Essentially smuggling requires a market opportunity involving huge difference of prices, demand-supply mismatch and relaxed border checks. You open up your border/trade routes and all 3 incentives vanish overnight. I will give you 4 more reasons.
Ability to do an illegal activity depends largely on how much your conscious approves of it. Betting rings, gambling rings are easier to create and operate than a narcotics dealership.
Basically. its easier to recruit and convince people to ignore them. Even the authorities are more likely to let go a better off with a warning/bribe than a drug/arms dealer.
Smuggling has terrible supply chain management. Your goods gets confiscated, bootleggers charge exorbitant logistic charges, delays are common, you have no control over inventory and payments. Wallmart will tell you how many zillion dollars you could recover by improving it.
All the profits of smuggling is shared between the smuggler and the buyer and none of it goes to the seller (who in many cases is unaware of the final destination). Also you cannot advertise across the border or provide after sale services. So the manufacturer and marketeer have all reasons to promote legal channels over illegal ones. No wonder Nokia is fighting so hard to curb the grey market of its cellphones in India.
The revenue generated through customs is something that was earlier profit of the bootleggers. So you can fight them better with their money.
Its just the same with smuggling. Its easier to convince someone to smuggle mangoes, medicines or machines than drugs and arms even though both involves currying a 20kg load on your back across the border. That bag of medicines can always contain some contrabands, after all nobody is going to check it. But if the mangoes, cd player etc is priced same in both places, under what pretext are you going to bootleg?
Last, but not the least anything that goes underground becomes messy. Take film industry or land mafia for example. The anarchic laws do not provide for a way for financing of movies and transfer of land so it becomes a breeding ground of goons. Same was true with casinos in Las Vegas, or businesses during license raj. If you open up these sectors and stream line the laws, not only do these industries boom, but crime is combated.