In this article the static and dynamic effects of the Customs Union between Turkey and the European Union are discussed. The static effect of the Customs Union, namelv trade creation and trade diversion, has been developed in favor of the European Union. The Customs Union has generated limited trade creation for the Turkish economy. However, Turkey has partly benefited from the dynamic effect of the Customs Union. On the other hand, it was found that the Turkish import and export is quite sensitive to the exchange rate policy.