Brussels has repeatedly warned Cambodia it risks losing the highly preferential tariff arrangement it enjoys, known as "everything but arms" (EBA), a move that would cripple the country's billion-dollar garment industry, its largest formal employer.
Cambodia's elections in July last year, which returned veteran strongman Hun Sen to power, were widely criticised internationally as undemocratic and prompted EU Trade Commissioner Cecilia Malmstrom to announce the start of punitive measures.
The European Commission, which manages trade issues as the bloc's executive arm, said there was "evidence of serious and systematic violations of core human rights and labour rights in Cambodia, in particular of the rights to political participation as well as of the freedoms of assembly, expression and association".
Monday's announcement begins a six-month period of intensive monitoring and after 12 months the commission will decide whether to suspend Cambodia's EBA deal -- which gives duty-free and tariff-free access to the EU market for all products except weapons and ammunition.
"It should be clear that today's move is neither a final decision nor the end of the process. But the clock is now officially ticking and we need to see real action soon," Malmstrom said in a statement.
"When we say that the EU's trade policy is based on values, these are not just empty words."
In December, Cambodia said banned opposition members may be allowed back into political life and shuttered media outlets could reopen, in an apparent effort to appease EU concerns.
Rights groups fear Cambodia is sliding towards authoritarianism with the help of China, which showers the government with loans and infrastructure while asking few questions about how Hun Sen runs the country.
The leader has been in power for 33 years using a mix of wily political gambits and networks of alliances in the army and police.