We all know China has a huge impact on the global economy, but an article in the Sydney Morning Herald shows how that impact has even been enough to help John Howard remain in office as Australia’s prime minister – until recently, anyway.

According to Andrew Charlton, an Australian economist, Howard has claimed great success in keeping inflation, and thus interest rates, low through fiscal discipline. However, this is an artifact of increasing imports of Chinese low-cost goods, and has nothing to do with Australian fiscal policy. "More than 80 per cent of Australia's clothing imports and 30 per cent of our electrical goods come from China and prices have been falling every year by as much as 2-3 per cent,” Charlton writes. But Australia has two economies, and inflation in the non-traded economy, or the portion that doesn't get imported across the border – food, hair cuts, child care – is running at 4-5%.

The situation is about to change. While China has been a deflationary force in the world economy for the past 10 years, it is set to become an inflationary force over the next 10. Why? Because inflation is taking hold in China, driven by increasing wages, higher commodity and freight prices, and government-mandated export price increases. China will export this inflation to the rest of the world through higher prices for exports.

The soaring value of the remnimbi will also help drive up inflation around the world, especially if US and Euro lawmakers get their way. Chinese lawmakers seem to have a better grasp on the causes and effects of the yuan's value and its relationship with trade balances so this is unlikely, but more economic pragmatism and less appealing to the political base at home would be welcomed from the EU and US.

Back to Charlton; the Australian economist sees two options for the new Labor government to combat inflation in the non-traded economy.

“One is to passively sit back and let the Reserve Bank reduce demand by bludgeoning shoppers with repeated interest rate rises," he writes.

"The better solution is to improve productivity in non-traded sectors so that our domestic production can grow to meet demand. A wave of competition policy in the early 1990s dramatically improved the efficiency of Australia's traded economy, stripping away tariffs and opening up the sector to competition. The new Labor Government must now do the same for the non-traded economy. That means improving productivity in formerly neglected sectors like transport and logistics, education, utilities, health and many other services.

Australia desperately needs government leadership to ease capacity constraints in these areas by improving infrastructure and increasing skills. And most importantly, we need another wave of competition policy to improve efficiency in our service sectors.”

Charlton doesn't discuss what can be done about the inflation due to be exported by China, but presumably he doesn't favor the options favored by US and Euro lawmakers – tariffs against Chinese imports if the yuan doesn't appreciate on the time scale they favor.

What these lawmakers haven’t seemed to grasp is that a higher yuan will simply increase the inflationary pressures being exported from China. Replacing Chinese exports with home made goods would escalate inflation even further; Chinese imported goods have already destroyed domestic manufacturing in much of these countries, but even if they could reboot production, how much greater would the price tag be.

While inflation is not the only consideration in debate over China's place in the world economy, all roads ultimately lead there. In a complex, deeply intertwined global economy, there are no quick fixes. The rich world has made its bed by exporting production to China and the rest of the developing world, and has done quite nicely out of it too. The chickens are coming home to roost, and a knee jerk quick fix is not the solution.

Much better for these countries to concentrate on underlying structural weaknesses in their own countries than point the finger solely at China. The rich world's goods may be made in China, but its problems are made at home. That is where the solutions must be found.