The decision stems from the US failure to remove anti-dumping duties, but the monetary value is roughly half the total amount that China had sought.
The ruling came as the world’s two biggest economies try to clinch phase one of a trade deal.
US President Donald Trump and his negotiators are “very optimistic” about concluding it, White House adviser Larry Kudlow has said.
With the WTO announcement, a three-member WTO arbitration panel said Chinese exporters suffered impairment to trade.
China may now ask the WTO’s Dispute Settlement Body for a green light to impose the retaliatory tariffs on imported US goods valued up to that amount each year.
Beijing told the WTO in September 2018 that it had suffered $7.043bn in damages annually due to US anti-dumping duties that were ruled illegal by a WTO panel in 2016 and later upheld.
China therefore requested permission to raise trade barriers on US goods to the same amount, as allowed under WTO rules.
As the Trump administration objected to the amount, the issue was sent to arbitration.
The case relates to US dumping duties on industries including metals, minerals, light industry and machinery and electronics. It deals with how the US Department of Commerce calculated the amount of “dumping” – Chinese exports that are priced to undercut US-made goods on the US market.
The US calculation method, known as “zeroing”, tended to increase the level of US anti-dumping duties on foreign producers and was repeatedly ruled to be illegal in a series of trade disputes brought to the WTO.
Washington is disappointed by the WTO decision, a US official said on Friday, adding that it “overstates the amount of the impact on China” and that the WTO approach had “no foundation in economic analysis”.
The Trump administration would actively consult within the US government and with stakeholders on how to move forward, the official said. The case will not have any bearing on ongoing trade discussions between the two countries, the official added.