There is plenty of middle ground between the two extremes and I would rather go for that instead as I have previously outlined.
My main objection to your plan is how we are rewarding the Khem for their actions and weakening our own people in the process. If you can find a way that does so without strengthening them at the expense of our own people such as giving our trade and income
There
is middle ground, but what you've outlined doesn't meet any of that: being unwilling to sacrifice anything that "hurts the Ymaryn", no matter how small, like 0.1 income.
(I assume, if you're going for the middle-ground, that you have dropped the more extreme planks of your policy, such as additional gun sales to Khemetri's enemies; as that certainly is not middle-ground.)
This amounts to doing nothing except that which improves the Ymaryn's short-term interest: hardly a policy to make us seem less as rivals, or more as friends.
You want a free lunch with the Khem. Such a thing rarely, if ever exists in diplomacy: why would they give you anything without you being willing to offer any considerations?
Alternatively: if you're not willing to give them a free lunch, why would they?
I don't see it working as neither us or the Khem are dependant on trade.
Dependent or not, the Khemetri are "trade rivals"; it was surprising they hadn't rivaled us before their humiliation considering our competition in places like Kus.
Positioning the Ymaryn increasingly as middle-men weakens, then eventually drops that rivalry. If that doesn't work, medical cures also help to show the Ymaryn as friendly to them.
(If that's not enough, we also have Aranfan saying it's implausible to have a rival with high Opinion.)
An important note: "giving trade to Khem" is a misunderstanding. A trade deal, most likely, mainly reduces tariffs; in doing so actually
increases trade. In particular, it only reduces tariffs between the Khem and the Ymaryn, so a third-party wouldn't be bypassing the Ymaryn to go to Khem: they would still be trading through us, and we would be acting increasingly as middle-men.
This incentivizes the Khem, in fact, to
come to us, rather than the other parties, as they are not the ones offering reduced tariffs.
Regardless of absolute dependence, the Khem traders (and the wealthy benefiting from their products) will throw more of a fit if their lucrative Ymaryn deals are threatened by war.
The upper classes are going to behind all of our policies. We don't live in a democracy so as far as I am concerned, the impetus behind all of our policies is members of the upper classes.
And we will get a narrative of the upper classes ignoring the lower classes' protests, selfishly going to war to preserve their own prestige. It will very much call into mind the lesson of Sherynyt, leading to increased instability in the Ymaryn, along with the enduring moral that:
"Our leaders never listen; even just fifty years after Collapse, they're still making the same mistakes. Out of that same pride."
Narratively, this leads nowhere good.