* You can change the size of the embark map by pressing U, H, K, and M (note capitals) when in the embark map. They may seem small but remember that you are actually playing on a map with multiple levels (sometimes hundreds of them), both upward and downward, which makes even a 4x4 embark site quite huge. This is why it's advisable to embark on smaller sites (I use 4x4 to 6x6) so that lag is lessened when your fort becomes large enough in the future and you start digging down deeper and deeper.
* And no, you can't expand while playing fortress mode (though you can always abandon a fort and move on elsewhere, or abandon it and then reclaim it with a larger embark zone).
* Yes. Diplomats and traders will regularly visit your fort. To trade, you need a trade depot built first. To speak with diplomats, you need a meeting area and nobles. If you reach a certain amount of wealth, your settlement gets upgraded until it finally becomes the capital of your civilization (in which case, the king or queen comes and lives in your fortress). If you kill enough people from certain civilizations, they'll declare war on you.
* It's planned to be like a 4x game (i.e. send out armies, conquer other settlements, make treaties etc.) in the future, but the current version isn't there yet. There are still plenty of ways to interact with neighboring civilizations though. Trade and diplomacy is already mentioned. You also get ambushes and seiges from hostile civilizations (especially from goblins). And if you get tired of playing fortress mode, you can play adventure mode and visit the different settlements in the world.