Investors are ill-prepared for the possibility of President Donald Trump walking away from talks aimed at cementing the "phase one" China trade deal that was announced in principle in October, CNBC's Jim Cramer said Monday.

"I think people continue to believe that there's going to be a deal because they think it's rational, 'Why not do a deal? It's good for both sides,'" Cramer said about what he sees as conventional wisdom on Wall Street.

However, Trump feels "prodded by the Chinese, humiliated," Cramer said on "Squawk on the Street," pointing to what he calls the latest "provocation" — China's Communist Party reportedly ordering all state offices to remove foreign hardware and software within three years. The order, as described by the Financial Times, could hit major U.S. firms including Microsoft, Dell and HP.

The policy is seen as a direct move against U.S. technology firms during the 17-month-long U.S.-China trade war, which has spilled over into an economic dispute, including how Beijing subsidizes its tech industry.

"Why should there be a deal?" asked Cramer, a supporter of the president's hard-line approach to try to force China to open up its markets. "It's provocation."

For its part, the U.S. has effectively blacklisted Chinese telecommunications giant Huawei on national security concerns about whether China could use Huawei equipment to spy. Huawei has repeatedly said those concerns are unfounded.

Ahead of Sunday's deadline for new American tariffs on Chinese goods, "it's fish or cut bait time and I think that the cut bait is, 'Thanks for nothing China,'" Cramer said. The planned Dec. 15 tariffs on products, including smartphones and laptops, would be on top of the billions and billions of dollars of levies that Washington and Beijing have already imposed on each others' imports.

"[Trump] wants some sign, some sign that the Chinese want to do a deal, so that he can do it," according to the "Mad Money" host's read on the situation. "I think the president is increasingly saying, 'If they're going to continue in my face to not what to do a deal, I'm happy to walk away.' So I think that's the tenor of things right now."

On Friday, Cramer said on CNBC that the strong November jobs report gives Trump cover. "The president can walk away from the table with this number," highlighting the unemployment rate last month dipping to 3.5%, matching a 50-year low. Cramer has said the U.S. stock market hovering around record highs is also a feather in Trump's cap in trade negotiations.

Top Trump economic advisor Larry Kudlow, a former CNBC personality who used to host a show with Cramer, said the president is prepared to walk away from a China deal if he doesn't get the terms he wants. However, Kudlow, director of the National Economic Council and a self-described free trader, also said Friday that the U.S. and China are "close" to a deal.