How does trade actually work?

What does trade actually do besides act as a footnote. I haven't noticed any difference between supposedly wealthy trade empires and dirt poor hermit empires. What's to technically stop my nation from just not trading with anyone and a nation saying I'm one of the most wealthy nations in the galaxy. Likewise, if a nation was supposedly extremely rich, why would it build its war machine at the same, ceilinged rate as the rest of the factions in the RP.

I think its supposed to be in the interests that the mechanics of the game are fair. But in all honesty, it means that attempting to get on with anyone in the game unless your opinions are totally aligned at that one time means nothing. Examples include the Korrae Union, and Omni's faction. They quietly make the odd post, however it seems to be they have no real foreign policy incentives. And in history the basic incentive of any civilisation is trade and conquest. We mebbe have the conquest but not the trade aspect, I think that if you're going to implement some sort of system, it should have its limitations. Like, it wouldn't be galactically feasible to trade with people 900 lightyears away from you.

I sort of have a rough system for how I think trade should work, including exports and imports. It seems a bit complicated though. I'm actually going to take into account some systems you've inspired me with there, like the proximity trading thing.

Trade is handled ingame, there is no RPG mechanic to actually provide an incentive to trade it's a completely RP-centric feature as is most others. This isn't Civ.

But how can you give people rewards for trade agreements and likewise punish people for embargoes if the fleet compositions are controlled by points?

It's all IC, quite easy really, just involves a bit of common sense on behalf of us players.