The answer is very simple. Our prophet Muhammad (peace be upon him) explained by example how Muslims should treat non-Muslims.
In Mecca, when Islam was a few people in number, he lived and interacted with non-Muslims (idol worshippers, specifically) peacefully. He would buy and sell from them, visit their sick, and they would even entrust him with their belongings (despite fighting him and oppressing him and torturing him and his companions). This is why they called him "Al-Amin," the trustworthy.
So in terms of ethical and moral conduct, he did not distinguish between people of any race, religion, social or economic background.
In Medinah, when he lived in a Muslim state, along with some Jews, he conducted himself the same way as in Mecca. All of the above applied.
As for "ahlul kitab" and people of the book, they are a brand of non-Muslims who have special favour in Islamic law -- we can eat their meat, marry their women, etc. Note that these are all personal actions.
Also, in terms of friendship, Islam allows friendship with anyone -- Muslim or non-Muslim. However, with one caveat: you are who your friends are. Would you make friends with someone who constantly attacks your way of life? Probably not. If you don't lie, don't cheat, don't steal, don't scam, don't fornicate, don't drink, would you really be compatible at a deep level of friendship with someone who does some or all of those things? Probably not.
So Islam encourages Muslims to seek deep friendship with those who are the best friends: the ones who will call you to good, forbid you from evil, and help you succeed in the eternal Hereafter.
Edit: Some proofs about this issue are below. First, the verse of Surah Al-e-Imran:
O you who have believed, do not take as intimates those other than
yourselves, for they will not spare you [any] ruin.
This refers to deep friendship and ruining you in your religious values, as I mentioned above; from the perspective of Islam, this is your hereafter, and that's the most important thing.
A hadith from Abu Dawud:
The Prophet (peace be upon him) said: A man follows the religion of
his friend; so each one should consider whom he makes his friend. Collected in Abu Dawud