I’ve literally never seen this happen in the tech world

Neither have I but it is an interesting point to consider - to what extent is the EMs thinking biased by their previous experience of the team as an engineer.

Doesn't this seem like a useful bias to have?

The word bias has a negative connotation so perhaps you mean something else.

Given two EMs, one that came organically from a team and another that came "from the outside" and spent a few months working with a team - what advantages and disadvantages would the first EM have over the second?

IME internally promoted EMs are 4x better. They understand what problems the team is facing, how the product works, the various interactions with other teams, and the company processes. It takes at least a year for an external hire to ramp up to that level of familiarity.

I will say that for very dysfunctional teams it could be valuable to get an outside perspective which can do more severe change but hopefully this is less common.

Note, almost happened to me. My team's EM left, I said I would take his place even though I had no real desire to become EM. I'd rather just do it than bring in someone from the outside because our team was great.

Well, as soon as HRBP found out I would become a EM, suddenly there were 2 other areas that needed EMs much more than our team. (As we were very functional).

I made a condition that I would become EM only for our team and did not desire to lead others I didn't know.

I find it bizarre that HR would be involved in this at all. I'm glad I've only been a manager at places where HR pretty much functioned as a consultant available to management.

Also there is a comment by Major Winters that this is a stupid rule, because Lipton is one of the best and most respected platoon leads in the company.

True, Winters indeed said that but the interesting question is why would the Army have such a policy in the first place (I assume that here as in other things BoB sticks to the realities of the time).

The new LT would have to continue to interact with SNCOs in the battalion who had outranked him, which might cause friction.

Emotional detachment? Military officers have to send their troops into harm's way.