Perfect example of a collective action problem.
(In this case) the dynamic forces them both/each to expend a lot of resources, which each only negate the other's; thus, both sides incur substantial cost(s) while providing basically no net gain. This outcome is suboptimal for both as there are better possible outcomes for both sides, indeed a single alternate possible outcome that would be better for both sides.
But if such a universal improvement, a pareto improvement in other words, is possible, then how both sides still experiencing this avoidable problem?
But both sides are also essentially forced into it; it's the rational thing to do. After all, if they don't do it but the either side does, then they'll lose out even more. Only if both sides stop doing it is the outcome better for both. Thus, some agreement and coordination, presumably with mutually-acceptable/accepted enforcement provisions/measures in case of cheating/going back on,--in other words, law--is necessary for the best possible outcome in these kinds of cases.
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As a typical/paradigmatic case/example of a common collective action problem, this example is important because it may be able to illustrate to those not otherwise sympathetic to centralization and government action/intervention/activism the soundness of the deductive case for it's being optimal policy in some circumstances, namely when the conditions sufficient for a collective action problem are present and the benefits yielded justify the costs incurred (and also maybe necessary is that no other pathology of government is worse than freedom's/market's pathology in this case/area).
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Hopefully states and localities can recognize this problem and band together resolved not to compete with other states and localities for economic activity by bidding with taxpayer money. If federal legislation is not possible, then states should band together in the model of Common Core or National Popular Vote plan.
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Similarly, but more controversially, the same collective action problem that applies to individual states in the whole country also applies to individual countries in the whole world. For this reason (among many others), it seems necessary that some level of world government will be necessary.
In the same way that individuals voluntarily surrender some rights and assume some responsibilities in order to live in society, and just also as states voluntarily surrender some rights (nuclear non-proliferation for instance, or use of land mines) and assume responsibilities (to defend other states) in order to enter treaties with other states, gaining alliances and allies, states will, at least will need to, establish a common world government.
Too many collective action problems otherwise: impossibility of universal currency devaluation, Piketty on a global wealth tax, financial regulation, etc.
The process of globalization is a one-time only phenomenon, though of course long and difficult and must be managed right. But the costs are mostly related to the process (as in economic, distributive costs, as there are arguments for other social and cultural costs) and not the outcome, so the economic benefits of the hopefully-long-lived outcome likely outweigh the costs of the temporary process.
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This phenomenon should also be taken into account when evaluating the economic and employment performance of different states, for the purpose of discovering/learning what policy should be undertaken at the federal level to boost employment or economic performance otherwise, or adjudicating between which candidates for federal office are better for the economy and employment than others' (which now sounds similar, even identical to the last question).
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