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 not to 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 phenomenon 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 even, sometimes despite the rest of the world being a full-fledged High Fantasy or Heroic Fantasy world, even if the culture in question also had tons myths and story that would make it a great fit with the former! A perfect 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.
A simple equation can solve this problem: keep the fantasy level "equal" if you're going to have different ethnic fantasy regions side-by-side. Suppose you make the faux-Chinese or the faux-Arabs or whatever have less magic than the faux-Europeans. In that case, that's a no-no (especially with the formers had a richer story well of mystics and warriors doing very 20th level character things compared to the conservative feats of medieval Christian stories.)
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
- Malatra - Stone Age Indo-China 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.
- The Islands of Sina Una - Fantasy pre-colonial Philippines in Dungeons & Dragons.
- 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.