The paper consider the Turkey-EU customs union (CU). After re v i e w i n g briefly the developments in Turkey-EU relations the paper studies the structure of protection that prevailed prior to the formation of the CU as well as struc ture of protection that will prevail when all of the adjustments required by the CU will be completed. The re s o u rce allocation effects of the CU are studied using nominal and effective protection rates. Besides the liberalization of trade the CU introduces new rules and disciplines that will effect the functioning of markets in Turkey. With the formation of CU Turkey is confronted with reduc tions in annual tax revenue. The paper studies the possible effects of tax rev enue losses as well as the effects of the CU on FDI in-flows.