The effect of trade in your economy is huge. Trade income can be broken in three chapters that are handled separately with two appearing in the monthly tax income and the third in the monthly trade income.
Tolls are the sum of trade taxes from all provinces and depends on province population and your trade efficiency. They are lumped with other taxes.
Trade tariffs are collected from the merchants present in your CoT and they are one of the reasons why a CoT boosts your economy. They also appear as taxes. They amount to 3 times the number of merchants in the CoT in Ducats per year, so if the CoT is full you will get 60D per year, or 5D per month. Early on this is a huge income. Go get yourself a CoT if you don’ t have one, and if you do, go for another. Owning a CoT has the additional benefit of giving you a bonus extra merchant per year.
Trade revenue depends on the number of your merchants in CoTs, times the percentage of the CoT value they get, times the percentage of your trade efficiency. This value divided by 12 is what appears under trade in your monthly income. It is likely to become your main source of income unless you colonize like crazy. At the beginning of the game don't bother sending merchants to CoTs that you don't own. The exception is if you are one of the lucky countries (like Venice) that start with a Trade 3 level, while everybody else is at level 1 or 2. Around 1500, once you have raised a level or two in Trade, you should start sending merchants to selected CoTs to see how well you compete. Even if you break even, trade is worth it, since its income goes directly to research through the monthly income.
An added benefit of trade is that every 100 units of grain traded improves army support by 2K men. There is a similar benefit on naval support for the trade of naval supplies.
Start with low competition CoTs (peripheral) that are nearby (low cost to place) and with good trade value. Tago, Anglia, Andalusia are usually good. Avoid cutthroat Veneto and Liguria, your merchants won't last there until you reach a good trade efficiency. Exotic CoTs are great, even if expensive, if you get to discover them. Once you have 5 merchants in nearby CoTs, you are succeeding and can move to other CoTs. If you go through a low stability period, start to rebuild your merchant network once you regain at least 0 or +1 stability (-1 if you have a big trade advantage). Otherwise you lose money. The administrative skill of your monarch also affects the ability of your merchants to remain in the CoT.
How to send the merchants?
Do not auto-send. There are two techniques. Sending the merchants in batches of three is the easiest. The rationale is that one will fail, the next will compete other nation’ s merchant, and the third will take the available slot. Many times it doesn't work, but is much better than sending them one by one. The other technique is the available slot one. You check in the ledger which CoTs have some slots available. It is the competition value. If it is 100% then the CoT is full and you avoid it. Every 5% below 100% is one slot available. That way you send your merchants to different CoTs, all with available spots. This technique has been proven to be slightly superior, to the batch technique, but it requires a little bit of extra work. Also avoid sending merchants on the first day of the month. The AI is a great expender and usually runs out of money. On the first day of the year and on the first day of the month, as the AI gets the money, lots of nations flood the CoTs, so the first day of the next month, competition is at its worst, and you don't want your merchants arriving with the pack. Some say the second day of the month is slightly better than the rest as there are more slots available from the fierce competition of the first day. See Sending merchants strategies.
They require Trade 3 level, and are rarely worth it early on, because the sixth merchant gets kicked very soon. Exceptions are: It's your CoT, it's an exotic CoT with ignorant natives (Cuzco is great for that, but it usually disappears due to lack of competition), or you have a huge trade advantage. It's also a good way of getting banned by the CoT owner. Monopolies direct any empty slot income directly to the monopoly owner and are a very good source of income once you lead in trade. Having a monopoly will give you an extra merchant a year. By sending merchants to your monopoly, you compete out other nations merchants, increasing your share of benefits, although if the CoT is yours you lose part of the tariffs. Theoretically you can get all the trade in the CoT, but once the competition diminishes, the CoT disappears and reappears somewhere else, so don’ t overdo it.
If you are a successful trader, once trade level 4 is reached by other nations, you will be banned by the CoT owner that feels threatened. To avoid that, you can get a trade agreement with them or depending on your personality use it as a CB to go to war with them and perhaps take the CoT for yourself. If you win the war (you have to get some money or provinces) the trade embargo is lifted, the resulting truce prevents them from banning you for 5 years. If you want, you can deny access to your CoTs to your enemies, but do it while at war with them to avoid the stability hit. I personally don't like trade bans, because if you go Free Trader in your DP, you get a reduction in your trade efficiency and your trade research if you embargo. You also give them a permanent CB and I don't think that you harm them that much, since there are so many CoTs. Most AI nations will lift the ban when your merchants have disappeared or reduced. A strategy that many of us use sometimes to gain a CB is to prepare for war, cancel the trade agreement and flood the CoT with merchants. When the trade ban comes, we just declare war and march on, but that is naughty.
There is only one reason to sign them, to avoid being banned by the CoT owner. It is really your choice. I usually avoid them unless the alternative is getting banned. I never have them with non CoT owners. TAs also reduce your trade efficiency by 1% (up to 5% in some beta patches), so they could hurt you more than help you. In theory, if you have too many of them your merchants will have problems establishing in the CoTs that are full. I recommend having a TA with Spain, since spanish AI will embargo you for life, and usually they own several rich CoTs.
Although it exceeds the aim of this guide, you probably have noticed that new CoTs spring suddenly in some provinces, and might also disappear or move to a new location due to lack of competition. Also provinces can change the CoT they feed. To improve your chances of getting and keeping a CoT there are a few things you can do. CoTs favor provinces (or colonies) that belong to nations with a high trade efficiency, and city size plays a secondary role. Being mercantilistic favors that your provinces trade in your CoT, while being free trader favors other nations provinces close to your CoT to trade there. Finally do not strangle your CoT by driving competition out. If you gain a monopoly do not drive out all the competing merchants to take it all, that all could turn to nothing.