Haven't actually tried it, but it's fairly simple. '-' as an output filename tells tar to write to stdout. '.' says to archive everything in the current directory.
Without the parentheses, all that junk would be piped into the cd builtin, which would do nothing. With the parentheses, the output from tar is piped into the stdin of the last command, which is another tar. This second tar is waiting for a file on stdin ('-' here means stdin), which it dutifully "extracts" to the new working directory (/mnt/loop1 in this case).
It's quite similar to 'cp -r . /mnt/loop1'. There may be some subtle difference that I'm unaware of. Where'd you come across the command
? Do they offer a rationale for such a method?
Or is this homework, and I'm a damned fool.