Now I wonder why Israel didn't built something TSMC-tier. It doesn't really seem out of their capability and it'll gain them a lot of advantages especially geopolitically.

Israel specialized in startups on the design side, and they absolutely dominate. Mellanox and annapurna labs come to mind. On the manufacturing side there's pretty much just Intel, which has 10nm node and beyond inside the borders and formerly owned mobileye. On the process side there's orbotech, which has a majority in their part of the market.

Other than Taiwan itself, it's hard to think of any "small" nations with a comparable density of semiconductor expertise.

Orbotech merged with valor sold to a amwrican cad company mentor i believe

Nobody did anything about Israel because they have the backing of the US (and are quite powerful themselves). I do hope China's leaders are not so stupid they think the passivity about Palestine means they will have free hands over Taiwan.