I was under the impression from earlier discussions that people with Wanted status will still be instanced with you even if they block you.
So Alice (a stinking pirate) blocks Bob (a bounty hunter); if Alice has a bounty, which is quite likely, they will be instanced together.
But if Bob blocks Alice, they won't be placed in an instance together unless Bob has a bounty, which is less likely.
That's how I understood it would work, so that peaceful trader types could block pirates, whereas vengeful bounty hunter types like yours truly could still find pirates even if they're trying to block bounty hunters.