How does tag mode wrk??

Tag Mode is a mode on ACWW in which you activate it and put your DS in sleep mode while you take your DS with you. The point of it is to hopefully encounter somebody else in Tag Mode when you're out and about and exchange information and in game data. Unfortunately, this mode is very underused and I highly doubt you'll find somebody at random, especially with the age of ACWW.

really it only exchanges bottled mail with you and your friend

Actually, by exchanging data, like Nintendude says, it exchanges bottle mail, sometimes patterns, constellations, and even neighbors.