The spatial distribution of economic activity is known to depend on trade costs, both international and domestic. This paper examines the interplay between these external and internal trade costs using a model of trade and production that we test with the organized manufacturing sector data for India from 1989-2009. We establish that the trade liberalization episode of the early 1990s helped spread manufacturing away from the primary region (districts closest to ports) to the secondary region between 1994 and 2000. Such dispersion of activity away from primary to secondary region was driven by high internal trade costs that insulated manufacturers from import competition. This trend, however, reversed post-2000, a period of massive decline in internal trade costs, attributed to the Golden Quadrilateral
highway upgrades. During this period, the districts along the highway network in secondary region gained market access and manufacturing activity, while the ones off the network lost. Irrespective of the period, or the nature of trade costs, manufacturing activity in the interior region (districts farthest from ports) remained depressed, thereby emphasizing the importance of complementary conditions in driving territorial development.