Seems that was tried back in the 1930s. Not only did most countries have embassies in Germany, there was a fair amount of international trading with them as well, at least as was possible with the Great Depression and all. Germany even hosted the Olympics in 1936. None of that stopped Hitler from becoming stronger and eventually waging war.

On the other hand, following some particularily nasty business in Nanking and other Chinese cities, the US cut off trade relations with the Japanese. We still had diplomatic relations with them, but that wasn't enough to stop them from attacking us.

We had diplomatic relations and business dealings with the Soviet Union for decades, but that didn't stop them from oppressing their people. Nor has it stopped the Chinese from oppressing their people or the people of Tibet. One can even argue that business relationships help prop up the dictators' rule by keeping their economies from collapsing.

Ultimately, it seems that dictators have to be dealt with on a case-by-case basis. Those who show agression towards their neighbors and/or commit mass murders don't exactly deserve to be treated as normal people. As the humorist Will Rogers noted many decades ago, "Diplomacy is the art of saying 'nice doggie' while you're looking for a stick."