I think is a decision made in order to secure (or at least try to secure) a diplomatic victory. If someone goes freedom they can easily steal allies with trade routes to CS. I've seen Greece propose this numerous times.
Also Merchant confederacy gives 2 gold form trade routes to CS. So anyone who got this will be directly crippled. Germany is also seriously crippled by this.
Another effect is if a civ already has an embargo it can still send routes to CS. If embargo city states is in already in place, embargoing another civ is a lot more powerfull.
A human player would propose this:
1) in order to secure a Diplomatic Victory if someone else went freedom, or make sure someone else does not win a Diplomatic Victory.
2) in order to cripple the runaway civ, combined with an embargo for that civ
3) in order to cripple players that finished Patronage (which may also want to get the level 3 freedom tenant that gives influence from trade routes)
4) in order to cripple the effect of the German Hanse.
So for an AI to propose this, as frustrating as that is (especially if you play Germany), it is strong play. I could even joke and say it is actually hard coded, that at some point if there is nothing better to propose, this gets proposed.