Is it ethical to apply different criteria for graduate admissions based on country of undergraduate study?
I'm going to advise against.


You say your sample size is small. And honestly, unless you hired a professional statistician, I have doubt the analysis was carried out properly or shows exactly what you think it shows. Good statistics are hard to do.
Assuming my google results are truthful, National Origin is a Protected Class in the US. You can't discriminate against people because of it. I assume this is an american institution as you talk about GRE, but similar applies in other places. EDIT: OP has since clarified a misunderstanding of mine - the judgement is based not on the student's country of origin, but the country of the school they attended, which makes me less certain this point still applies.
You're department is actually, seriously proposing to say to people "Sorry, while you have the same official qualifications as another candidate we accepted, we're rejecting you because of your country of origin"? I mean, really? Whoa. Just stop and play back how this kind of justification would sound in almost any other circumstance. Think about how the press will make it sound when they (inevitably) get wind of it.


SUBSEQUENT EDIT

So, this question interested me, and I've bounced it off a couple of other people in my lab. Their main concern seemed to be that grouping by country was just to coarse a measurement, as every country has its own mix of good and bad schools. The basic idea, though, didn't seem to elicit the same gut reaction as it did from me.

Moreover, I've googled and found at least two examples of courses that vary their requirements based on country of origin, so there is precedent:

https://www.auckland.ac.nz/en/for/international-students/is-entry-requirements/is-minimum-overseas-entry-requirements.html

http://sydney.edu.au/business/futurestudents/postgraduate_study/pg_coursework_studies#app_req

So maybe I've got this wrong, and should just be ignored. At any rate I'm no longer sure it's quite so clear cut.