The EFTA countries manage to trade with the EU without being forced to cede their law-making powers to the European Commission.
Also: UK trade is vital to the EU. The EU would lose a huge fraction of their export trade if they shut us out. We have the whip hand here.
None of the EU members cede their domestic lawmaking either, but the EU regulations still have force of law. Same applies in the EEA.
I agree that an impasse is most likely bluster, but the saber-rattling belies the true nature of the EU in spite of its protestations of “peace”.