For Seven.the.Hun's question, I simply sink them all. I don't care about the faction being allied or neutral, I simply sink them.

I usually have 5-8 provinces capable of building ships and that usually means that I can outproduce any AI faction in terms of a navy. Besides, first strike gives a nice little advantage in naval combat so I always attack first.

I would sink them all and not risk any disruption to my trading. Only exception is early in the game if my trading is not set up yet and I can't afford a naval war.

gaijinalways, it's funny that you are talking about opportunity costs. This might turn into a full blown economics course Anyone though about the rate of inflation and unemployment within MTW? possible tabulation of number of mercs for unemployment statistics?

yeah, my first few games I didn't know to trade but I'm a huge trader now in every game. I guess I would only not trade to make the game harder.