Annotating paper in Google Drive - changes synced?

Yes that works.

If you annotate a PDF in an external application and the file is correctly synced back to Google Drive the changes will be reflected in Paperpile. Paperpile will notice that the file has been changed and will show you the updated version. The file in the starred folder and in the main alphabetical folders are always identical (i.e. they are not copies they are the same file), so that should not cause problems.

The only caveat is that if you use a sync client, like for example inSync on Linux or GoodReader on iPad that do not fully and/or correctly implement the Google Drive API, this will cause trouble. See here and here.

But with generally the workflow you describe should be ok.