That's a really poor analogy here though. Here's one that I think is better:
- instance = country
- community = bar
- federation = visa agreements
Communities can block individual users that are undesirable without the instance getting involved. That's the Nazi bar example, and it's totally reasonable for communities to have strict moderation for who they let in.
Instances should only get involved if admins from another instance refuse to take action against their users who cause issues. And an instance can block another with minimal drama, it's like border security not accepting visas from that country any more. Until we have evidence that an instance isn't capable of enforcing rules on its users, there's no reason to ban them.