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U.K. Prime Minister Boris Johnson and European Commission President Ursula von der Leyen in January. Photo: Peter Summers/Getty Images

The United Kingdom and the European Union have reached a historic trade deal, staving off a potentially catastrophic "no-deal" Brexit cliff on Dec. 31.

Why it matters: The two sides appear to have defied the odds, striking a complex free trade agreement in record time after nine months of intense negotiations. Both the U.K. and EU had warned in recent weeks that a no-deal scenario was "very likely" as talks appeared on the verge of collapse.

The big picture: Ending the Brexit transition period without a deal would have forced the U.K.-EU trading relationship to revert to World Trade Organization rules, resulting in automatic tariffs, border checks and other massive disruptions between the U.K. and its largest and closest trading partner.

  • An official government forecast warned that a no-deal Brexit would cause widespread job losses and an increase in food prices — wiping an additional 2% of GDP off a British economy that has already been devastated by the pandemic.
  • A deal seemed within reach in recent weeks, but the sides were stuck on three key points: fishing rights, a "level playing field" on subsidies and regulations, and a mechanism to resolve disputes.

What they're saying: "The deal is fantastic news for families and businesses in every part of the U.K," a Downing Street spokesperson said.

  • "We have signed the first free trade agreement based on zero tariffs and zero quotas that has ever been achieved with the EU."
  • "The deal is the biggest bilateral trade deal signed by either side, covering trade worth £668 billion in 2019."

The other side: "It was a long and winding road but we have got a good deal to show for it," European Commission President Ursula von der Leyen said at a press conference.

  • "It is fair, it is a balanced deal and it is the right and responsible thing to do for both sides."
  • "Normally you feel joy after a trade agreement," she added. "Today I only feel quiet satisfaction and relief. This is a difficult day for some and for our friends in the U.K., I want to say parting is such sweet sorrow."

What to watch: Neither the U.K. Parliament nor European leaders will have much time to scrutinize the deal before Dec. 31, but it's unclear whether lawmakers on either side will put up enough of a fight to derail the ratification process.

How we got here: The June 2016 Brexit referendum set off three years of political instability in the U.K., during which former Prime Minister Theresa May struggled to negotiate a divorce agreement with the EU that would pacify hardline Brexiteers in her Conservative Party while earning the backing of a divided Parliament.

  • May's failures ultimately forced her to step down in 2019 and give way to Boris Johnson, who called an election and campaigned on a promise to deliver Brexit with an "oven ready" deal.
  • Johnson won a sweeping majority and took the U.K. out of the EU on Jan. 31, triggering a transition period in which the two sides would work out the terms of their future relationship by the end of the year.

The bumpy negotiations that ensued coincided with the coronavirus crisis, which wreaked havoc on both the U.K. and the EU — prompting calls for Johnson to extend the Brexit transition period to avoid further economic misery and possible supply shortages.

  • He categorically refused, frequently hailing the prospect of an "Australia-style" deal (Australia doesn't have a free trade agreement with the EU) and the restoration of U.K. "sovereignty."
  • In the end, though, it may have been Johnson's brinkmanship that brought about the compromises necessary for a deal to be reached.

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Why it matters: Though the money is aimed at helping state, local, territorial and tribal governments recover from the pandemic's economic fallout, the administration will generally give them wide latitude on how they can use the funds.