Theuderich said:
Even if they don't have a CoT their embargo means their goods don't count towards the value of the local CoT for your merchants. Admittedly that only matters if they have a lot of goods and you actually trade in the CoT, but it does have an affect.
As for the balance of power, while it would be enjoyable for some, EUIII is a game, not a historical simulation. Most players like to feel they have won at some point, and if instead they get ganged up on by the rest of the world every time they start to pull ahead they probably will not enjoy the game as much.
I'd also second Merrick and reccoment you get the patchs, the AI is constantly improving.