Of course not. If instance A does not like instance B and blocks it, there is reason why there can't be an instance C that federates with both A and B.
If these three were the only instances in the world then, yes, A could be so strict it also blocks C because of it's communication with B. But since there are hundreds of these instances and since there is no limit on how many can be created this will not be a problem.
Admins can be dictators on their own instance, but there are a lot of admins to choose from. If a big instance goes sour, it is very easy to migrate to another one.
Yes, federating child porn or threats will cause other instances to block media content and perhaps toots from your instance, as other instance admins do not want to babysit filtering what your instance relays to theirs.
If these three were the only instances in the world then, yes, A could be so strict it also blocks C because of it's communication with B. But since there are hundreds of these instances and since there is no limit on how many can be created this will not be a problem.
Admins can be dictators on their own instance, but there are a lot of admins to choose from. If a big instance goes sour, it is very easy to migrate to another one.