UPDATE: After appealing to the App Review board, my app got approved. A few hours after the app was released I was able to ‘break the circle’ and remove tracking through the App Privacy settings in App Store Connect.
I do think that this needs to be addressed internally at Apple though. Either a procedural change in the app review processes or a technical change in App Store Connect, or both.
Because basically, with the situation/process as it is now, App Review is not allowing app developers to stop tracking user data. This goes against everything that Apple stands for from a privacy perspective.