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 complaint before the judgment is made public.

The decision deals a significant blow to China, which had argued that its...