With nearly a year of trade dispute between the United States and China, it has become apparent that the global economy will slow down, and this will have a direct impact on world trade. We adopt a vector autoregressive model to examine the impact of the U.S.–China trade war on the Thai economy. The results indicate that Thailand's output and exports to key markets are adversely affected by the escalating trade dispute. The slowdown in the Chinese economy will also put further downward pressure on world commodity prices, which in turn will reduce Thailand's exports.

During Thailand's economic development, the shares of output and employment in agriculture have been consistently higher than in other countries at the same level of income. There are push and pull factors for labor transformation. This paper demonstrates that the slow transformation from rural to urban economy is the result of the agricultural trap, which keeps agrarian labor inside the farm sector. In addition to the lack of public investment in human capital, extremely wasteful farm subsidies have weakened the natural process of structural transformation. Farm subsidies encourage land expansion, which usually lags behind commodity booms, resulting in the excess supply of farm products. In turn, when commodity prices collapse, excess supply perpetuates further subsidies and emboldens the pork barrel activities of incumbent governments.

In the past three decades, with the exception of the Asian financial crisis in 1997–98, the Thai economy was propelled by the rapid growth of manufactured exports. There were 18 years of a double-digit export growth, averaging 20.5 percent per year. In 2009, Thailand's exports collapsed after the 2008–09 global financial crisis, but rebounded sharply in the following year. Thailand's exports growth significantly slowed down in 2011 and 2012. From 2013 to 2016, Thailand's exports experienced negative growth. The global recession and China's slowdown contributed to the dismal export performance. There was also a supply factor responsible for the negative growth, however. The dwindling level of foreign direct investment (FDI), caused by Thailand's political turmoil and pessimistic business sentiment, has diminished export capability and competitiveness. The fall of Thailand's export-oriented industries can be attributed to the country's inability to attract FDI inflows. Some industries that are able to secure continuous flows of FDI remain competitive, whereas others that cannot will progressively retreat from the world market.

If rules of fiscal sustainability are observed, available fiscal space permits effective countercyclical fiscal programs. The importance of automatic fiscal stabilizers should not be underestimated. The discretionary impact of increased public spending and tax cuts can be amplified if implemented when consumer confidence investor sentiments are high. There is no evidence to support non-Keynesian effects of fiscal policy in Thailand. Unwarranted fears of unsustainable public debt and ultra-conservative fiscal policy has cost the country a lost opportunity for achieving high growth. After the military coups in 2006 and 2014, the Thai economy experienced the lowest economic growth among ASEAN countries. The budget spent on economic services was diverted into defense, increases in public sector's wages, and income transfer payments. The opportunistic political budget model predicts higher fiscal spending by incumbent democratic governments before an election to gain votes. In the case of Thailand, such spending comes after military coups, akin to a military business cycle spending.

Globalization leads to the increasing complexity of production networks through foreign direct investment, which transmits demand shocks from the rest of the world to the Thai economy. Short-term fiscal stimulus would not be able to shorten the length of recession unless consumer confidence is restored. Violation of established social obligations and contracts erodes business sentiment and eventually would lead to a negative long-term impact on economic growth. The duration of the recession and the speed of a recovery hinge on the government's ability to restore confidence during uncertain times.

The analysis of three recent shocks to the Thai economy suggests several lessons for economic management. The adverse consequences of the external shocks dissipate when economic agents adjust their behavior to the new environment. Appropriate policy responses are crucial in shortening the duration of an economy's deviation from its pre-shock growth path. Any intervention, either in energy or exchange rate markets, to maintain fixed prices will inevitably be costly and ineffective. Any attempt to cover up a brewing crisis will destroy public confidence, aggravate the situation, and deepen the crisis. Therefore, transparency in economic management is essential.

The Bank of Thailand could have eased its monetary policy to prevent a slowdown in 2001. An expansionary monetary policy or budget deficit financed by money creation can spur growth in Thailand during recession, provided the Thai central bank does not intervene in the foreign-exchange market. The baht-dollar exchange rate cannot be disengaged from the yen-dollar rate by central bank intervention in the long term. Monetary policy seems to be more effective than other policy alternatives during the current debt deflation episode in Thailand.