Your concerns are completely valid. The breed of the dog doesn't even matter, it's the behaviour of the dog and the way your inlaws have already shown they are not dog savvy that is the point.
An anxious dog is the most likely dog to bite. If a toddler backs the dog into a corner (and I mean literally, or makes the dog feel anxious) there's a good chance the dog will bite to get out of the situation. And as your know, toddlers behave erratically. It is not always easy to know what will set an anxious dog off, the child doesn't necessarily have to be doing anything 'wrong', the way a child moves with jerky, lunging type movements can be frightening enough to some dogs.
I love dogs, I am great with dogs, I know I am good at training dogs - but still, one of my dogs is not great with kids. I would never ever put her or a child in a position where she could hurt them. I wouldn't put the DOG in a position where she could become frightened and upset by a child, because that's how accidents happen. I am very realistic about my dogs limitations - one is no good with other dogs, one is no good with kids. I would never let the first dog off lead or take him to a dog park, and I would never let the second play with kids. If children come to our house she is crated or spends time in her outside area. That way, she is not stressed and there's no chance of something terrible happening (including the child becoming frightened of dogs in the future!)
Why would anyone (I mean your inlaws) put themselves in the position where an accident is a likely outcome? I would stand your ground on this. Maybe at some stage you could have several short, very supervised interactions between your child and the dog until you are more comfortable. But, if it were me, I wouldn't leave them with anyone who doesn't understand toddlers and dogs should never be left alone together.
Hard situation, I know! But I don't think you're being over protective.