By Steve Scherer

OTTAWA Canada and Saudi Arabia have agreed to restore full diplomatic ties and appoint new ambassadors, both countries said on Wednesday, ending the fallout from 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.

"Punitive trade measures will be lifted," said a Canadian government source familiar with the agreement who was not authorized to speak on the record.

"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 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.

Wednesday's 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 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.

"We've seen in recent years that Saudi is an important global player," said the source. "Saudi Arabia helped evacuate Canadians (in Sudan), and they're also playing an important role in finding a solution to the conflict there."

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.

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

(Reporting by Steve Scherer; Editing by Kirsten Donovan and Nick Zieminski)