OTTAWA, May 24 (Reuters) - Canada and Saudi Arabia have agreed to restore full diplomatic ties and appoint new ambassadors, both countries said on Wednesday, bringing to a close a 2018 dispute that damaged relations and trade.

The decision follows discussions held between Canadian Prime Minister Justin Trudeau and Saudi Crown Prince Mohammed bin Salman on the sidelines of the summit of the Asia-Pacific Economic Cooperation (APEC) Forum in Bangkok in November last year, according to statements from Canada and Saudi Arabia.

The decision stems from "the desire for both sides to restore diplomatic relations between the two countries on the basis of mutual respect and common interests," the statements said.

The 2018 row pre-dated the killing of journalist Jamal Khashoggi later that year, which Canada and all Western countries condemned. It started when Canada's embassy in Riyadh published a tweet in Arabic urging the immediate release of women's rights activists held by Saudi Arabia.

That prompted Riyadh to recall its ambassador and bar the envoy from returning, and to institute a ban on new trade.

"Punitive trade measures will be lifted," said a Canadian government source familiar with the agreement who was not authorized to speak on the record. It is unclear what effect the dispute had on trade.

Saudi Arabia was the biggest export market for Canada in the region in 2021, according to official data, when they totaled C$2.2 billion ($1.65 billion). Imports were $2.4 billion. Almost all Canada's imports were oil and petrochemicals. More than 80% of exports to Saudi Arabia were transportation equipment.

"Empty chairs at the end of the day don't push our interests forward, and they don't push things like human rights forward," the source added.

The normalization comes as the Saudi prince, known as MbS, seeks to reassert Saudi Arabia as a regional power by using his place atop an energy giant in an oil-dependent world consumed by the war in Ukraine.

"Saudi Arabia is pivotal within its region. It's an important player," said Roland Paris, Trudeau's former foreign policy adviser and professor of international affairs at University of Ottawa. "It only makes sense to have ambassadors back in place in order to keep channels of communication open."

Canada will appoint Jean-Philippe Linteau as its new ambassador in Riyadh.

Canadian Foreign Minister Melanie Joly has said "we need to have conversations with people we don't always agree with on everything in order to find global solutions to global problems," the source added.