I saved the transaction to a USB stick but the file extension is .psbt. I tried opening the file for signing on the CSW but got "No items match your search" as a .txn file was expected.
No the .psbt file is what is needed. You just need to find it. Go to tools, then load transaction file, look for any file of .psbt. Sometimes when you use the direct search button with file name I think it doesn’t work.
You can as well decide to update to a higher windows version like windows 10. You should also try to make sure that the electrum wallet version on both airgapped device and the online one is same
Maybe creating a standard wallet with the CSW seed would solve the problem but at the cost of exposing the seed to the internet. I didn't create a Multisig wallet so I don't know what happened, what is the best way
No you don’t create a watch only wallet with a seed phrase or private key, it is not longer a watch only wallet again. You create it with address or master public key.