Trading can both be a legal, and illegal way to make money. Trading of any kind does change how the economy goes in all markets, as well as increasing your total reputation. Making successful trades can lead some people to do generous donations to you, and boost your work with a big money pack. While with smuggling, you do get reputation, but you get lawless reputation, meaning that pirate parties will be less likely to attack you, or interfere with your business.
This kind of trading is the most safe, and usually the most profitable one. You will need a great trading ship for large and profitable transports, or you could use a small and fast ship to transport data. Data transports are the easiest and safer ones, as pirates probably won't try to take you down for cargo, since you don't have any. These data or cargo trades can be done on your own, but most of the times they will be offered to you as missions, with usually a great reputation income, as well as a big (or small) pay.
Smuggling is the darker side of trading. It consists in accepting pirate missions to transfer either non-legal commodities, stolen commodities, or sensitive and/or confidential data, as well as pirated data too. Smuggling is dangerous, from both sides: The people who give you these missions are not the most trustworthy ones, and on the other side smuggling of any kind can be a light or severe law infraction, that can lead to big sanctions.
Both of these activities do raise reputation levels, Trader does help with LegalRep, while Smuggling raises your IllegalRep.