You are correct that you cannot claim copyright over the idea or process of using strips of paper to make Christmas ornaments. Copyright does not protect ideas, it only protects how particular ideas are expressed in works of authorship. This is clearly set forth in the copyright law at 17 U.S. Code 102(b) which provides:
(b) In no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work.
So, the other seller really has no legitimate claim of copyright infringement against you for merely using the same technique or process of making these ornaments. If you copied the particular ornaments the other seller made there might be a legitimate claim. But if your ornaments are different there is no legitimate copyright claim.
In terms of Etsy, the only thing I can suggest is that you point them to 17 U.S. Code 102(b) and simply argue that merely using the same technique is not copyright infringement.
I hope this helps.