His parents should be monitoring his behaviour and pulling him up when he does something that is not acceptable, like name calling. Even though he probably doesn't even understand what he is saying he still needs to be taught that it is wrong. Also he should not be allowed to continue with the baby behaviour - when he acts that way he should be ignored and not given attention for it.

I agree you should get your DH to watch the two of them when they are together so that he can see for himself how his nephew is acting, then he might be more inclined to back you up.