Auctions yes, across countries no. There was nothing like a commodities exchange market where all nations had perfect information and could place their bid, nor was there anything like a commodities market that nation states as actors could go and trade.
Yeah well, there also wasn't magic.
If trading is only available via trade routes the weakest players will suffer the greatest, as one or more stronger empires can more frequently cripple their trading abilities. And the weaker player struggles to protect shipments while the stronger player grows and harrasses the weaker player.
So implement some compensating feature so that is not the case. You could make internal banditry a problem in larger countries. To keep trade caravans passing through your territory safe you'd have to invest some of your income/resources/military/whatever into keeping your roads safe not only from other players, but from bandits within your own lands. This could scale with nation size. Likewise, it would be easier for a smaller nation to send little raiding parties into larger countries to disrupt trade than the other way around - the smaller country would be able to respond to such an incursion much faster. Sure, the large nation could send a whole army into a smaller nation to disrupt trade, but at that point it's an invasion, not a raid on trade.
Additionally, players who raid trade caravans anywhere should be shunned by traders.
All the GREAT fantasy TBS games have allowed the trading of goods via a trading screen option which occurs within 2 turns or less without disruption. Which is easily understood due to the ability of teleporation, mind spells, and other magical traits supporting the trading goods.
Well, the only TBS game I've played that doesn't utilize instantaneous trading is Colonization, and I love Colonization. The caravan system there was clunky, and Stardock can do much better, but it's a great starting place. All the great fantasy TBS games have done instant trading because almost every single TBS game ever has - no one has taken the risk or made the effort to make a more in depth trading system which, I think, has tons of potential. And quite frankly, 'mind spells' are not going to transport 200 bears across 500 km in a day. And if I could teleport 200 bears, enough grain to feed a city and a steady supply of iron across hundreds of kilometers with negligible effort, then I should be able to teleport small armies all over the place whenever it strikes my fancy. Likewise, if I can do that, then why do I have to deal with caravans and such within my own territory? Stardock is rethinking 4X economics in this game, and I think foreign trade deserves as much rethinking as internal transportation of goods.
Take weak player_A who needs to travel pass player_B then player_C then player_D before reaching the valuable or desired trader player_E. The stronger players will be able to provide more protection and due to being larger have more protected safe routes.
It really depends on how it'd be implemented. In my mind, you'd have to be a really belligerent bastard to harass trade, even if it's going to someone you don't particularly like. Like lwarmonger said, I envision the merchants as "something to influence, not control." If you attack a caravan heading from A to B, you aren't attacking A or B (although you are stealing their resources) - you're attacking the merchants - independent traders. If you build up a reputation for harassing traders passing through your territory, you're going to see a lot less trade come through your way and that is your loss.
With your suggestion the game then provides huge benefits for those being in the best location for trading . Your suggestion also seriously limits the ability of trading by only being able to safely trade with others nearby. All players should be able to trade with any other player despite their location... as seen within other games initial contact should really be the only requirement. I can only imagine the PAIN involved if I found myself pinned within a corner of the map where I could only trade with ONE PLAYER!
It does provide benefits for those in the best trading locations. Just like players in the most resource-rich locations have advantages. And just like how in most TBS games, the most isolated players have the advantage. This just switches things around a bit. Also, it may give an advantage to the players on the best trade routes, but it also makes their territory much more juicy to others, and they will probably find themselves on the end of more invasions because of it. Look at Persia - it was essentially the biggest trading hub in the world and it was conquered more times than I can remember - over and over and over. The riches were too good to pass up. So it provides a pro and a con - balance them out and you have success.
This is the reason why so many fantasy TBS games have allowed the instant trading between players.
Forgive me for being cynical, but I think the reason why so many TBS games have allowed instant trading between players is because the effort and risk required to make a good trade route system was more than anyone wanted to deal with. Much easier to stay with the tried and true method. "Everyone else is doing it" isn't a good reason. You've provided other reasons, but none of those are insurmountable with a little creativity.
Really, the one problem that I think will be difficult to work out is the whole time-delay thing. That said, I think caravan-based trading is a necessity if they go through with their planned internal caravan-based economy. And I think we'll get used to it quickly; and I think it'll add another strategic component to the game. Just think of trade routes as another resource to consider when placing your settlements and planning invasions. Except they are even more strategic than regular resources because they can move under the right circumstances!