"I have determined that it is appropriate to suspend Bangladesh ... because it is not taking steps to afford internationally recognized worker rights to workers in the country," Obama said in a statement early on Friday Bangladesh time.
The US sanction does not directly affect Bangladesh's main export, multi-billion-dollar clothing to the United States, since garments are not eligible for duty cuts under the Generalized System of Preference, or GSP programme.
Bangladesh’s apparel came under scrutiny after the collapse of the Rana Plaza garment factory building in April that killed over 1,100 people and the Tazreen Fashions Ltd factory fire in November last year that killed more than 110.
But it could influence the European Union to take similar action, which would have a much bigger impact on Bangladesh and its garment sector. The European Union buys more than $12 billion in Bangladeshi garments each year, or roughly three-fifths of the country’s production.
Losing the GSP facility will cost Bangladesh millions of dollars in taxes.
"This was not a decision taken lightly," new US Trade Representative Michael Froman told reporters on a phone call. "Our goal, of course, is not only to see Bangladesh restore its eligibility for (the trade) benefits, but to see Bangladeshi workers in safe, appropriate work situations."
Richard Trumka, President of the AFL-CIO labour federation, said the decision sent an important message to countries that receive duty-free access to the US market under the Generalized System of Preferences (GSP) programme.
"Countries that tolerate dangerous – and even deadly – working conditions and deny basic workers' rights, especially the right to freedom of association, will risk losing preferential access to the US market," Trumka said.
Despite the relatively small volume of trade affected by the US decision, Froman said Bangladeshi officials put great value on remaining in the programme.
"We will be staying very much in direct and continuous contact with the government of Bangladesh as they take additional actions on workers rights and workers safety," Froman said. "We'll review their status at the appropriate time."
It also puts American companies on notice they must take meaningful steps to improve conditions for Bangladesh's factory workers, Senate Foreign Relations Committee Chairman Robert Menendez, a New Jersey Democrat, said in a statement.
"No one will want to wear clothing that is ‘Made in Bangladesh' if it is made on the blood of workers. It's time for American industry to show leadership and work with their European counterparts on a global standard for safety."
However, Froman told reporters that the US had no plans to restrict clothing imports from Bangladesh to put additional pressure on that country to improve safety conditions for workers.
The top US trade official hoped that suspending US trade benefits on a number of non-textile goods would be enough to encourage the Bangladeshi government to make needed reforms.
Labour advocates have been wanting the US to convey its disapproval of working conditions in the country by stripping Bangladesh of its special trade status.
Suspending Bangladesh from the GSP programme would increase US duties on an array of products the country exports to the United States, such as tobacco, sporting equipment, porcelain china, plastic products and a small amount of textile products.
It was created in 1976 to help economic development in the world's poorest countries and to reduce import costs for US companies.
Bangladesh is among more than 125 countries that receive breaks on United States tariffs under a World Trade Organisation programme intended to promote economic growth around the globe.
In 2012, Bangladesh was spared about $2 million in US duties on about $35 million worth of goods under GSP programme, but it paid about $732 million in US duties on $4.9 billion of clothing exports not covered by the programme, according to Ed Gresser, a trade analyst with the GlobalWorks Foundation, Reuters said.
Still, Obama's decision is a repudiation of working conditions in Bangladesh. EU officials raised the possibility of suspension in early May in the hope of prodding Bangladesh into action.
The EU imported roughly 9.2 billion euros ($12.13 billion) of goods from Bangladesh last year, according to data from the EU's executive, the European Commission.
Clothing and textile products ranging from towels and bedding accounted for almost 93 percent of those goods.
EU officials have threatened to kick Bangladesh out of the programme – a process that could take more than a year - unless it improves worker safety conditions.
EU and Bangladeshi officials will meet in Geneva in July for talks aimed at improving safety conditions in Bangladesh and preserving the country's trade benefits.
An EU spokesman in Brussels said the expected US action underscored the EU's concerns.
However, labour unions and Democrats on US Capitol Hill have been pressing the US government to suspend the trade privileges for Bangladesh, reported the New York Times. But at the same time, some State Department officials also pushed against suspending the trade privileges, saying it would damage diplomatic relations and undermine the economy or an already poor country.
Bangladesh is allowed to export nearly 5,000 products duty-free to the United States, which purchases about 25 percent of the country’s $18 billion in annual apparel exports.
The United States' own review dates back to 2007, when the AFL-CIO, the main US labour group, first filed a petition asking that Bangladesh's trade benefits be revoked.
European retailers have responded to the two tragedies by signing an agreement to promote worker safety in Bangladesh, but many US retailers have balked at accord, saying it gives unions too much control over ensuring workplace safety.
They have been working instead with former Maine US senators George Mitchell, a Democrat, and Olympia Snowe, a Republican, on an alternative plan to improve fire and safety regulations in the garment factories of Bangladesh.
The effort is being coordinated by the Bipartisan Policy Center, a Washington think tank.
"At this point only a few final details remain to be worked out and agreed upon. We remain on track to complete the process by early July," BPC President Jason Grummet said earlier this week in an email.