I got no impression from the UDF that they were xenophobic, nor a dictatorship. Earth still looks like a paradise to me, it's probably running as well as it ever did.
They were only isolationist because of the disaster that hit them and the entire galaxy. I think it is a lot easier to be isolationist when long haul warp travel is now very rare, putting your resources into defensive structures makes way more sense. Though it is pretty short sighted when you think about it a bit.
This.
I mean, it seems like interstellar trade is a fraction of what it once was. Couriers and raiders are an issue, but nothing that a single planet can't handle on its own. Basically why bother forming an interplanetary state when logistics are hard to coordinate, there's nothing much worth exchanging, and common defense is no longer needed?