Trade is used to generate science or gold depending on how you have your city set. On the XBox, hitting the "Y" button in the City Screen toggles whether a city is producing science or gold.
Each type of terrain produces a given amount of trade, just like it produces a given amount of food (apples) or production (hammers). Generally sea tiles produce 2 trade units and most land tiles produce no trade units. Those trade units can be converted to gold or science depending on the toggle described in the previous paragraph.
