China has averted a potentially damaging trade dispute by reaching a short-term deal with the European Union over coal exports.

The European Commission had threatened to take Beijing to the World Trade Organisation over China's export restrictions on coking coal and had initially set a deadline for this action of May 14th.

Coke is an important raw material for steelmakers, who complain that the restrictions by China, the world's biggest coal producer, have helped drive up prices from $79 a tonne two years ago to $350 in the first quarter of 2004.

As much as $200 of that price is made up by an export licence fee charged by Chinese coke producers.

The battle was also an important test of relations between WTO members. China became a member of the trading organisation three years ago.

China is already facing a WTO complaint filed by the US in March over an allegedly discriminatory tax on semiconductors.

The deal reached between China and the EU on Friday provides that this year China will provide EU industry with no less than the 4.5 million tonnes of coke it supplied in 2003 and that export licences will be delivered "without cost or delay".

"We are obviously very pleased," said Mr Pascal Lamy, EU trade commissioner. "\ shows the growing maturity and strength of the EU-China trade relationship."

However, the agreement does not resolve the problem for the years after 2004 - an issue the two sides said they would work on in coming weeks.

The EU had called on China to abolish the trade restrictions altogether. Beijing has rejected such calls, since the purpose of the quotas is to maintain supply to domestic producers at a time when China's economy is booming.

Last year China allowed less than 10 per cent of its annual coke production to be shipped abroad.

But ties with the EU are growing in importance. With total trade of €135 billion last year, China is now the EU's second-largest non-European trading partner after the US, and the EU is China's second-largest export market.

The EU's trade deficit of €55 billion with Beijing in 2003 was its largest with any partner.

China is currently pushing the EU to lift its arms embargo and to grant China "market economy status", which would make it harder for Brussels to punish Chinese companies for dumping activities.

Brussels has also complained about alleged obstacles encountered by European carmakers and construction companies in the Chinese market.