That dropdown only appears when at least one of your delivery routes is already tagged as FedEx. It lets you choose the FedEx service (for example FEDEX_GROUND, FEDEX_2_DAY_FREIGHT, FEDEX_3_DAY_FREIGHT, FEDEX_NEXT_DAY_FREIGHT, PRIORITY_OVERNIGHT) used to rate shipments to that state. Config Default means the global service type is used. A zip code can override the state choice with its own Service Type for Fedex.

In the current version, the FedEx option is not selectable in the Delivery Routes & Methods "TAG" dropdown used to create a new route – it's commented out of the code – so this state-level dropdown is only relevant to accounts that already have an existing FedEx-tagged route from before.