[Nathan]

Suppose you do convince people to stop saying "gaijin". Now what? What word do they use to talk about foreigners? Because that IS the word for foreigner.

I've heard people say the word "gaikokujin" is offensive. So now we need to get rid of that word to?

You know, even the word "foreigner" in English can be used in an offensive manner. "We don't want any of you foreigners in our town!" for example.

On the subject of kids using it to pick out others - kids of any nationality will pick out something different in another kid. They'll pick out the non-Japanese, the Japanese, the fat, the freckled, the redhead, the smart... Its just something they do.
Adults aren't any different.