The city-state model differs in scope. Each city is its own sovereign, albeit smaller-scale, nation of sorts, with its own ruler, army, and potentially religion. Among the ancient Greek city-states, for example, adherence to worship of the Olympians was shared, yet different cities might emphasize their own preferred Olympian, as with how Athens focused on Athena--though the Olympians are very obviously not uncaused causes even in the context of their own stories, so they cannot truly be gods or goddesses. They are just created superhuman beings even on ancient Greek paganism that had loyal regional devotees. The historical record suggests many city-states in and outside of Greece.
Athens and Sparta are especially renowned among the former Greek city-states from the classical era, the two of them fighting against Persia as allies. Ur and Uruk of Mesopotamia, the region between the Tigris and Euphrates rivers in what would now be termed the Middle-East, are earlier examples on the alleged historical timeline (for no historical events or scenarios like this can be logically proven, only probabilistically evidenced), and the Minoan civilization on the island of Crete might have also had its own city-states. As relatively rare as it might be today, and as alien as it might be to many people, this type of political structure is not foreign to what evidence points to concerning ancient cultures.
The logical possibility of a nation-state ruling effectively aside, though the Biblical scope of government is strictly limited to enforcing the laws that correspond to God's moral nature (Deuteronomy 4:5-8), a city-state would be objectively more likely to be managed in a manner that benefits its populace quickly and directly. With less territory to maintain, the government's resources could be utilized very pragmatically when the entire state is only bound to the one city itself. Transitioning from nation-states to city-states would enable the easier governance of local areas by people who are actually in or from the exact region they preside over.
It is not that nation-states cannot rule efficiently and consistently in a Biblical way across broader geographical distances. They could. At the same time, the larger the region a nation-state covers (or city-state, though a city-state would very likely be smaller than many nation-states), the more potential difficulties might arise for everything from communication to mobilization. A city-state, in plenty of cases, would naturally lend itself to a government that is not riddled with bloat and disjointed branches, certainly to a far greater extent than a nation that contains numerous cities.
The delusions of emotionalistic patriotism, the variant many patriots hold to, would nonetheless deter many people from ever endorsing the dissolution of their nation-states into (likely) far more effective city-based governments where there is no federal or overarching government. The allure of tradition and the fallacious pursuit of familiarity for familiarity's sake would probably make such a thing very unpopular. Still, alignment with reason and morality and all that they entail is all that makes a government valid, not emotion-based allegiance or arbitrary human norms. As for interactive benefits, individual cities could still aid each other through trade, disaster relief, charity, and so on, and, more importantly, true justice could still be achieved. There is hardly the same degree of challenge in pragmatism here as there is in implementing almost anything in the nation-state.