The move comes after China sent its only aircraft carrier, the Liaoning, through the Taiwan Strait in January, in one of a number of military drills held as relations deteriorate.
Taiwan last week warned of an increased invasion risk from China and has pledged to boost its military in response.
Tsai called the launch of the submarine plan a “historic moment” at a naval base in southern city of Kaohsiung.
She was presiding over a formal signing ceremony to initiate the project between the navy, Taiwanese shipbuilder CSBS Corporation and the National Chung-Shan Institute of Science and Technology, which develops combat system integration.
Delivery of the submarine is expected to take eight years and is part of the island’s “indigenous defence policy”, said Tsai.
“I want to tell you all that the Taiwanese always face challenges bravely and overcome them,” she said. Taiwan’s navy currently operates a fleet of four submarines, bought from abroad, but only two of them can be deployed in the event of war.
The other two were built by the United States in the 1940s and are only used in training as they are too old for combat.
As part of her visit Tuesday, Tsai boarded Taiwan’s Zwaardis-class submarine the Hai Hu, which was purchased from the Netherlands.
Tsai watched the simulated firing of a torpedo while on board.
Beijing still sees Taiwan as part of its territory to be brought back into its fold, by force if necessary, even though the island has been self-governing since the two sides split after a civil war in 1949.
Ties have worsened since Beijing-sceptic Tsai took power last year, ending an eight-year rapprochement. Tensions heightened further after a protocol-busting call between Tsai and Donald Trump, following his US election victory.
The US is Taiwan’s most powerful ally and main arms supplier, despite having no official relations with Taipei after switching recognition to Beijing in 1979.
But Taiwan has turned to the domestic submarine project after years spent waiting for US models. A long-stalled offer approved by then US president George W Bush in 2001 to supply eight conventional submarines has never come to fruition.
Defence minister Feng Shih-kuan has said the Liaoning’s sail near Taiwan highlighted the need for the island to press ahead with building its own subs.
Taiwan also announced last month its bid to create a new generation of locally built jet trainers by 2026.-AFP