The isolation card has been there since 2001. But the USN knows about this from the start and even up to now, hasn't given an approval sign.
The fear is that if the US starts building diesel subs again, the USN may be forced by congressional pressure, to buy diesel subs. That's why the USN does not even BUY diesel subs from Germany, Sweden, etchetera, for its own Red Flag Aggressor purposes. Everyone knows that to win the budget battles, you need to always present only the most expensive foot forward. For NASA it is the space shuttle. For the USAF, the F-22. For the USN, the AEGIS destroyers and the nuclear subs. You can't let them show a chink in your armor, because one thing leads to another.
It seems pretty okay for the USN to completely lose the post war export sub market, which has sold well over 50 submarines, a large portion of which were Type 209 and to Germany's pockets, just to hold this all nuclear sub position. Losing the Seawolf class in the budget war is a big blow to the Navy, they're going to lay the line down on the Virginia class.
The nuclear submariners can easily show reasons blocking the ROC sub sale. One the 8 subs probably won't matter much, the ports would be so blockaded anyway and so deeply outnumbered by the PRC subs they won't stand a chance anyway. More Virginia class subs stationed in the West Pacific like Guam or Okinawa would present a much better chance for Taiwan's defense. Second, Taiwan herself is not considered an entity that is well trusted and there are many that believe that sharing technology to Taiwan means eventually passing it to the PRC itself. Part of this distrust also has a streak of racism in it, and this distrust pops up in matters like the Wen Ho Lee case.
In any case this leads to a counter alternative, that providing if allowed, the USN is going to pour through the new diesel sub design to make sure certain classified technologies are not going to be passed to Taiwan, and these are the secret "stuff" for the sonar, sensors and most of all the quieting technologies. The end result is that the new sub won't really perform that well, despite the marketing and mouth hype. The downgrade will also serve the nuclear faction well, because the sub's performance won't be a threat to nuclear submarines, and the USN will keep its Virginia sub budget.