The European Union will begin wrestling this week with the tricky question of how to protect itself in future against an influx of cheap Chinese goods, with much depending on how China's economy is ultimately defined.

China is the EU's largest supplier of goods, but the bloc has argued that many of its imports illegally undercut European prices, imposing anti-dumping and anti-subsidy duties on products ranging from solar panels to ceramic tiles and ironing boards.

The rules for calculating fair Chinese export prices were agreed in 2001, when Beijing joined the World Trade Organization. But part of these provisions will expire at the end of 2016, making it harder to demonstrate that Chinese exports are being sold below value.

The European Union must now decide how to react in order to protect its own industry, all the while without harming relations with Beijing. The bloc's executive, the European Commission, is due Wednesday to hold its first discussion on the issue.

The crux of the debate is around whether China should be treated as a market economy, which would mean it is recognized as a country where domestic prices are freely set by supply and demand. If this is the case, low domestic prices would justify low export prices.

Few dispute that Beijing still subsidizes many of the country's key economic sectors, pushing down costs. For this reason, third country comparisons are currently used to calculate what the minimum export prices for Chinese products should be.

The Economic Policy Institute think tank predicted that placing Chinese producers on a level playing field would cost the EU up to 3.5 million jobs and a reduction of 1-2 per cent in gross domestic product, compared to 2011, in a controversial paper published in September.

But proponents of treating Beijing as a market economy argue that the move would send an important signal to a key trading partner - and that not doing so could prompt retaliatory measures, possibly even stalling ongoing trade talks between the EU and China.

"The commission has a huge political challenge here," said EU lawmaker Christofer Fjellner, a member of the European Parliament's trade committee. "They're damned if they do, they're damned if they don't," he told dpa.

China has been lobbying EU members, arguing that granting the country market economy status would benefit them too.

"It would be helpful to the economy ... of the EU to open the market door further for China and drive comprehensive cooperation between two sides in trade, investment, finance and other fields," said a commentary last week in the Economic Daily, an official government mouthpiece.

Yet even within China, experts and industry members are divided on whether the country deserves the recognition.

"China is in fact not a market economy. When we look at the Chinese economy, we still see shadows of a planned economy," said Yan Chengdong, professor of economics at Donghua University in Shanghai.

Successive Chinese leaders, including the current president, Xi Jinping, have followed the model of a "socialist market economy," in which the government controls state-owned enterprises that dominate industries such as steel, energy production and mining - all of which enjoy massive state support.

Industry and employee representatives from around the world have expressed fears about the consequences of granting China market economy status.

Markus Beyrer of the BusinessEurope industry association spoke last month of "deep concerns within major parts of the European business community." He called on the EU to "maintain effective trade defence instruments that take the real market situation in China into account."

Workers Uniting, an umbrella group of British, Irish, US and Canadian steel workers and trade unions said in November that granting China market economy treatment is "wholly unacceptable" as it could have "devastating effects for workers."

Their concerns are particularly relevant to the steel industry, where Chinese prices recently hit record lows.

Xu Wei, a sales executive of Tianjin Boai Steel tube trading company, said China might not be recognized as a market economy just yet.

"I don't think China will achieve a complete market economy status, but a 'partial' economy status," Xu said.

Such a "creative" legal solution is also what Fjellner expects from the commission - granting the sought-after status to individual companies or economic sectors, for example - to meet political and legal requirements, as well as Chinese demands.

He said EU member states are deeply divided, with Britain at one extreme wanting to treat China as a market economy and traditionally protectionist Italy at the other extreme. Other countries are waiting to hear what Germany - the bloc's powerhouse - has to say.

But either way, he said the EU cannot afford a wait-and-see approach, as it would take a year to adapt its anti-dumping laws, in a process requiring the approval of EU governments and lawmakers.

"The status quo is not an option," Fjellner said.

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