I got the impression the Federation and the Romulans were in a position that it wasn't clear who would win the war but they would definitely both take heavy casualties. The Romulans probably thought they would lose an all out conflict, so instead they set up a scenario where they could be safe in the short run and win in the mean time. And the Federation negotiator was, well, a dummy, probably believing that just given enough time the Romulans would want to join the Federation just like everyone else.
Remember the Romulans' tactics in TNG. They wanted a war, but a specific war: The war where the Federation draws first blood, guaranteeing nobody would join on their side, because they knew that's the only war they could win.