I see the relation, but considering the actual meaning is harmless (squirrels/chipmunks), the real issue is that the complaining students/faculty assumed the real meaning was derogatory and took offense at it, causing this whole uproar.
So, it's not that students are racist towards Asians. It's that those students/faculty don't know/understand midwestern terms and can't live with them.
This is not a midwestern term or even an Iowa term. This is an extremely localized term that only a few people from the immediate Des Moines area know. I never heard it spoken even once when I was at ISU and I saw plenty of ground squirrels. The vast majority of ISU students don't know and could not logically associate that word with squirrels by thinking about it. You can't play the game of blaming the listeners, because there is no other logical way they could interpret "squinty." It's basically the equivalent of cracker = squirrel. The "racist" version might not be extremely bad or negative, but it's still the obvious interpretation and it is a racial term.
That said, I agree that if the person did mean to refer to squirrels (and we aren't sure they did) then they did not make a racist comment. However, I frequently heard the same kind of comments being made using a lot clearer language when I was still in school. There are a good number of people out there who do not like the recent influx of Chinese students at ISU (and Iowa for that mater) over the past few years.