The good news is that this problem is very easily fixable.

In general I like this game. However, I would never have purchased it (not for 50 bucks) if I knew how bad the AI was going to be. If they made a couple easy fixes/refinements, I'd consider buying DLC. But right now diplomacy with AI factions, and between them, is so extraordinarily dumb. I'm not even bothered by the tactics or strategy AI. The diplomacy AI sucks. I've seen plenty of bad reviews on steam referring to this problem. And it can be vastly improved very easily inside the system already in place.

Diplomacy in GalCiv3 is very one dimensional, and not very dynamic. If I have the smallest military, then friendly personalities who share borders with me will declare war on me, and aggressive personalities will declare war on me even if they are on the other side of a huge map. And the war will never end, even if they lose all the ships they send for hundreds of turns. What they require in a trade deal to make peace seems to be dependent on the difference between their military power and mine, which means if I'm the smallest and they're the largest, even offering every planet, station, and ship I have is not enough sometimes. They won't ask for peace until I create a larger military than them. That seems to be their only consideration. This can be pretty irritating when other factions continue to declare war on me because I still have the smallest military, and why would they declare war on anyone other than the weakest faction?

I know there are other factors, but they don't seem to weigh very heavily, and there are plenty of factors that don't seem to be considered at all. I've played several games where I have the weakest military, and even several hundred turns in (I always play the slowest pace settings), with a dozen factions, the only wars in the galaxy are against me. Basically the resulting feel of the game is that if you have the smallest military, then everyone hates you and declares war on you (defacto uniting against you), and if you have the largest military, then everyone loves you (or at least hates you less and tolerates everything you do). Very dumb game design when the opposite should be true. The stronger your military becomes, the more factions should be uniting to fight you.

Strong factions picking on weak factions is realistic. This alone doesn't bother me. It's the cost of pursuing a non-military strategy. Although it feels silly when it seems factions rarely declare war on any faction other than the weakest one. The real problem is that GalCiv3 is missing a lot of other realistic diplomatic behavior that would balance out the game play.

This can be fixed with very little code if a couple more factors are considered.

Every faction should be vying to become the most powerful faction. That means the most powerful factions should view each other as rivals, and should likewise be more friendly and supportive of that faction's enemies. If I'm a weak faction in a war with the largest faction, why is no one providing me with aid? There should be other factions very interested in weakening the top dog. This used to happen in GalCiv2. Other factions would gift ships if you were fighting one of their rivals. 

Furthermore, if #2 faction wants to declare war on #1 faction, but can't because their military isn't strong enough, then they should consider the military strength of any other faction fighting against the #1 faction. When the #1 faction is in a war with any other faction, that should be seen as an opportunity for the #2 and #3 factions to deal a blow to the top dog.

When I'm a weak player, at war with the strongest, and all the enemy's ships are in my territory (instead of defending their own), I always wonder why no other faction is taking advantage of that opportunity. The answer is simple. AI factions aren't really trying to win. They grow like plants, following dumb scripts, and occasionally bump into each other or choke each other out. They are not even remotely opportunistic, ambitious, or forward thinking. They ignore the reality that if another faction reaches victory conditions before they do, then they lose. If they were trying to win, they'd take appropriate action to prevent other factions from reaching victory conditions first. You could spend a lot of time creating an intricate AI that weighs and analyzes each factions proximity to victory conditions against the costs of different interventions. But for now, it would be good enough just to consider each factions 'Faction Power' ranking.

All of the structure is already in place to make AI diplomacy much more intelligent very easily with the + - system. So here's a quick list of what could be added.

1) The most powerful factions should see each other as rivals. (add some -'s for each other)

2) The most powerful faction should have some extra animosity toward them from everyone.

3) Every faction should have more positive views of any faction that is fighting their 'rivals'. (common enemy is currently considered, but only applies if two factions are actually at war with the same faction. rivals aren't necessarily at war)

*The 3 changes above will do a lot to turn the game into a competitive struggle for the top without actually changing anything outside the + - system. The changes below are also easy to make, but involve calculating some other data.

4) When deciding whether to declare war on a particular faction, the AI should consider the military power rating of every faction already fighting that faction. (this will make the AI more opportunistic)

5) Weaker factions should attempt to form loose unofficial alliances (short of official military alliances) to challenge stronger players. For some reason, other factions only want my help fighting weak factions like minor races. I've never had another faction ask for help to bring down a larger faction.

6) Maybe less important, but maybe the AI factions should consider their losses compared to enemy losses in a given war when considering peace. I really feel like I'm playing against a potato when I destroy incoming fleets for 100 turns, never lose a planet, and the AI faction refuses to reconsider the benefits of the war they started because my military rating is still considerably lower than theirs.

7) For that matter, maybe a faction's kill/loss ratio, and the weight of those kills and losses, should figure into their military rating. This would result in AI factions re-evaluating your military strength if you were holding your own against a stronger military, which would make the AI seem more intelligent and also leave the player feeling that their achievement is respected, the same way people would look again at a skinny kid who just beat up a big dude. This could deter other factions from declaring war, and persuade factions to end wars that aren't going well. If the other changes were implemented, this would also cause AI factions to view you as a threat a little earlier on, creating a greater challenge for the player if they are disliked and other factions see the need to unite earlier. 

8) If you want a diplomacy system even more dynamic and lively that doesn't revolve as much around the most powerful factions, easily implement an actual 'rival' system. For each faction, the faction they view most negatively is their rival, and gets an extra '-' (if you don't want factions to switch rivals quite as often). Every faction who is at war with their rival, or who also views that faction as a rival, gets an extra '+'. Rivals will tend to be factions who share borders, which is fine, but something as simple as a powerful faction being reduced could result in shaking up and refactoring the geopolitical playing field.

Right now, in my experience, games tend to be either impossible, or too easy to enjoy, depending on the difficulty setting I choose, or what stage of the game I am in. Some games are very challenging until I persevere and become somewhat powerful (that part is cool), after which the game stops being challenging at all (the long boring part). I end up rising to the top, no one wants to mess with me or even could mess with me if they wanted to, and all AI factions sit back while I eliminate them one by one. Making some or all of these changes would result in a game that is challenging during more stages of the game and under more difficulty settings, while also being impossible under fewer circumstances and under fewer difficulty settings. The difficulty of each game will scale better with the player power rating, and it will feel more like playing against a vibrant set of living competitive opponents instead of a pile of vegetables.