I'm actually surprised that people think that, by three, kids should have the whole world figured out. Developmentally, 3 year olds ARE the center of their own universe; it's a normal stage of development and they really do not have the cognitive ability not to be so egocentric. And you know what, freaking out over a stupid cake (as a grown, fully developed adult) is WAY more childish and immature than anything the child did.

Your nephew's behavior seems perfectly normal and I think it's the brother in law that has the problem. How does your sister in law feel about the issue (the one whose child is being insulted)? I would talk to her, say you don't like the behavior and ask if it bothers her, then decide what to do.