The fact that the US allows companies to flat out steal your device during a repair process is insane.
The US doesn't allow it. Google won't keep your phone; they'll just refuse to service it. They had that line in their TOS for their own protection for weird scenarios, but they're not going to keep your phone. Why would they? It's broken and full of parts they can't use; they're not going to just let it occupy space in their warehouse, they'll send it back.
This whole thing is an absurd overreaction to a poorly-written line in a TOS that has never even been enforced.
it sounds like the unlikely outcome of two reasonable policies.
you might not get back the device you send in - say it's a simple broken screen and they're willing to cover it. its easier to just send you an already refurbished identical model and then toss your phone into the queue to be fixed later.
unauthorized parts may violate your warranty and whatever you send in isn't going to get repaired.
They should still just return it. but if you know it's not covered you shouldn't really send it in and it makes sense to cover their ass policy wise even if they do make an effort to just return them.