The difference is whether or not Google can see your passwords.
When you use a passphrase, your data will presumably be encrypted with your passphrase and thus only be visible to you with knowledge of the passphrase. Not even Google could see the data while it would be stored on their servers.
Encryption during transit means that no bad actors like hackers, unscrupulous ISP's or overzealous governments can access your data _while_ it travels over the wires towards Google's servers but Google can still do what it wants with your data.
When you use a passphrase, your data will presumably be encrypted with your passphrase and thus only be visible to you with knowledge of the passphrase. Not even Google could see the data while it would be stored on their servers.
Encryption during transit means that no bad actors like hackers, unscrupulous ISP's or overzealous governments can access your data _while_ it travels over the wires towards Google's servers but Google can still do what it wants with your data.