The World Trade Organization decided that China didn’t automatically qualify for market-economy status in 2016 as Beijing has asserted, according to two people with knowledge of the case, handing a major victory to the European Union and U.S.

An interim WTO ruling will allow nations to have more scope to apply duties against low-cost—or “dumped”—Chinese products on a case-by-case basis, the two people said, who asked not to be identified because the decision is private. China could still settle the...