* China's status at WTO up for change, could limit EU
* EU executive likely to favour China and avoid retaliation
* EU governments divided, Germany's role to be crucial
By Philip Blenkinsop and Robin Emmott
BRUSSELS, Jan 10 The European Union will take
the first step on Wednesday towards refashioning its trade ties
with Beijing, torn over how to lower its defences to avert
Chinese retaliation while protecting key industries against a
damaging flood of cheap imports.
Commissioners from the bloc's 28 members will debate for the
first time the politically sensitive issue of granting China
"market economy status" from December, which Beijing says is its
right 15 years after it joined the World Trade Organisation.
The coveted status would make it much harder for Europe to
impose anti-dumping duties on Chinese goods sold at knock-down
prices, changing the criteria for determining a fair price.
A study by a group of 25 European manufacturing federations
estimates the European Union could lose up to 3.5 million jobs
if it removes its trade defences against China.
The bloc's final decision, taken together with EU
governments and the European Parliament, will set it on a
collision course either with Beijing or with its own
manufacturers and with Washington, which sees no obligation to
treat China's heavily state-shaped economy as a market economy.
"My opinion is that China is not a market economy. But it is
a major trade player and we have to take that into account,"
said one senior EU official.
The Commission must take the initiative and all signs point
to it accepting China as a market economy while seeking to keep
trade defence measures for a transition period, which could
appeal to sectors such as steel, chemicals or textile makers.
This could take the form of maintaining existing duties
until their natural expiry - typically five years - and
potentially raising duties imposed for illegal subsidies.
Chinese officials have said they could show flexibility in
allowing a transition period for particular European industries.
A 2013 deal to end an EU investigation into Chinese dumping of
solar panels showed Beijing and Brussels can find agreement.
The Commission's legal experts have advised it to grant
China market economy status. A report prepared with two outside
economists is expected to conclude this can be done, together
with certain extra measures, without harming the EU economy.
The Commission has indicated no final decision should be
expected before the summer, but an exchange of views with EU
governments could come as early as Feb. 2 when EU trade
ministers meet in Amsterdam.
They seem divided, with free-traders like Britain, Nordic
countries and the Netherlands likely to be in favour but with
nations such as Italy, which compete with Chinese goods, and
France being against granting market economy status.
Germany's position could sway the decision, which diplomats
say is likely to need the support of all governments and not
just a qualified majority. It is the EU's biggest exporter to
China, but there is friction as China seeks to produce the kind
of sophisticated products that compete directly with Germany.
Free trade advocates say Europeans gain from cheaper Chinese
imports and that companies such as Alstom or Siemens
will gain easier access to China's vast market in
return. Rebuffing Beijing also risks retaliation.
The EU is China's largest trading partner, while China ranks
second after the United States for the EU and was the source of
some 302 billion euros ($330 billion) of imports in 2014, more
than triple their level at the start of the century.
MARKET ECONOMY STATUS
Market economy status is important because it determines the
way in which dumping - selling at unfairly low prices - is
assessed. With market economies, the test of dumping is to see
if the export price of a product is below the domestic price.
In China's case, as a non-market economy, domestic prices
are not considered a suitable benchmark. So its exports prices
are compared with domestic prices of another country - in a
recent stainless steel case, the United States was chosen.
Critics of such a system say it is unfairly stacked against
China, with labour costs clearly higher in the United States and
U.S. producers, also facing Chinese competitors, are inclined to
inflate price estimates.
The European Commission had 28 anti-dumping investigations
underway at the start of January, 16 of them involving China,
albeit some together with other countries.
Of 69 anti-dumping duties in force, only 17 are not targeted
against China. Duties of up to 65 percent have been imposed on a
range of products from steel to solar panels.
Swedish centre-right lawmaker Christofer Fjellner, a member
of the European Parliament's influential trade committee, said
there was concern among members about yielding to Beijing's
demand, but also fear of retaliation if Europe did not.
"The Commission is between a rock and a hard place... I
expect the Commission to be creative," he said, adding he
expected a proposal for parliament in February or March.
RISK TO U.S. FREE-TRADE DEAL
Those opposed to opening up to China say Europe's decision
will have knock-on effects on trade with other major partners.
United Steelworkers, North America's largest industrial
union, warned Washington last year that if the EU granted China
preferential status, EU companies using imported Chinese goods
would have an unfair advantage over U.S. counterparts.
This, it said, should be considered as the EU and U.S.
negotiate for a third year a transatlantic free-trade deal.
Those who feel the time is right to relax trade defences
against China say Russia's status as a market economy since 2001
has not harmed the EU's ability to impose dumping duties, such
as a 29 percent levy on electrical steel from Russia last year.
They also say the change would not inhibit the European
Union's right to impose duties if illegal subsidies are found.
"I don't agree with this alarmist view. You can still apply
safeguards against dumping and it's not true that you can't
fight dumping," said one EU trade source.
($1 = 0.9150 euros)
(Additional reporting by Paul Taylor in Brussels and David
Brunnstrom in Washington; Editing by Ros Russell)