iCloud Desktop and Documents will move these folders from ~/username/ to a directory buried deep in the file system, and create a Finder Sidebar link to these hidden directories. The only files and folders iCloud will upload to the cloud are files dropped into these folders. Well, also files associated with apps that support iCloud sync which will have their own folders.
With Optimize Mac Storage enabled, if your local drive gets full, your files will be left in the cloud but removed from your Mac to preserve space in the internal drive.
If you want to just sync the external drive to the cloud, you might want to look at other cloud services like Dropbox which allows you to specify which folders to sync to the cloud.