From the LHTR PDF, version 1.2:

Step 7: Press Attack or Retreat
Combat continues unless one of the following conditions occurs (in this order of sequence):
a) Attacker retreats all attacking units;
b) Defender retreats all subs by submerging, leaving no other defending units in play;
c) Attacker loses all units;
d) Defender loses all units; or
e) Both sides lose all units.

So it seems he get to choose to retreat first, but if he stays, you can choose to submerge.

Note: IMO items c-e should be listed before items a and b, and could be combined into a single item: “One or both sides lose all units.”