Bandwidth Hawk
To tariff or not to tariff? That is the question. ‘Tis better to model contingencies, methinks. Here’s where the situation stands now – in great detail – and some advice on what to worry about.
By: Steven S. Ross, Broadband Communities
Despite months of mounting worry, it now looks like tariffs are unlikely to have much – if any — measurable effect on the cost of electronics for the Broadband Equity, Access, and Deployment (BEAD) program. Labor costs and shortages loom as bigger issues. So will the cost of money to fund what BEAD won’t pay for. Still unsettled is how the National Telecommunications and Information Administration (NTIA) will impose a growing demand in Congress for quick deployment, relying on low-Earth orbit (LEO) satellites for as much as 40 percent of the premises to be served.
It does not help that the appointment of Arielle Roth to head NTIA – announced February 3 – was sleepwalked through the Senate and is now on hold at least until the Senate is due back in session last week in April.
With full realization that the situation could change at the direction of the White House on any given day, here’s what to consider in a BEAD application or other proposed deployment right now.
Tariffs
Most importantly, the 90-day tariff extension announced April 5 applies only to the round of so-called worldwide “reciprocal” tariffs. Commerce Secretary Howard Lutnick, on “ABC News This Week” on April 13, said any of these products and components made in China could be subject to specific tariff levels to be negotiated on semiconductors, “probably in another month or two.”
There are no negotiations scheduled as of now. Until then, modeling at least for the Administration’s 10 percent “baseline” tariff on all imports makes sense even though it is not in effect at this time. I matched the Harmonized Tariff Schedule designations in the tariff extension’s executive order to actual definitions (see the table here).
As far as China is concerned, there’s a 125 percent tariff on the table, plus a 20% tariff announced earlier this year (supposedly as punishment for inadequate control of fentanyl and fentanyl precursors) to bring the total to 145% on Chinese imports.
How high would a semiconductor tariff be, if it ever exists at all? Apparently, no one, including folks at the White House, knows. Senior counselor for trade and manufacturing Peter Navarro, speaking on NBC’s Meet the Press on April 13, said this is because “this is very complex stuff,” because we don’t buy many chips “like in bags … we buy them in products.”
But realistically, as electronics are typically 5 to 8 percent of a broadband deployment (closer to 5 percent in rural areas), a 10 percent effective tariff rate could directly increase overall construction cost by under 1 percent.
Tariffs could also raise prices of electronics and other parts of the build in indirect ways – think wooden telephone poles from Canada, for instance or potential shortages of parts.
One tariff avoidance vendor strategy has traditionally been to underprice the hardware and aggressively overprice the software needed to run it. Software, with very rare exceptions, is not subject to tariffs in any world trade. So, consider modeling a range of scenarios after scanning the vendor list.
President Trump has been critical of the bipartisan 2022 CHIPS and Science Act, which offers subsidies to chip companies willing to produce semiconductors in the United States. He says tariffs are a faster and better way to achieve the same goals. However, CHIPS is aimed at high-end semiconductors, not the typical, widely available, components of network electronics … and new plants in the US are years away, anyway.
The wireless folks see electronics as a much bigger part of the build. LEO folks see electronics as 80-90 percent of the total on-ground build cost. The active parts in the electronics come from all over the place, so calculating tariffs is tricky — even on stuff assembled here.
Labor
Two issues increase labor uncertainty. The obvious one is that as many as a third of all outside-plant construction workers are not citizens of the U.S. The Trump Administration has ended special status for Haitian, recent Cuban and other immigrants, and has shown eagerness to end the Deferred Action for Childhood Arrivals (DACA or “dreamers”) program for young, undocumented immigrants who were brought to the U.S. as children. There are as many as 900,000 of them. But it has also looked for excuses to deport other holders of green cards and temporary visas.
With some exceptions, the Davis-Bacon Act of 1931 requires federal contractors and grantees to pay prevailing (typically union) wages and benefits as determined by the Department of Labor. The White House has shown disdain for the act, and the labor department has lost some personnel needed to enforce it.
The fiber industry has roughly settled on 24-strand fiber for typical deployments – lots of capacity, barely more expensive than 12- or 6-fiber cable – but there seems to be a minor rethinking going on for rural builds, motivated by small labor savings.
I’ve been advising deployers to model extra time and extra money for construction. Money is easy. Just plug in a new number. Delays are tricky (click here to see modeling for deployment changes and contingencies).
Financing
Expect money to be more expensive and harder to get. I’m mainly seeing interest rate increases but have also seen hefty up-front fees to be paid out of the loan’s initial proceeds. That, in turn, lowers margins for existing carriers looking for a BEAD grant, discouraging BEAD applications.
Two decades of low-interest financing and “easy” money have ended with efforts by the Federal Reserve to curb inflation by raising interest rates. The short-term rates the Fed controls have been falling but longer-term rates have remained high. Trump’s economic policies have not helped in that regard.
Tariff-driven stock market instability has also driven many investors worldwide to bonds, but not necessarily U.S. treasury bonds, which is also putting pressure on interest rates. That, in turn, seems to be the major reason most proposed tariffs got a 90-day suspension in the first place.
LEO satellites
Last year, BEAD observers expected LEO to handle between 2-4% percent of all BEAD premises. I’ve seen estimates now as high as 20 percent, and one Republican Congressman, Rep. Richard Hudson (R-NC) has proposed H.R.1870, the SPEED for BEAD Act. The legislation introduced March 5 seeks to, in effect, reserve connections to as much as 40 percent of BEAD premises for LEO. Certainly, consider modeling as high as 10% for LEO connections.
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