[Regression in 3.1.2-RC1] Inferred union in type argument position gets widened

Compiler version

3.1.2-RC1

First bad commit 3ab18a90ac24dba440c498aab6a8f0c763589605 in https://github.com/lampepfl/dotty/pull/14026

Minimized code

object ImplNotFound:
  def main(args: Array[String]): Unit =
    val res: Seq[String | Int] = (??? : Seq[Int]).collect {
      case 1 => Seq("")
      case 2 => Seq(1)
    }.flatten

Output

[error] -- Error: /.../ImplNotFound.scala:6:13 
[error] 6 |    }.flatten
[error]   |             ^
[error]   |no implicit argument of type Seq[Matchable] => IterableOnce[B] was found for parameter asIterable of method flatten in trait IterableOps
[error]   |
[error]   |where:    B is a type variable with constraint <: String | Int

Expectation

Successful compilation as in 3.0.0 to 3.1.1

[ansvonwa]

It is Create fresh type variables to keep constraints level-correct from #14026

[smarter]

/cc @mbovel who’s been on a crusade for less widening 😃