Why not ermee? Is it the difference between "with it" and "with this"?
Im finding it hard to read this. Is it just a matter of memorizing these 'er' phrases?
It is common to combine er, hier, and daar with prepositions into one word, so I think it is better to realise that and try to recognise those words, than to start memorising phrases. To give you an idea how common these kind of words are, have a look at the possibilities in this list: https://onzetaal.nl/taaladvies/advies/er-voorzetsel-werkwoord#lijst
The issue is I don't understand how "hiermee" could ever possibly translate into "with this". It seems like a memorization thing.
Hier does mean here. This is just another way of using it. Hier stands in for a pronoun such as dit or deze (this, these) when combined with a preposition. The same construction can be used in English, although it has become uncommon and now sounds quite antiquated, whereas it is still the standard in Dutch. This type of usage only survives in any noticeable way in English in a few words like thereby and thereof, many of which connote legalese and high formality. But Wat doet hij hiermee? could also be translated as What does he do herewith? by the same rule.
If followed by a specific object, you'd use "met dit". If left unspecified, you need "ermee" or "hiermee". Ermee and hiermee always refer to something mentioned before.
"Wat doet hij met dit ding?"=What is he doing with this thing? "Wat is dit ding, en wat doet hij hiermee?"= What is this thing, and what is he doing with it?
hiermee can mean both "with this" and "with that" ? Or is there a word for "with that" ?
The usage here follows a pretty striaghtforward near/far dichotomy.
Hier = this (here)
Daar = that (there)
So with that would be daarmee.
Ermee is the unstressed version, so it refers to whatever is already understood as the object in question, regardless of how it would be translated to English.
Can this be also understood in less literal sense? As in "what does he has to do with this?"