The U.S. and its allies have two choices:
1. Officially recognize Taiwan as a country and make it an explicit ally.
2. Give Xi the green light to annex Taiwan.
I don't see any middle ground here. Failure to do #1 is functionally the same as #2.
Instead, the current US position is strategic ambiguity. It is clear there is probably a line somewhere after which the US will intervene, but it is not clear to either side where this is. The goal is that this will deter both sides from changing the status quo, but as China becomes increasingly aggressive it may be necessary for the US to make its position more explicit.
From the sounds of it, Taiwan doesn't want to declare its independence nor signal there is no hope of peaceful reunification with mainland China because either of these would trigger an attack mandated by PRC law.
It really does seem as though Taiwan is between a rock and a hard place here. To gain formal status as a country and enter formal mutual defence treaties, they'd have to trigger a Chinese attack. If they don't have formal treaties, they could be absorbed at any time without anyone doing anything. It's either certain attack or risk an attack with no allies.
Talk about being held hostage. There should be more international pressure on the PRC to eliminate Article 8.
This position is (also awkwardly) preferable to People's Republic of China, since they see it as better negotiating position for reunification, rather than Taiwan independence.