Racials SHOULD be usable in the arenas.
If you take racials out of use in arenas, may as well take them out in PvE for the SAME exact reason.
Like someone said before, choosing a class is just as important as choosing a race. If you choose poorly then that is your own fault. If you REALLY feel like a racial is THAT game breaking then just suck it up and grind another 70 levels to change your race.
Who cares about racials in pve besides fear ward? Only other thing thats game breaking in pve is maybe 5% hp on tauren MTs, thats it. Theres a big difference and PvE is NOT arena.
No doubt choosing poorly factors into most of alliance race choices, look at the number of human/night elf warriors in arena. I can count the number of gnome warriors I remember on 1 hand.
And point me to where I can reroll to blood elf on alliance for that uber mana tap? Lol thats the whole point, racials not being balanced across factions so rerolling is not an option. And a stupid one at that, when they can just flag arenas to disallow racials. They introduced pallies to horde and shamans to alliance to make things even for both sides, time to even out racials next imo.