I'm not too familiar with square circuits because I fly oval ones. In the case of an oval circuit I would definiately call "Going Around" and trundle back around at circuit heigh using the correct circuit pattern.
In a square circuit I would think the same is appropriate, bearing in mind how far out he is of course. By calling "going around" you don't cut in front of him in the circuit and you position for the deadside so you are clear of him. (Though is similar type he shouldn't catch up anyway) As such you are still number 2 but you happen to be closer to the airfield.