But it does.
Example: You're on lemmy.world. Let's say lemmy.world defederates lemmy.ml today.

Now you won't be able to see any new posts made by users of lemmy.ml, be it on lemmy.ml itself or on any other instance. You will still see everything that was posted up until the defederation though because defederation just means that your instance won't request new copies of the content of lemmy.ml .
And they also can't post stuff on comunities of lemmy.world(I believe they technically could do that, just that nobody could see it, but it may be that by now it's entirely blocked to even make a post there).

Now as long as lemmy.ml doesn't defederate lemmy.world too, their users will still be able to see your comments and may also reply to your comments on other instances , but you won't see that.

So defederation mainly serves two purposes for the users of the instance that defederates another instance:

1. Their users won't see any content from comunities of those instances in their "all" feed and also won't see any posts from users of that instance in the comment sections of any comunity of any instance.
2. Users of those instance won't be able to post on their instance.