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The propogation is in one direction. ie, you have your source files (characters, props, etc), where changes propagate to your destination (level) scenes.
Ideally, major changes would be made in the source file, such as deciding you want the character to have longer arms.
And local changes would be made in each level scene, such as the character having a scar only in a specific scene after some battle. This is where the "keep local changes" checkbox comes in handy with the update tool, so you don't end up wiping any local edits if you later decide to change the source file again.