This is to say nothing of the problematic aspects of fantastic racism, such as implying race = species (ugh).
I have only seen one fantasy novel subvert that: The Goblin Emperor, by Kathleen Addison. In it, elves and Goblins are essentially different ethnicities of the same species and can reproduce with viable offspring. Goblins tend to be larger and stronger but not always, and elven and goblin royalty intermarry.
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