I compared my production rarity chances with that of another player (non-dwarf) and the %s are the same for each rarity. Dwarves are getting shafted out of their racial ability.
Dwarf with 2nd 'increased chance' smithing research
EG: Heavy banner, 2 rare, 2 epic frags = 48% rare 52% epic
3 rare 1 epic = 67% rare 33% epic
1 rare 3 epic = 26% rare, 74% epic
Non-dwarf with same research:
Heavy banner, 2 rare, 2 epic frags = 48% rare 52% epic
3 rare 1 epic = 67% rare 33% epic
1 rare 3 epic = 26% rare, 74% epic
.. apparently dwarves don't get a racial bonus