You are right about smuggling petrol or alcohol in the US however I have heard there is a rising problem with smuggling illicit tobacco in some countries (generally sold as fraudulent products). So would the current drug production move towards producing cheaper fraudulent drugs?
I actually like the idea of legalizing some drugs as it will bring control to drug production (preventing cutting drugs with other drugs or other dangerous chemicals). I would certainly prefer a incremental implementation, so start with the weaker drugs and move upwards.