As Spencer Walpole [Land of Home Rule, ch13] so aptly puts it
"Smuggling, paradoxical as the statement may seem, has in every country been the creation of law, for the difficulties which law has imposed, and the exactions which it has levied, on the trader, have alone called the smuggler into being and made his calling profitable. The regulations which were placed on the trader in the Isle of Man in the sixteenth century must necessarily have given an impulse to smuggling. The trader was treated almost as an enemy;...
Smuggling, or 'the Running Trade', was for nearly a century a major activity of the Island - good's could be legally imported into the Island where they paid a small duty to the Lord of Man. These goods were however either forbidden (e.g. certain goods from the East Indies carried in non-British ships) or subject to a high duty (tea, spirits...) when imported into England, Scotland or Ireland. Thus whilst no Manx laws were broken, except by those greedy merchants who wished to avoid all duties, great encouragement was given to those who wished to break the laws of the neighbouring countries. Many major, and otherwise respectable, merchants in the Island (e.g. George Moore of Peel) made their fortunes from this trade. Such great damage was done to the collection of British customs duties that the British Government forced the sale of the Regalities of the Island in 1765 (Act of Revestment) - although this was supposed to stop most smuggling the trade continued (now of course illegal under both Manx and British law) until the mid 19th Century.
Train dates the start of the smuggling activities to c.1690 when a band of adventurers from Liverpool settled on the Island; the English goverment had started to station agents on the Island from the 1700's (the authorities sometimes cooperated and at other periods hindered them) - George Waldon in early 18th century was one such agent. Waldron may have have been stationed in response to a suggestion by James Isaacson to Earl of Oxford dated 18 Aug 1711 in a letter about Scotch customs he requests "and also to have an officer at the Isle of Man to prevent as much as possible the running thence of wines, tobaccos and other goods (which has been but too frequently practised) to Dumfries, Kircudbright, Glasgow and other Ports" [HMC papers of Duke of Portland vol X]
However the trade was further enhanced when in 1720 the Earl of Derby farmed out the customs duties to two Merchants - Richard Macquire from Dublin and Josiah Poole from Liverpool. This pair appeared to make so much money from their scheme that they could not stop boasting about it. At one time they even attempted to coin their own money on the Island - eventually Tynwald became alarmed and applied some restrictions on them though it was probably the 'blockade' on Manx trade imposed by the British Government that had the most effect. In 1736 with the accession of the first Athol Lord some check was applied with the appointment of James Murray, previously receiver general of Scotland, as Governor. Within a couple of years this gamekeeper turned poacher and realised that by imposing small Manx duties he could turn the smuggling trade to the great advantage of the Duke of Athol. The extent to which this legitimate (by Manx law) trade had developed by 1750 can be seen in the letters of George Moore.
M PostlethwaytUniversal Dictionary gives some of the reactions to the trade in 1755
The Commissioners of the Customs called for a report from various Collectors in 1764 - those for Dublin, Lancaster, Liverpool, Whitehaven and Scotland supply many details
Spencer Walpole Land of Home Rule, ch13 gives some discussion of attitude of Tynwald and earlier smuggling into Man.
J. Train Historical and Statistical Account ... Vol 2 1844/5 chap 22. - gives anecdotal evidence of post revestment smuggling via Galloway.
That smuggling continued post 1765 is obvious from the many depositions taken by the 1792 Commission of Inquiry.
A.W.Moore History of Isle of Man, 1900 Book 3 Chapter 2 section 3 and Book 4 Chapter 2 section 3
F Wilkins The Isle of Man in Smuggling History Wyre Forrest Press 1992 (ISBN 1-897725-00-0) - certainly the first reference book that should be consulted though at times requiring careful reading, and its lack of index is especially frustrating.
F Wilkins George Moore and Friends Wyre Forrest Press 1994 (ISBN 1-897725-07-8) - deals with the letters of George Moore, Peel merchant.
F Wilkins The Smuggling Trade Revisited Wyre Forrest Press 2004 (ISBN 1-897725-12-4)