I've also had similar thoughts about such a trade, and I'm not quite as skeptical as some here. Giving up Taiwan is not going to be a blow to democracy everywhere, or make our allies distrust us. Taiwan has very little soft power, and it really hasn't ever done any kind of activism on the part of democracy, ever. Moreover, China has opened up quite a bit since we last re-evaluated our Taiwan policy, so even if this is about democracy one would have to take that into account. The analogy here with Japan is academic, as nobody in the region wants to see Japan re-arm itself. A similar trade could also be discussed for Korea, but this would only be in the very long term, after North Korea cleans itself up the way China has.

The only main caution I would have about this would be whether the Chinese are actually concerned over military control over Taiwan as they say they are. It would of course be a disaster if the US executed such a policy to only a lukewarm response in the PRC. It could be more effective to simply arrange some kind of apology for historical whatever, or to concede on some question of governance philosophy or the like. The US supposedly specializes in understanding foreign cultures better than they understand themselves, and this may be a case where that sort of skill is necessary.

I wouldn't totally take a Taiwan political trade off the table. It could be a useful element of our foreign policy 'toolbox' in that region, to at least hold in reserve. One should assume that the end of American protection would immediately mean a PRC conquest; however this wouldn't be bloody if Taiwan were convinced that they would lose and the US wouldn't back them up. So such a move would need to be planned very thoroughly.