Exactly, obviously /etc/hosts will still take precedence, but instead of munging your /etc/hosts when starting a container you can just use their DNS server. I don't see a problem with this.

Because /etc/nsswitch.conf exists to do exactly what's needed here. Now there's an extra layer of need-to-know that adds confusion. I can almost guarantee that there's going to be a major outage somewhere, someplace because of this change.

Docker assumes it cannot trust the container's DNS resolver to respect TTL and cache in a compliant way. So it guarantees stable name->ip mapping for each container. As a result, when you point a service endpoint at another container, it's the IP/container mapping that is changed, which is a much more reliable and atomic change. I would definitely never rely on changing DNS records to orchestrate changes to my production stack, that would be way too brittle.