It was my understanding that embeds.xml was created for a different purpose. The old wowace packager didn't need embeds.xml to create disembedded versions, as it did so before the embeds.xml was implemented and continued to do so even though not everyone used embeds.xml
It was created to get rid of errors in the loading process when someone was using standalone libraries. Normally in the toc you would have all of the libraries listed. If a user had stanalone libs, though, the game would say "where the heck is this file?". It'd then write an error to a log and continue loading, but loading would take longer because of these missing files.
With embeds.xml, the client sees the xml file in the .toc and loads it. The toc then loaded each library the addon required. If someone used standalone libs, WAU would wipe the xml file clean except for the header, so no errors would be created when the xml file didn't find the libs.
xml files do get reloaded when reloading the UI, else how would you make tweaks while coding? Then again, I'm not sure if the same is true when loading files from xml. But the toc is *not* reread when reloading your UI. *Any* toc changes require a full game restart to take effect.