So I have been thinking, why didn't Napoleon or Britain negotiate in 1807? Before Napoleon instituted his Continental System neither France nor Britain had a clear advantage over each other. Now seems like the perfect opportunity to sit down and hammer down a peace treaty. So why didn't either side do just that?
The timeline of this question is a little confusing to me. The British issued the Order In Council to blockade ports from Brest to Elba in May 1806; at the same time, frustration was growing in Prussia over Napoleon's policy in regard to the successor states of the HRE, and following the declaration of the Confederation of the Rhine in July, it was pretty clear that war between Prussia and France was in the offing. Napoleon formalizes the Continental System in late 1806 with the Berlin Decree, and Britain responds by issuing more expansive Orders In Council, and Napoleon expands the Continental system even further with the Milan Decree.
There's no real room in this chain of events for a negotiated settlement, and it's difficult to imagine on what grounds such a settlement could have been reached. After Tilsit and the formation of the Kingdom of Westphalia, it seems pretty unlikely that Napoleon would return Hanover under any circumstances; the British, for their part had no particular reason to cease their blockade, since they faced no credible naval threat from France or their allies (especially after the destruction of the Danish Fleet) and the economic impact of the Continental System on British trade was manageable.
Indeed, many of Napoleon's campaigns after 1807 were at least partially motivated by attempts to expand the Continental System, to plug the holes as it were, and bring the British to a place where negotiations could be opened from a position of strength.
One of the reasons is the concept of "balance of power" which was relevant in the XVIII and part of the XIX century. I will look at this from the British perspective. The very basic idea is that there needs to be an equilibrium of power on the continent. This system was severely weaken by Napoleon because until then no power had ever controlled the continent from the Atlantic to East Prussia like the emperor did. The British wanted this system to be preserved because it was in their interest and so they did not stop until they achieved this goal. Let's not forget that the peace after the Napoleonic wars was not harsh for France because of this idea of balance. We do not have the hard peace treaties like after WW1 and WW2.