Ethnic Fantasy is a catch-all term for a variety of Setting Aesthetics all rooted in the same basic idea: take a specific real world locale, and more specifically its history & mythology, and build a fantasy setting out of their specific trappings and tropes. Essentially, if you're making a setting specifically as "Fantasy Egypt, Japan, China, whatever"? You're making an Ethnic Fantasy Setting. Whilst this can be highly interesting, especially compared to the more generic and kitchen-sink style fantasy you tend to see in games like Dungeons & Dragons, it's also a potential recipe for disaster, because it's hard to think any Setting Aesthetic more inherently /pol/ connected.
To get the most obvious problem out of the way; Ethnic Fantasy settings are often (but not always) tied to the histories and beliefs of real world people who have often gotten a pretty shitty deal in real-world history. So, understandably, they can get a little touchy if their myths and stories aren't treated with respect. Now, this is obviously a vague line to be crossed, and it depends a lot on the fact people are people wherever you go - for every guy who just wants people to not treat his people like a bad joke, there's a guy who is sincerely interested in sharing his culture and myths to a new and interested audience... and a third guy who wants to shout "racism" because it gives him power.
This doesn't make Ethnic Fantasy settings inherently bad, just that they get much better reception if you put a bit of honest effort into researching things and try to avoid obvious blatant racial stereotypes.
The other major issue with Ethnic Fantasy settings is a phenomena more associated with Dungeons & Dragons in particular. This issue is a tendency to become particularly fixated on representing real world history and/or "accurate" portrayals of mystical entities and abilities within that setting - in effect, forcing the setting into a Historical Fantasy or Low Fantasy route, sometimes despite the rest of the world being a full-fledged High Fantasy or Heroic Fantasy world! A particularly good example of this is Maztica, where you have an entire continent whose only access to magic are gimped Clerics and arcanists who create "Pluma" and "Hishna" magic... whose magic is so minor that they are handled as rogue kits! And yet, somehow, these people are living in the same world as non-gimped clerics and fully-fledged wizards - it's even a plot point in the tie-in novels that the Faerunian invaders effortlessly curbstomp the native Maztican forces because their magic is more powerful and abundant than anything the Mazticans have seen before. This is something that more than one fan has called out as part of the problem when denouncing Maztica as racist.
This problem can be solved by a simple equation: keep the fantasy level "equal" if you're going to have different ethnic fantasy regions side-by-side. If you make the faux-Chinese or the faux-Arabs or whatever have less magic than the faux-Europeans, that's a no-no.
Known Ethnic Fantasy Settings
- Maztica - Pre-Columbian South America in Dungeons & Dragons
- Kara-tur - Medieval China and Japan with a dash of Korea in Dungeons & Dragons
- Mahasarpa - Medieval India in Dungeons & Dragons
- The Horde - Mongolia under Genghis Khan in Dungeons & Dragons
- Anchorome - Pre-Columbian Central/North America in Dungeons & Dragons
- Amonkhet - Egypt in Magic: The Gathering
- Ixalan South America in Magic: The Gathering
- Rokugan - Fantasy Japan
- Damn near any locale in Golarion
- Lok - From the Saga of the Forgotten Warrior books, which actually "sold well" in India, which shows such a setting can absolutely appeal to the culture it's based on.