IMovie HD does what's called non-destructive editing. When you remove parts of a clip, the original source material is always retained. That lets you restore a clip to its original state at any time, and recover from goofs.
So long as any clip uses a particular Media file, that Media file is never shortened nor discarded. When the LAST clip of a file is deleted, the Media file is discarded when you empty the iMovie trash. But never before.
If disk space is a problem, the solution is to buy an external hard drive where you store/edit your projects. Drives are cheap today, so that's a good solution.
When that's not possible, the project can be exported back to the camera, then re-imported to a new project. The clips you cut from the first project will remain on the cutting room floor.
One benefit of iMovie HD's non-destructive editing feature is that projects are no longer as vulnerable to the corruption that occurred in iMovie 2, iMovie 3 and iMovie 4. In those versions emptying the iMovie trash could lead to major problems, including complete destruction of the project.
There are lots of threads here that discuss the pros and cons of non-destructive editing. Search the forum for "non-destructive" to locate them.
If you export back to tape can you reuse it like a hard drive or do you lose quality.
There will be no loss of quality. The video is digital material, so it can move back and forth between the camera and iMovie with no change in quality. It's not necessary to use new tapes. (Unless your tape has been used many times, of course. On the contrary pros sometimes advise against using a new -- i.e. untested -- tape for important material.)
Karl