad set of countries, including Iran and North Korea. In other instances, they have targeted China specifically.

The state moves, some of which also include investments coming from Russia, Iran and North Korea, have raised the ire of business groups that fear the rules will be too onerous or opponents who view them as discriminatory. Some of the proposals wound up being watered down amid the backlash.

This year, Texas lawmakers proposed expanding a ban that was enacted in 2021 on the development of infrastructure projects funded by investors with direct ties to China and blocking Chinese citizens and companies from buying land, homes or any other real estate. Despite the support of Gov. Greg Abbott of Texas, a Republican, the proposal was scaled back to prohibit purchases of just agricultural land, quarries and mines by individuals or companies with ties to China, Iran, North Korea and Russia. The bill ultimately expired in the Texas Legislature in May.

In South Dakota, Gov. Kristi Noem, a Republican, has been pushing for legislation that would create a state version of CFIUS to review and investigate agricultural land purchases, leases and land transfers by foreign investors. Ms. Noem has argued that the federal government does not have sufficient reach to keep South Dakota safe from bad actors at the state level.

The legislation failed amid pushback from farming groups that were concerned about restrictions on who could buy or rent their land, along with lawmakers who said it would hand too much power to the governor.

One of the most provocative restrictions has been championed by Gov. Ron DeSantis of Florida, a Republican who is running for president. In May, Mr. DeSantis signed a law prohibiting Chinese companies or citizens from purchasing or investing in properties that are within 10 miles of military bases and critical infrastructure such as refineries, liquid natural gas terminals and electrical power plants.

“Florida is taking action to stand against the United States’ greatest geopolitical threat — the Chinese Communist Party,” Mr. DeSantis said when he signed the law, adding, “We are following through on our commitment to crack down on Communist China.”

But the legislation is written so broadly that an investment fund or company with even a small ownership stake from a Chinese company or a Chinese investor that buys a property would be violating the law. Business groups and the Biden administration have criticized the law as overreach, while Republican attorneys general around the country have sided with Mr. DeSantis.

The Florida legislation, which targets “countries of concern” and imposes special restrictions on China, is facing legal challenges in federal court. A group of Chinese citizens and a real estate brokerage firm in Florida that are represented by the American Civil Liberties Union sued the state in May, arguing that the law codifies and expands housing discrimination. The Justice Department filed a “statement of interest” arguing that the Florida’s land ownership policy is unlawful.

A U.S. district judge, who heard arguments about the case in July, said last week that the law can continue to be enforced while it is being challenged in court.

The restrictions are creating uncertainty for investors and fund managers that want to invest in Florida and now must decide whether to back away from those plans or cut out their Chinese investors.

“It creates a lot of thorny issues not just for the foreign investors but for the funds as well, because some of these laws try to make them choose between keeping investors and being able to invest in those states,” said J. Philip Ludvigson, a partner at King & Spalding. “It’s really a gamble for the states that are passing some of these very broad laws.”

Mr. Ludvigson, a former Treasury official who helped lead the office that chairs CFIUS, added: “You might want to get tough on China, but if you don’t really think through what the second and third order effects might be, you could just end up hurting your state revenues and your property market while also failing to solve an actual national security problem.”

The state investment restrictions also coincide with efforts in Congress to block businesses based in China from purchasing farmland in the United States and place new mandates on Americans investing in the country’s national security industries. The Senate voted overwhelmingly in favor of the measures in July, which still need to clear the House to become law.

The combination of measures is likely to complicate diplomacy with China and could draw retaliation.

“Officials in Beijing are quite concerned about the hostility to Chinese investments at both the national and state levels in the U.S., viewing these as another sign of rising antipathy toward China,” Eswar Prasad, a former head of the International Monetary Fund’s China division. “The Chinese government is especially concerned about a proliferation of state-level restrictions on top of federal limitations on investments from China.”

He added, “Their fear is that such actions would not just deprive Chinese investors of good investment opportunities in the U.S., including in real estate, but could eventually limit Chinese companies’ direct access to American markets and inhibit technology transfers.”