I know very little about BLE, so my below thoughts could be totally wrong.
I'm thinking most, if not, all smartwatches use BLE because the batteries are very small in those devices, so low power usage is a must.
For it to be a "rule" that anyone who wants to use ANYTHING that uses BLE that they will need to keep location ON would be totally outrageous!
Before the new location permissions rules, apps were able to "scan" for nearby wifi aps and bluetooth devices. But because of the use of bluetooth beacons and database's created by streetview cars, an app was able to possibly determine a users location even when GPS was off.
I believe that is why google now requires "location" permission if your app wants to "scan" for nearby devices.
But, once your app has been paired to a device, it no longer needs to "scan" for other nearby apps, so my thought is that it shouldn't require the location "function' to be on just to "connect" to a previously paired device.
My thought is that there must be a way to store a paired devices's MAC or other ID, and that their is an alternate API that you could use that ID to directly connect to that device again without calling a "scan" function (because that would require locations services to be on).
So, I can see that location service needs to be ON to "scan" and "pair" to a NEW device, but once that is done, I am thinking that location services does NOT need to be on to simply connect to a paired device because a user's location privacy can't really be violated by ONLY connecting to a user-paired device (and not doing a "scan" for non-approved devices, which could leak a user's location without their permission).
Otherwise, like I said, it would be crazy to require everyone with a smartwatch to leave location on so that google can monitor your location 24/7!!!