The whole design is relatively rack hostile so why would rack measurement units be a completely non negotiable design constraint???? The previous Mac Pro was 8.1 between 4U ( 7" ) and 5U ( 8.75" ) and the world didn't end. Given you'll need a cradle to hold the round object to fit in a square hole the 0.4" seems a bit of a tight squeeze for a strict 4U fitting.
Think of it as a "monkey's paw" type of thing: people keep asking you for something easier to rack-mount, and no bigger than 4U, you give them a computer they can put 2 of in a 4U rack space...why are they still complaining?
Yeah, sure, it's also some goofy round thing, but that's the problem with getting your wishes from monkey paws, no?
Heavier and slightly more expensive components? I don't really see the 'show stopper' issue. Perhaps a put more money in Apple's pocket issue, but technical one? Yeah it is quite opaque as to what these might be.
One of the issues is how the thermal design and the use of the central switchboard in the base both benefit from having the CPU-and-GPUs as close to the bottom as you can reasonably get them: moving the components "up" adds to the wiring length -- and if you move CPU/GPU up uniformly, you can be adding ~ 2X that to the wiring length -- and similarly for thermal reasons having them placed lower is better than having them placed higher.
So it's not that you couldn't make it an inch or two taller, there's just not much benefit to it and there's some minor drawbacks. Going wider is pretty logical but the 4U thing is what it is.
EG: say you make the thing an inch taller. The optimal place for CPU/GPU/etc. is still going to be about where they are vertically, so if you leave them in the optimal spot you've added dead space at the top for no real benefit. If you move them up half an inch or so you add about an inch to some of the data paths -- not a big deal, but why do it if you don't have to? -- and don't appreciably change the thermals. If you try to use the extra space to cram in a CPU2 next to CPU1, you overload the power supply, the thermals, make the wiring that much longer, and still only have 4 ram slots (so 2 per CPU...yeah...).
Not much benefit here unless the inch is enough to actually allow a larger power supply and also provide enough thermal improvement to accommodate the extra power draw (without materially increasing fan noise, etc.).
Rather than adding an inch, the next logical height to consider is having the central area be "2 RAM sticks tall", but that's a significant redesign and would likely need to be wider just for practical reasons, at which point you may not need to go that tall anyways.