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States Limit Chinese Investment, Take Care To Avoid Unintended Effects

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Following the recent release of a government memo noting that law enforcement has identified 270 illegal cannabis growing operations in Maine alone, the state’s congressional delegation sent a letter to Attorney General Merrick Garland asking for information on the Department of Justice’s efforts to thwart foreign-owned illegal cannabis cultivation.

“These reports of illegal growing operations within the state are alarming, and we are writing to request additional information about what the DOJ is doing to address this situation,” the bipartisan group of lawmakers wrote in August. The problem they are seeking to address, however, extends far beyond Maine and has prompted a legislative response in nearly every state capital. As Politico reported back in March, “Chinese investors, owners and workers have emerged in recent years as a new source of funding and labor for illegal marijuana production.”

“What is known — from interviews with state law enforcement officials, experts on the international drug trade, economists and lawmakers — is that the number of farms funded by sources traceable back to Chinese investors or owners has skyrocketed,” Politico’s Natalie Fertig reported. “Chinese owners and workers have become a larger presence at illegal grows in Oklahoma, California and Oregon, they say.”

Meanwhile in October the Chinese owners of a property in Reedley, California were charged by the U.S. Department of Justice with operating an illegal biolab. On November 16, the U.S. House Select Committee on the Chinese Communist Party unveiled a report on its investigation into “the illegal People’s Republic of China-tied biolab discovered in Reedley,” which included a series of disturbing findings.

In an effort to thwart such activities and due to national securities concerns, over the past year alone legislation restricting Chinese and other foreign investment in the U.S. has been introduced in all 50 states, with 37 of those bills enacted. One of those 37 new laws was signed by Florida Governor Ron DeSantis (R-Fla.) in May. That Florida law “restricts the issuance of government contracts or economic development incentives to, or real property ownership by, foreign principals, which are certain individuals and entities associated with foreign countries of concern.” The countries of concern listed by the bill include China, Russia, Iran, North Korea, Cuba, Venezuela, and Syria.

Florida officials are now in the process of approving the regulatory framework implementing this law. As they do so, investors and other economic stakeholders are urging state regulators to clarify that the new law does not prohibit in-state investment by funds, companies, and firms in which a de minimis share of capital is derived from passive foreign investors. Such clarity is crucial and failure to provide it would have negative unintended consequences for Floridians and the state economy as a whole.

Florida had the nation’s fastest growing population last year. In such a rapidly growing state, a great deal of new housing construction is needed to keep up with demand and prevent further inflation of housing costs. Should Florida regulators fail to clarify that the newly enacted prohibition on foreign investment in Florida real estate excludes U.S.-controlled entities with a small share of capital sourced from passive foreign investors who possess no authority over the real estate-controlling entity, it would limit the availability of capital in a manner that harms in-state development to the detriment of Floridians and their standard of living.

“Florida state agencies are being very thoughtful about how they implement SB 264 through the rule making process at several state agencies,” says Brewster Bevis, president of Associated Industries of Florida (AIF). “AIF has called attention to the fact that there is a major risk of affecting real estate investment in Florida where passive Chinese investors have only a 5% piece of the fund’s investment. These funds would be controlled only by American citizens because passive investors – even if foreign nationals - have no ability to direct the fund’s actions or even access information on the fund’s assets.”

It appears, however, Florida regulators are being cautious to avoid such an error and the unintended consequences that would follow. The Florida Department of Agriculture will hold a workshop this week, on November 21, to review proposed regulations that would clarify the de minimis test and provide that passive foreign investments are still permitted in the Sunshine State.

Whether it’s low taxes, expanded school choice, or lighter regulatory burdens, Florida has served as model for pro-growth policy that many other states are seeking to emulate. It would be out of character, however, for Florida to serve as a bad example by failing to provide needed regulatory clarity related to the new restrictions on foreign investment in-state.

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