Like so many issues in ED, smuggling could be "fixed", as a rush-inducing, high risk high reward thing like all criminal activities should be. All there is to do, is apply a little bit of the thing that FD unfortunately seems to hate the most: logic.
First of all, a bit of trivia: why does smuggling exists in the first place? Because there are always people seeking to get their hands on legally unobtainable things, like for instance drugs, or weapons, etc. And why do smugglers risk themselves breaking the law and possibly getting caught, to provide those people with the goods they seek? Because those poeple are willing to pay a lot of money to obtain those goods.
What needs to be done?
- Black markets must pay, for illegal goods, quite higher above market value, not less than standard market value as they do now. High reward: fixed.
- If the smuggler is caught with illegal goods, he should not only get a high fine, station faction rep should take a big hit, and most importantly the illegal goods must be impounded as well (I mean, when was the last time a smuggler was caught but still allowed to sell the illegal goods?...). High risk: fixed.