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It would actually work a lot better to just arm the merchants. Why upkeep a dedicated navy when you could just get the traders who are already running the routes to defend themselves?
yes, arm the transports and individual merchants. make it known that the faction doesn't accept piracy. on top of that if we have a fleet of actual defense and not just transports with a laser turret. with an actual fleet the faction can back their own assets, protect installations and act on as well as intimidate opposition or predatory factions.