Diplomacy works just fine for me, up until World War One starts early, then the AI apparently goes into Banzaii Mode.
I've traded, gifted, and demanded settlements quite a lot. Why, just the other day I gave Jerusalem to Russia in exchange for Riga, and was only too happy to take the Holy City back four turns later when it revolted, so I could take Stettin off the Pole's hands. Meanwhile I was making a bucketload of cash sacking the city :)
Summation being,
Diplomacy works fine for me. Maybe you arent trying hard enough.

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