These are all solvable issues with fairly obvious solutions. For example:
> If main.html includes child/include1.html and child/include1.html has a link src="include2.html" then when the user clicks the link where does it go? If it goes to "include2.html", which by the name was meant to be included, then that page is going to be missing everything else. If it goes to main.html, how does it specify this time, use include2.html, not include1.html?
There are two distinct use cases here: snippet reuse and embeddable self-contained islands. But the latter is already handled by iframes (the behavior being your latter case). So we only need to do the former.
> These are all solvable issues with fairly obvious solutions.
No, they are a can of worms and decades of arguments and incompatibilities and versioning
> But the latter is already handled by iframes
iframes don't handle this case because the page can not adjust to the iframe's content. There have been proposals to fix this but they always run into issues.
> If main.html includes child/include1.html and child/include1.html has a link src="include2.html" then when the user clicks the link where does it go? If it goes to "include2.html", which by the name was meant to be included, then that page is going to be missing everything else. If it goes to main.html, how does it specify this time, use include2.html, not include1.html?
There are two distinct use cases here: snippet reuse and embeddable self-contained islands. But the latter is already handled by iframes (the behavior being your latter case). So we only need to do the former.