I think the difference is that what VSCode is doing is not an SSH Session like you get in a terminal with the ssh command or putty.
VSCode is installing a remote agent on the target machine that happens to use ssh as its transport protocol, and offers to share that transport with the user.
Is this a problem? Not if it only does things you want it to do. However any agent based system exposing an arbitrary API is suddenly a much bigger attack and risk surface area than the well trod (and still fraught) path of emulating a terminal over ssh.
VSCode is installing a remote agent on the target machine that happens to use ssh as its transport protocol, and offers to share that transport with the user.
Is this a problem? Not if it only does things you want it to do. However any agent based system exposing an arbitrary API is suddenly a much bigger attack and risk surface area than the well trod (and still fraught) path of emulating a terminal over ssh.