The two parallel passages at the centre of this chapter make an argument that is unusual in early Chinese political thought, and it is worth setting against what surrounded it.
The standard position, held across several traditions of the period, was that government works by matching response to conduct. Reward the good and punish the bad, and behaviour will follow the incentives. Whole administrative systems were built on the assumption, with graded ranks, measured penalties and careful attention to making the response reliable.
This chapter denies the premise for two specific qualities. If the not good are treated as good and the untrustworthy are trusted, then goodness and trust are attained, which means they are being described as things that come into existence through the treatment rather than as prior facts the treatment responds to.
The claim is narrower than it looks and the chapter keeps it narrow. It is made about goodness and trustworthiness, not about competence, and not about whether a crime should have a consequence. A system of graded penalties is not what is being addressed.
It is also not a claim about the moral improvement of individuals. The subject throughout is a ruler and a population, and what is attained is a condition of the whole, which is consistent with chapter fifty-seven, where the people become straight, prosperous and simple of their own accord once the ruler stops acting on them.
Chapter seventeen supplies the endpoint of the same argument. The best ruler is one the people barely know is there, and when the work is done they say they did it themselves.