Diplomacy and trade are inseperable. In order to cement good relations with your neighbors, signtrade agreements and conclude peace treties with them. You can do this by entering the "info" mode and going to the player status sheet, which is the upper most level, where you will see a piece of parchment in the lower right hand corner. Click on the parchment to enter the diplomacy menu. From here you can sign, or cancel trade agreements (coins) and peace treaties (cannon). Trade agreements between yourself and one of the computer players, or between yourself and one of your fellow players in multiplayer or network mode, offer you the advantage of being able to see the supply and demand situation in the warehouses and markets belonging to your "partners". This offers you an altenative to dealing with teamsters and trading ships when doing your buying and selling. Peace treaties help to prevent attacks by your "allies", letting you concentrate on trade and the further developement of your settlements.
The successful conclusion of a peace treaty, or a trade agreement, is dependent upom it's acceptance by the other player. His acceptance, in turn, is dependent on his general attitude towards you. The direction in which the thumb points shows the current attitude. If the thumb points down, offering a financial inducement can improve your chances immensely. You can do this by clicking on the thumb icon.
You are now in the "tribute" menu. You see by the angle of the thumb what change your financial offer makes in the other players attitude towards you. To pay the inducement, simply click on the hand holding out the money.
Once both parties have accepted the contract, or treaty, the appropriate parchment scroll in the diplomacy menu will unroll. Should you wish to break a contract, simply click on the unrolled parchment.
Ideally you should, as shown on the right, conclude both peace and trade agreements with all of the computer players, so that you ca concentrate on trade and developement.