Cannot derive (newtype I a b = I (F a -> F b) deriving newtype Category) for type family F

This works fine

{-# Language PolyKinds #-}
{-# Language GADTs #-}
{-# Language GeneralizedNewtypeDeriving #-}
{-# Language InstanceSigs #-}
{-# Language RankNTypes #-}
{-# Language ScopedTypeVariables #-}
{-# Language StandaloneDeriving #-}
{-# Language TypeApplications #-}
{-# Language DataKinds #-}
{-# Language DerivingStrategies #-}
{-# Language TypeFamilies #-}

import Data.Kind
import Control.Category
import Prelude hiding (id, (.))
import Data.Coerce

data TY = TI | TB

type family
  Interp ty where
  Interp TI = Int
  Interp TB = Bool

newtype Ixed :: TY -> TY -> Type where
  Ixed :: (Interp ix -> Interp ix')
       -> (Ixed ix ix')
  -- deriving newtype Category

instance Category Ixed where
  id :: forall a. Ixed a a
  id = coerce (id @(->) @(Interp a))

  (.) :: forall b c a. Ixed b c -> Ixed a b -> Ixed a c
  (.) = coerce ((.) @(->) @(Interp b) @(Interp c) @(Interp a))

This instance can **not** be derived using newtype deriving. Commenting the Category-instance out and uncommenting deriving newtype Category results in an error

$ ghci2 -ignore-dot-ghci hs/164-trac.hs
GHCi, version 8.5.20180105: http://www.haskell.org/ghc/  :? for help
[1 of 1] Compiling Main             ( hs/164-trac.hs, interpreted )

hs/164-trac.hs:28:20: error:
    • Can't make a derived instance of
        ‘Category Ixed’ with the newtype strategy:
        cannot eta-reduce the representation type enough
    • In the newtype declaration for ‘Ixed’
   |
28 |   deriving newtype Category
   |                    ^^^^^^^^
Failed, no modules loaded.
Prelude> 

I may have asked this before, but can we make GHC smart enough to derive this instance? It consists entirely of the right visible type application of method: method = coerce (method @a @b @..)

Trac metadata

Trac field	Value
Version	8.4.1-alpha1
Type	Bug
TypeOfFailure	OtherFailure
Priority	normal
Resolution	Unresolved
Component	Compiler
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