Yes, exactly, there are no negative connotations in the German word (besides, of course, that the original had to be replaced for some reason).
I think it took on the negative meaning in English because they already had a perfectly fine neutral English word in "replacement" already, but felt they needed one for the negative connotation, and quite frankly, Brits like to use German for those kind of words ;) Or maybe the person who brought it into English just felt that way (needing an replacement often just isn't a nice experience) and linked the feeling to the word, and the connotation stuck.
Things like that often happen with loanwords; either they are considered more fancy because they are exotic, or they randomly take on a connotation that it doesn't have in the original language to fill a gap.
So there are no connotative meanings behind it in German? It's used as a noun, according to dictionaries.
From what I've read, 'ersatz' in English is quite specifically used as an adjective and it is an unflattering one to use. (i.e. ersatz emotion - Oxford Dictionary).
Nonetheless, very interesting. I find that I'm learning something new about my native language, through learning German. I love German!
I assume the negative connotation of the word in English comes from WWI and WWII, when several products were unavailable due to war shortages and restrictions, so they had to be replaced by lower-quality substitutes. At least that's the reason why, in French, we use the word ersatz with this same negative connotation.
"dich" is accussative and used for direct objects, so the action is directly affecting you: Ich ersetze dich = You are the one who is replaced
"dir" is dative and used for indirect objects, so the action is happening indirectly for you: Ich ersetze dir das Buch = I replace the book for you/ I replace your book
Unless you have a verb or a preposition that specifically needs dative, you can't have a dative object alone; it's an additional indirect object to further explain what's happening with the direct object.
Not harsh at all! Look at the conjugation table (there is no erzetst there). It goes ich ersetze, du erseTZT, er ersetzt. I know you misspelled it, but there's a reason why your answer couldn't be considered as misspelled. Just like when we've learned plurals and forgot to put the s in the back. Sometimes they will accept your answer, but it's better they don't in these cases.